Understand Salary Income and its Components
For most people, salary is simply a paycheque they get at the end of each month. The salary slip that comes with it hardly attracts any attention since people don’t want to do the math and figure out what each and every component of a salary slip means and how it is derived.
Understand the Salary Structure
The fact is that you can achieve a lot more if you just understand the basic structure of your salary slip. You can:
- Plan your investments so that you can optimally utilize the deductions and reduce the tax liability. This will, in turn, reduce the TDS being deducted from your salary every month.
- Evaluate different job offers in order to determine which one is more beneficial in terms of salary structure.
- Understand how much of your total salary goes into forced savings like Employees’ State Insurance (ESI), Employees Provident Fund (EPF), etc. These components are determined by your employer and are not under your control.
Components of Salary Structure
As you can see in the salary slip above, the “Earnings” and “Deductions” are displayed separately. Earnings will contain the components which are paid to you and as the name suggests, the deduction will contain the amounts which are deducted from what is paid to you. Let’s take a look at each component of the earnings side:
|Serial No.||Component||Tax Implication|
|1||Basic salary: This is the major component of your salary and it forms the basis for some of the other components of the salary structure.||It is a part of your take-home salary and is 100% taxable|
|2||Dearness Allowance: This allowance is paid to counter the inflation impact. It is calculated as a percentage of the basic salary. Currently, only Government employees have a fixed rate of allowance. There is no compulsion for a private or public company to pay Dearness allowance.||It is a part of your take-home salary and is 100% taxable|
|3|| Conveyance Allowance: This allowance is granted to cover the cost of traveling between home and work.|| |
The lower of the following will be exempt from tax:
1. Rs. 1600 per month or
2. Conveyance actually received
So for eg., if you receive Rs. 2000 as conveyance allowance, then Rs. 1600 will be exempt and Rs. 400 will be taxable.
House Rent Allowance: For salaried individuals, this is the allowance to pay the house rent. This may consist of 40% – 50% of your basic salary.
| The lower of the following will be exempt from tax:|
1. 40% of your basic salary
2. Actual rent paid minus 10% of the basic salary
3. HRA actually received from the employer
If the person does not live in rented premises but still gets the HRA, then the whole amount will be taxable.
|5|| Medical Allowance: This allowance is given to employees to cover the medical expenditures incurred during the employment period. These are usually in the form of reimbursement so the employee has to submit the proof of expenditure incurred.|| |
Maximum Rs. 15,000 is exempt per annum subject to the submission of proof of medical bills.
Special Allowance and performance bonus: These allowances are over and above your basic salary. Performance bonus is usually linked to your past performance and is usually paid once or twice a year depending on the company policy
These allowances are 100% taxable
|7|| Leave Travel Allowance: This allowance allows the employee to take on a trip within India with family. The allowance is based on actual expenditure incurred and is allowed for the shortest distance on a trip. An employee can take two trips in a block period of four years|| |
The exemption is allowed for the actual expenditure incurred for the trip subject to certain limits. Any expenditure incurred during the trip for the purpose other than travel will not be exempt LTA.
Now that you have gone through the earnings components, let’s focus on deduction components:
|Serial No.||Component||Tax Implication|
|1||Professional Tax: It is a tax on employment which is levied and collected by different states. This tax is deducted from your salary by the employer and deposited to the state government.||Professional Tax is allowed as a deduction from your salary income.|
|2||Provident Fund (PF): almost 12% of your basic salary goes towards Employee’s provident fund. This amount is matched by the employer subject to certain limits which may vary as per company policies.||This is a forced investment since every company with over 20 employees, has to contribute towards PF. It is allowed as a deduction from total income.|
|3||Tax Deducted at Source (TDS): Based on your total taxable income, your tax is calculated as per the applicable slab rate. 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.||This amount represents the tax deducted from your salary and deposited to the government by your employer. This can be lowered by utilizing the deduction limits optimally.|