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How do I calculate my income tax in India, when I am new to salary components?

How do I calculate my income tax in India, when I am new to salary components?

How do I calculate my income tax in India, when I am new to salary components?
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One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.

As tax season is right round the corner, this is the right time to learn how to calculate your income tax liability using your salary component. This will also help you make the right investments in smart tax-saving instruments such as term life insurance, health insurance and unit linked insurance plans (ULIPs).

Let’s begin by understanding the important components in your salary structure and how they help you calculate and save taxes.

Understanding salary components in your pay slip

  • Basic salary
    Basic salary is the most important part of your salary slip. Other key tax saving components such as house rent allowance (HRA) and employee provident fund (EPF) contribution is calculated on the basis of your basic salary.
  • House rent allowance (HRA)
    If you live in a rented house, you can claim HRA deduction from your taxable income. The amount of income tax deduction you can get under HRA are based on the below factors:
  • 1. Total HRA mentioned on your salary slip

    2. 50% of basic salary + dearness allowance (DA) in metro cities

    3. 40% of basic salary + DA in non-metro cities

    4. Actual rent paid minus 10% of basic salary + DA

Remember, if you are making rent payments in excess of Rs. 1 lakh in a year, you have to furnish your landlord’s PAN number to claim deduction.

  • Leave and travel allowance (LTA)
    LTA is also a tax saving component in your salary structure. As a salaried employee, you can avail tax deduction for a trip taken only with your spouse, children and dependent parents and siblings within India. The extent of exemption is equal to the actual expenses incurred on the trip which has to be claimed by submitting original bills. LTA exemption is available for only two journeys within a span of four years.
  • Contribution to Employees Provident Fund (EPF)
    The EPF is a Government of India initiative to provide retirement benefits to workers. Under the EPF Act, both employee and employer are required to contribute 12% of the basic salary to the fund every month. EPF contribution from your salary is eligible for tax deductions under income tax rules.
  • Example of Salary Components in Your CTC

    CTC
    Components Amount
    Basic Salary Rs 3,00,000
    Social allowance Rs 1,00,000
    HRA Rs 80,000
    Medical Insurance Rs 5,000
    PF(12% of Basic) Rs 36,000
    Performance bonus Rs 75,000
    Total CTC Rs 5,96,000

Standard deduction

Before the 2018 budget, employees were eligible to claim deductions on conveyance and medical allowances. Employees are now eligible to claim a flat standard deduction of Rs. 50,000 from your total income.

For example, if your total annual income is Rs. 5,50,000, your taxable income will be considered as Rs. 5,00,000 after applying standard deduction.

Deductions on investments available for salaried employees

You can also invest in various tax saving instruments such as term life insurance, ULIPs and whole life insurance to save taxes. By investing in a ULIP plan such as Invest 4G from Canara HSBC Oriental Bank of Commerce Life Insurance, you can save taxes under Section 80C up to Rs. 1.5 lakh, get life insurance protection and secure your retirement through market-linked returns.

Tax deducted at source (TDS) on salary

You must also know that your employer deducts TDS from your salary and pays it to the Income Tax Department. TDS is deducted based on your salary and the investment declarations that you made in the beginning of the year to your employer. Therefore, it’s important to make declarations carefully and on time.

During June or July or every year, your employer will provide you a TDS certificate with details of tax deducted and submitted to the tax department. This certificate is known as Form 16. If your yearly income only constitutes salaried income, you can just use the Form 16 to file your tax return.

However, if you earn rental income, earn interest or dividends on your investments, or have sold securities such as stocks or bonds in the financial year, you also need to mention that in your income tax return filing.

The ability to decode your salary structure or CTC is a skill that will help you in your financial and professional life. Understanding your salary component not only helps you save taxes but aids you in negotiating for a better salary. If you are not comfortable with these terms, you should ask your HR to explain it in detail.

Speak to an insurance specialist now!

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