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Income from Salary & Taxes

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Hiral Vakil

CTC
ITR Form
Salary Income
Slab Rates
tax deductions
Last updated on September 14th, 2021

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:

Particulars Tax Treatment
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.

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.

Understanding Salary Income and 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.

Why Should Salaried Person File ITR?

It is mandatory to file the ITR if the gross total income exceeds the limit of INR 2,50,000 in the FY, subject to certain conditions. The limit for senior citizens is INR 3,00,000. Furthermore, it is also important to file an ITR for such individuals to:

Which ITR should a Salaried Person File?

The Income Tax Department (ITD) requires salaried individuals to file the ITR 1 Form. In this case, their total salary should be under INR 50 lakhs, inclusive of both salary income and income from other sources. Furthermore, the individual should not have more than one house property and their income from agriculture (if any) should not exceed INR 5,000. They can also file ITR 2 if they have income from salary, more than one house property, income from capital gains and IFOS. Individuals can file ITR 3 if they receive income from business and profession in addition to the above mentioned incomes.

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

What is CTC?

CTC stands for Cost to Company, which is actually the cost company bears for an employee. CTC includes the basic salary, all the allowances/ benefits, and employer’s contribution to retirement benefits. Allowances and benefits include HRA, LTA, Special Allowance, Free Meals, etc. And retirement benefits include the Employee Provident Fund (EPF), Gratuity, etc.

CTC = Basic Salary + All Allowances + All the Benefits + Retirement Benefits
Tip
CTC = Basic Salary + All Allowances + All the Benefits + Retirement Benefits

What is Take Home Salary?

The salary that gets credited to your bank account is your Take Home Salary. Take-Home Salary is also known as Net Salary. Take-Home Salary is computed after deducting taxes & contributions from CTC. As a result, your Take Home Salary will be lower than your CTC.

Example

Vijay is a fresher and the following is the salary offered to him.

Components Amount 
Basic Salary 5,00,000
House Rent Allowance 1,00,000
Leave Travel Allowance 15,000
Free meal (Non-Monetary Benefits) 15,000
Conveyance Allowance 19,200
Special Allowance 1,50,000
Employer’s Contribution to EPF (12% of basic salary) 60,000
Employee’s Contribution to EPF (12% of basic salary) 60,000
Bonus 1,00,000
Taxes/TDS 66,785

Following will be the CTC for Vijay

 

Components Amount
Basic Salary 5,00,000
House Rent Allowance 1,00,000
Leave Travel Allowance 15,000
Free meal (Non-Monetary Benefits) 15,000
Conveyance Allowance 19,200
Special Allowance 1,50,000
Employee’s Contribution to EPF (12% of basic salary) 60,000
Employer’s Contribution to EPF (12% of basic salary) 60,000
Bonus 1,00,000
Taxes/TDS 66,785
CTC  10,85,985

 

Following will be the Take Home Salary of Vijay

Components Amount 
Basic Salary 5,00,000
House Rent Allowance 1,00,000
Leave Travel Allowance 15,000
Conveyance Allowance 19,200
Special Allowance 1,50,000
Bonus received 80,000
Total Salary 8,64,200
Less: Employee’s Contribution to EPF (12% of basic salary) (60,000)
Less: TDS (66,785)
TAKE HOME SALARY 7,37,415

Conclusion

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Tax Deductions on Income from Salary

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.

How to Calculate Tax on Income from 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.

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Document Checklist for Filing ITR for Income from Salary

Form 16 or salary certificate

Any salaried individual, whose TDS has been deducted from his salary by the employer, receives Form 16 from his/her employer. Form 16 is a detailed statement that shows the salary earned during a Financial Year along with deductions, exemptions, and tax deducted from the salary in that year. If no tax is deducted even then the employee can ask for the issue of salary certificate.

Form 26AS

Form 26AS is a consolidated Tax Credit Statement which provides the following details to a taxpayer.

It is very important to check Form-26AS before e-filing the Income Tax Return because no one would want their tax credits to be unclaimed.

Form26AS

Salary Slip

Salary slip is given by the employer to you on a monthly basis. It will also include your gratuity leave encashment as well. An Individual must keep the details of gratuity or leave encashment that has received or is yet to be received no matter if it is taxable or not while filing their ITR.

Components of Salary-Salary Slip

If an individual, changes their job in the middle of the Financial Year, all Form 16 submitted by him/her should be considered.

Pension Certificate

Employee pension is also treated as salary income and therefore becomes taxable. It is wise to collect the Pension certificate through Form 16 from the bank as per requirements.

PF Passbook

Provident Funds are set up to encourage social security for both employees. Employees contribute a fixed amount of their basic pay towards this fund and the employer also contributes the same amount in many cases. The entire amount credited to the employee’s account can be taxable or not taxable. But for references, he/she should have their Provident Fund Passbook ready with all the details.

Form 12BB

Form 12BB also known as Investment Declaration/Investment proof is basically a disclosure of all their tax-saving investments in that particular Financial Year. It is required by the employer for an accurate calculation and deduction of TDS on salary income. It needs to be submitted at the beginning of every financial year.

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.

Got Questions? Ask Away!

  1. Hi, CTC or the Cost To Company is the cost company bears for an employee - it includes basic salary and other allowances like HRA, Dearness Allowance, Conveyance Allowance, etc.

    Whereas, take-home salary is computed after deducting taxes & contributions from CTC.

    You can refer the guide on the difference between CTC and Take Home Salary on our learn center.