Guide: Salary Income and Taxes
What is Salary Income?
Salary Income is simply the paycheque you get every month from your employer. So any amount received from your employer in form of bonus, allowance, perquisites etc. shall be considered as your Salary Income only.
Pension received by you after your retirement (not family pension) will also be shown under the head Salary Income.
So first let’s have a look at what is included in 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 employer to a Recognised Provident Fund in excess of the prescribed limit
- Leave Encashment
- Compensation as a result of variation in Service contract etc.
This is an inclusive and not the exhaustive list.
Now let’s focus on what is Pension Income:
The employer pays a certain amount to his employee after the retirement on 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: It is periodical payment of pension received by the employee after the retirement. Uncommuted pension is fully taxable to Government and Non-Government employee under the head Income from Salaries.
- Commuted Pension: It is lump sum payment received by the employee at the time of retirement.
In case of Government employees commuted pension is fully exempt.
Whereas in case of non-government employee:
|If he receives gratuity||⅓ of the pension which he is normally entitled to receive is exempt from tax|
|If he does not receive gratuity||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. Pension is received by the employer after his retirement and it is taxable under the head Salary whereas family pension is received by the nominated family members of the employee after his death. For family members who receive family pension, it is taxable under the head income from other sources.
Salary income can be filed in ITR-1, ITR-2, ITR-2A, ITR-3, ITR-4 and ITR-4S. Of Course the applicability of ITR depends upon all the sources of income but salary income can be filed in all these ITRs.
Understanding Salary Slip
From taxability point of view it is very important that you understand your salary structure. The salary structure may vary from employer to employer. If you are job hunting, then you need to be well versed about the components of the salary being offered to you. Here is a guide that will help you understand the salary structure.
Read Article: A Guide to Understand the Salary Structure
Calculate the Taxable Salary
Taxable Salary Income can be calculated in the following manner:
Step 1: Add up all the amounts you received from your employer, be it in the form of remuneration, wages, gratuity, commission, allowances, perquisites etc…
Step 2: 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…
Step 3: Deduct the employment tax and entertainment allowance
Step 4: 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”
Difference between CTC and Take Home Salary
For every salaried person, it is of utmost importance that they understand the difference between CTC (Cost to Company) and Take Home Salary. CTC includes both the monetary and non monetary components, whereas take home is the final amount that is credited to your bank account. So before you accept any job offer, you need to go through this guide explaining the difference between CTC and Take Home Salary, so that you can take an informed decision.
What are the deductions allowed from the Salary Income?
Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical allowance etc. Some of these allowance are exempt upto a certain limit under section-10 of the Income Tax Act.
- Medical allowance is exempt upto Rs. 15,000 on reimbursement basis.
- Children education allowance is exempt upto Rs. 200 per child per month upto maximum of two children.
- Conveyance allowance is exempt upto maximum of Rs. 1600 per month.
Tax on employment and entertainment allowance will also be allowed as deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.
Read Article: What is HRA?
How is tax calculated on Salary Income?
Based on your total taxable income, your tax is calculated as per the applicable slab rate. The employer is responsibility to calculate and deduct this tax from your salary income. You may be asked to submit your investment and other income declarations on quarterly basis. This will allow the employer to calculate the tax liability on your total income. This tax is deducted from your salary by your employer and deposited to the government on your behalf. You can find your TDS from Form-16, Part A which is generated by TRACES and provided to you by your employer.
Although it is the responsibility of the employer to deduct the tax from your salary, your tax liability will have to be calculated again while e-filing your Income Tax Return. If the your tax liability matches your TDS credit than you are not required to pay any further taxes
Income tax rates for the individuals below the age of 60 years are as follows:
|Income Slab||Tax rate (For FY 2014-15 & FY 2015-16)|
|Up to Rs. 2,50,000*||No Tax|
|Rs. 2,50,000 to Rs. 5,00,000||10%|
|Rs. 5,00,000 to Rs. 10,00,000||20%|
|Rs. 10,00,000 and above||30%|
|Surcharge @ 10% of total income tax if total income exceeds Rs. 1 crore.|
|Education Cess @ 3% on the total of income tax and surcharge.|
* In case of senior citizens (within age group of 60 – 80) the basic exemption limit is Rs. 3,00,000 & in case of super senior citizen (aged above 80 years) the basic exemption limit is Rs, 5,00,000
Frequently Asked Questions
Q1. What is a tax exempt allowance?
Allowances are fixed periodic amounts, apart from salary, which 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 Income-tax Act – taxable allowances, fully exempted allowances and partially exempted allowances.
Q2. Is pension income taxable?
Yes, Pension income is taxable as salary income. However, family pension will be taxable under the head income from other sources.
Q3. Is leave encashment taxable?
It isaxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed by the Income-tax act.
Q4. How to file income tax return without Form-16?
If you don’t have the Form 16, you need not worry. You can determine your taxable salary in few simple steps:
- First of all determine your gross salary (your salary without any deductions or allowances)
- Then deduct the fully exempt allowance that you have received as a part of your salary(Eg. Conveyance allowance, Travelling allowance etc.)
- Next deduct the exempt portion of the partially exempt allowance (Eg. Children education allowance, House rent allowance etc.)
- Finally deduct the dearness allowance and professional taxes to arrive at your taxable salary.
Q5. What is the difference between CTC and take home Salary?
Read this guide to know the difference between the CTC and take home Salary.