- What is Income from Salary?
- What is the Pension Income?
- Understanding Salary Slip
- Calculate the Taxable Income from Salary
- Difference Between CTC and Take Home Salary
- Income Tax Deductions for Salaried Individuals
- How to Calculate Income Tax on Salary?
What is Income from Salary?
Salary Income is simply the paycheque you get every month from your employer. An amount received from your employer in the form of bonus, allowance, perquisites, etc. is a part of your Salary Income only.
Pension received by you after your retirement (not family pension) is also a part of the head Salary Income.
So first let’s have a look at components of salary income:
- Annuity or Pension
- Fees, Commission, allowances, perquisites or profits in lieu of salary
- Advance of Salary
- Amount transferred from unrecognized provident fund to recognized provident fund
- Contribution of the employer to a Recognised Provident Fund in excess of the prescribed limit
- Leave Encashment
- Compensation as a result of variation in Service contract etc.
Moreover, this is an inclusive and not an exhaustive list.
What is the Pension Income?
The employer pays a certain amount to his employee after retirement on a periodic basis for the services rendered by him during his job. This is known as Pension. Pension is taxable under the head Income From Salary.
There are mainly two types of pension:
- Uncommuted Pension: A periodical payment of pension received by the employee after retirement. Uncommuted pension is fully taxable to Government and Non-Government employees under the head Income from Salaries.
- Commuted Pension: A lump sum payment received by the employee at the time of retirement. In the case of Government employees commuted pension is fully exempt. Whereas in the case of non-government employee it is as follows:
|Gratuity Received by pensioner||⅓ of the pension which he is normally entitled to receive is exempt from tax|
|Gratuity Not Received by pensioner||½ of the pension which he is normally entitled to receive is exempt from tax|
Please keep in mind that ‘pension’ and ‘family pension’ are two separate things. An employer receives a pension after his/her retirement, and therefore, it is taxable under the head Salary. Whereas family pension is received by the nominated family members of the employee after his death. Additionally, for family members who receive a family pension, it is taxable under the head Income from Other Sources.
Understanding Salary Slip
From the taxability point of view, it is very important that you understand your salary slip and its components. Additionally, the salary structure may vary from employer to employer. Salary Slip is divided into the following two parts:
- Basic Salary,
- HRA (House Rent Allowance),
- LTA (Leave Travel Allowance),
- Conveyance Allowance,
- Dearness Allowance,
- Special Allowance.
Calculate the Taxable Income from Salary
Salary Income is taxable on the basis of accrual or payment whichever is earlier. Hence in simple terms even if you receive your March months salary in April of next financial year it would still be taxable in the current financial year only.
Taxable Salary Income can be calculated in the following manner:
- Add up all the amounts you received from your employer
Be it in the form of remuneration, wages, gratuity, commission, allowances, perquisites, bonus, etc.
- Deduct all the allowances to the extent they are exempt u/s 10.
Like House rent allowance (HRA), Transport allowance, Medical Allowance, Uniform Allowance, etc.
- Deduct section 16 deductions i.e, the Professional tax, Standard Deduction, and Entertainment Allowance.
This resulting figure will be your taxable salary income.
In your Form 16 Part B, this figure will be reflected against the line no. 6 “Income chargeable under the head Salaries”
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Difference Between CTC and Take Home Salary
The salary that gets credited to your bank account is your Take Home Salary. Moreover, it is also known as Net Salary.
CTC stands for Cost to Company, which is actually the cost company bears for an employee. Moreover, it includes the basic salary, all the allowances/ benefits, and employer’s contribution to retirement benefits.
So before you accept any job offer, you need to go through this guide. It explains the difference between CTC and Take Home Salary so that you can take an informed decision.
Income Tax Deductions for Salaried Individuals
Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.
- Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
- Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
- Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.
Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.
How to Calculate Income Tax on Salary?
Income from Salary is taxed at the applicable slab rate. In the case of salary, TDS is deducted by an employer every month. The employer deducts TDS after taking into account the Investment Declaration (Form 12BB) submitted by the employee. You can know this TDS amount from your Form 26AS or Form 16 Part A.
Although it is the responsibility of the employer to deduct the tax from salary. An employee needs to calculate Tax liability while e-filing ITR. An employee ends up with tax dues if TDS deducted by an employer does not match with income tax payable.
Income tax rates for individuals below the age of 60 years are as follows:
|Income Slab||Tax rate (For FY 2019-20 )|
|Up to Rs. 2,50,000*||No Tax|
|Rs. 2,50,000 to Rs. 5,00,000||5%|
|Rs. 5,00,000 to Rs. 10,00,000||20%|
|Rs. 10,00,000 and above||30%|
|Surcharge @ 10% of the total income tax if total income exceeds Rs. 50 Lakhs and up to Rs. 1 Cr. Surcharge @15% if total income exceeds Rs. 1 Cr.|
|Health & Education Cess @ 4% on the total of income tax and surcharge.|
* In case of senior citizens (within the age group of 60 – 80) the basic exemption limit is Rs. 3,00,000. In the case of a super senior citizen (aged above 80 years) the basic exemption limit is Rs, 5,00,000.
Allowances are fixed periodic amounts, apart from salary. Therefore, they are paid by an employer for the purpose of meeting some particular requirements of the employee. E.g., House Rent Allowance, Transport Allowance, Uniform Allowance, etc.
There are generally three types of allowances for the purpose of the Income-tax Act
1. Taxable allowances,
2. Fully exempted allowances and
3. Partially exempted allowances
Yes, Pension income is taxable as salary income. However, family pension will be taxable under the head income from other sources.
It is taxable if received while in service. However, leave encashment received at the time of retirement is exempt in the hands of the Government employee. Moreover, in the hands of non-Government employee leave, encashment will be exempt subject to the limit prescribed by the Income-tax act.
Any arrears of salary received are taxable under section 15 of the Income Tax Act. It is taxable in the year of receipt under the head Income from Salary. However, relief u/s 89 is available on the same.
Salaried individual needs to file ITR-1 every year by 31st July of the next year. ITR-2 needs to be filed if the total salary is more than Rs. 50 lakhs.
Advance salary received is taxable in the year of receipt u/s 15 of the income tax act. It is taxable under the head Income from Salary and relief u/s 89 is available on the same.