Guide : Salary Income and Taxes

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Hiral Vakil

CTC
ITR Form
Salary Income
Slab Rates
tax deductions

Index

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:

Moreover, this is an inclusive and not an exhaustive list.

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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:

ParticularsTax Treatment
Gratuity Received by pensioner⅓ of the pension which he is normally entitled to receive is exempt from tax
Gratuity Not Received by pensioner½ 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.

A salaried individual can file ITR-1ITR-2ITR-3, and ITR-4. Of Course, the applicability of ITR depends upon all the sources of income but salary income can be filed in all these ITRs.

For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.
Tip
For FY 2019-20, due to COVID-19 the due date for filing ITR has been extended to 30th November 2020 for all taxpayer.

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:

Earnings

  1. Basic Salary,
  2. HRA (House Rent Allowance),
  3. LTA (Leave Travel Allowance),
  4. Conveyance Allowance,
  5. Dearness Allowance,
  6. Special Allowance.

Deductions

  1. Professional Tax,
  2. Employee’s Provident Fund (EPF/PF),
  3. TDS/ Income Tax.
Understand Salary Structure and Salary Components
It is important to understand the Salary Structure to do better tax planning.
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Understand Salary Structure and Salary Components
It is important to understand the Salary Structure to do better tax planning.
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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:

  1. Add up all the amounts you received from your employer

    Be it in the form of remuneration, wages, gratuity, commission, allowances, perquisites, bonus, etc.

  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.

  3. 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.

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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.

For eg,

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.

What is HRA?
House Rent Allowance (HRA) is paid by an employer to employees as a part of their salaries.
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What is HRA?
House Rent Allowance (HRA) is paid by an employer to employees as a part of their salaries.
Read More

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 SlabTax rate (For FY 2019-20 )
Up to Rs. 2,50,000*No Tax
Rs. 2,50,000 to Rs. 5,00,0005%
Rs. 5,00,000 to Rs. 10,00,00020%
Rs. 10,00,000 and above30%
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.

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FAQs

What is a tax exempt allowance?

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​

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.

Is leave encashment taxable?

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.​

What is the tax treatment of Arrears of Salary?

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.

Which ITR needs to be filed by a salaried individual?

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.

What is the tax treat of advance salary received?

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.

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