Income from Salary (Part 2)
PRITI SIRDESHMUKH- Oct 29, 2020
- 10 min read
Updated: Feb 12, 2024
This comprehensive guide is for anyone who wants to know how salary-based income works. In the first part of the guide, you will learn about the different components of a salary, including gross and net income. Gross salary is the total money you can make before allowances, taxes, and bonuses. In contrast, net salary is the total money you get after taxes and other deductions. Anyone who wants to do financial planning needs to understand such differences.
Table of content
This guide will teach you about industry standards, education, location, and work experience. Your salary is a lot more than your job duties. Several personal factors need to be taken into account. Such basics are essential for people new to the job market. If you want to know how to make the most of your money, you have come to the right place.
What is Income From Salary?
Income from salary is the earnings that a person receives from their employment. The income is usually a fixed amount paid monthly because of the employment contract. This is the basis of an individual’s financial stabilitty and is subject to deductions and taxes as per law.
What Constitutes Income from Salary?
Income from salary is not limited to the monthly pay received from employees. It includes several components, and each adds to the final earnings. All these components are structured according to the company’s policies, designation, experience, and job role.
What are the components of salary?
Basic Salary
The basic salary forms the core of the salary structure. It forms a significant part of the entire salary. This fixed component is usually the basis for calculating other salary parts, such as allowances and deductions.
House Rent Allowance
HRA is usually provided to employees who live in rented places. It is a very important component of the salary structure as it offers different tax benefits under various conditions.
Leave Travel Allowance
LTA is an allowance that companies provide for travel expenses. This is when an employee is on leave. It is tax-exempt to some extent under different conditions.
Bonus
A bonus refers to additional payments that are provided to employees. It is mainly based on performance or other company policies. These amounts are usually taxable and can vary based on frequency and amount.
Employee Provident Fund
The Employee Provident Fund is a retirement benefit scheme where the employer and the employee contribute some percentage of the basic salary. It forms a significant component of the salary in the long term.
Dearness Allowance
Dearness allowance, or DA, is given to employees to manage the impact of inflation. Usually, the calculation is done based on the percentage of the basic salary.
Conveyance Allowance
A conveyance allowance is given to employees to cover basic travel expenses from home to work and vice versa. This is usually part of the salary in an organization.
Standard Deduction
A standard deduction is a certain amount subtracted from gross salary for tax purposes. This brings down the taxable income and lowers the tax liability.
What is the difference between CTC and salary?
Cost to company (CTC) and salary are not the same thing. These are two different ways in which companies pay their workers. CTC is usually the annual amount an employer spends on an employee in one year, which includes all benefits. A basic salary is one of the many benefits. There are other types like bonuses, employer contributions, allowances, etc. There are different types, such as insurance, perks, and salaries.
On the other hand, salary is how much an employee gets to keep after removing taxes and other contributions to their retirement plans. All these are part of the CTC; workers' final amount in their bank account is their salary.
What are the retirement benefits?
Pension
A pension is a retirement benefit given to employees for a steady income after retirement. It can be a lump sum amount or a fixed amount. The tax involved in the pension case varies depending on whether it is committed and the nature of employment (government or private).
Gratuity
Gratuity is a huge amount paid to employees as a token of thanks for their service. It is usually handed over when an employee resigns, retires, or gets laid off. The tenure and the most recent salary determine the amount of the gratuity. The tax usually varies based on the employer type. It is subjected to certain exemptions under the Income Tax Act.
Income from Salary (Part 2)ew First Part >>
Perquisites (Perks)
Perks are benefits received by an employee because of his position or responsibility with an employer. These are included in the taxable salary income. The perks are mostly paid to the employee in kind. They need to be converted into their worth of money for inclusion into taxable salary. This is called the valuation of perquisites. The employee must provide such a valuation to her employer for TDS purposes. The rules and procedures of valuation are specified in Income-tax Rules.
Most Common Perks are the following:
Rent free accommodation
Provision of motor car
Free or concessional educational facility
Supply of gas, electricity, and water
Provision for sweeper, gardener, watchman, or personal attendant
Interest free or concessional loans
Club membership provided by the employer
Employee Stock Ownership Plan (ESOP)
The valuation of perks to convert them into their worth of money is given in Income tax Rules. The valuation for afew prominent perks is as follows:
Rent free accommodation
Facility | Government Employees | Other than Government Employees |
Un-furnished accommodation | License Fees as determined minus rent paid by the employee |
|
Furnished accommodation | License Fees as determined minus rent paid by the employee + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid by an employee | Value as determined for unfurnished accommodation + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid by an employee |
Provision of motor car
A very common perk. The value of this perk depends upon the ownership of the car and use of car either for official or private purposes by an employee and few other criteria. This is discussed below:
Free or concessional educational facility:
Sr. No. | Nature of facility | Value of perquisite |
1 | Educational facility owned and maintained by employer or employer can influence admission in such facility | Cost of such education in nearby locality minus the cost borne by the employee minus ₹12,000/- |
2 | Educational facility NOT maintained and owned by employer | The cost of such educational facilities in nearby locality minus the cost borne by the employee |
Interest-free or concessional loans
This perk is valued by computing the amount of interest that would have been paid by an employee in case she has obtained the loan from SBI. The amount so arrived is then reduced by the amount of interest paid by an employee to arrive at the taxable value of a perk.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan (ESOP) is a qualified defined-contribution benefit plan designed to invest in the stock of the sponsoring employer. The ESOPs are beneficial to the employee, the selling shareholder, and the company since each of them may get some or the other benefits. These are deployed as a corporate strategy by employers to build partnerships and belongingness towards an organization. These are the components of the salary package of the employees. Hence, they form part of the income from salary. However, they need to be valued at their money’s worth for inclusion in taxable salary income. The value of such ESOPs is computed as per the Income-tax Rules. The value of ESOPs is determined as on the date of exercise of options and not on the date of allotment. However, the tax payment liability is relevant to the date of allotment shares. The second incidence of tax on ESOP arises when the allottee sells those shares. The taxability of an ESOP is dealt with extensively in a separate article, please read more.
Profits in lieu of Salary
Sometimes, the employee is paid over an above his salary income for certain reasons like joining bonuses or compensation, etc. This income is called profit in lieu of salary. The prominent items under this head are as under:
Termination compensation: In case an employee is terminated before his superannuation or contractual period, then he is paid compensation. This compensation is computed as salary income as profits in lieu of salary.
Compensation on modification of terms of employment is also taxed as profits in lieu of salary
Contributions of an employer to different funds like provident funds, superannuation funds, or other funds are likewise taxed as profits in lieu of salary. These include payment of Gratuity, payment of commuted pension, payment of retrenchment compensation, payment from the statutory provident fund and public provident fund, payment from the recognized provident fund, payment from an approved superannuation fund.
Any payment received from a keyman insurance policy
Joining bonus or joining pay is also taxed as income from profits in lieu of salary
What is the standard deduction?
From the assessment year 2019-20, the salaried taxpayers are provided with a deduction from their salary income known as the standard deduction. This amount of standard deduction is reduced from income from salary to arrive at net salary income. The maximum amount of deduction under this head is ₹50,000/-. There are no eligibility conditions for this claim. This cannot be claimed against any other income than income from salary and pension. This cannot be claimed against income from other sources.
How do you check your tax deduction?
Form 16
Form 16 is a certificate that is given to employees by employers. It details the tax deducted at source (TDS) from the salary. This document is crucial for filing income tax returns, accurately depicting income and taxes deducted throughout the financial year.
Form 26 AS
Form 26AS is a tax statement available to taxpayers from the income tax department. This would include tax details on behalf of the taxpayer, tax collected, and any advance paid. It shows details of high-value transactions. Taxpayers can access Form 26AS through the e-filing portal for income tax to verify taxes deducted and deposited against the PAN.
How do salaried professionals save tax?
Health insurance
Under Section 80D of the Income Tax Act, the premiums for health insurance policies are usually listed. The deduction is available for premiums paid by the taxpayer, their family, and their parents.
Term insurance
As per Section 80C, term insurance premiums are eligible for tax deductions. This will help provide financial security to the policyholder's family in case of untimely death.
Unit-linked Insurance plan
ULIPs, known as unit-linked insurance plans, offer several insurance and investment benefits. As per Section 80C, the premiums paid towards ULIPs are eligible for tax deductions. The maturity process is also tax-free while subjected to certain conditions.
Public Provident Fund
PPF, or Public Provident Fund, is a well-known long-term savings scheme with several tax benefits. Any contributions made to PPF are eligible for deductions as per Section 80C. The interest earned and the final amount are usually tax-free.
National Pension Scheme
The NPS, also known as the National Pension Scheme, is a government-sponsored pension scheme. Any contributions made to NPS are always eligible for tax deductions as per Section 80C and further deductions as per Section 80CCD (1B). This scheme is meant to provide regular income after retirement.
What is the document checklist for filing ITR for income from salary?
You must have all the necessary documents when you are ready to file an income tax return for salary income. This will help ensure that the income reported and deductions claimed are correct.
Let us take a look at some documents -
Form 16 for salary certificate
The employer usually provides Form 16. It is an essential document for salaried people. This has details of salary paid, TDS during the financial year, and a lot more. It serves as proof of income and a tax deduction.
Form 26AS
Form 26AS is a tax statement including details of tax deducted on your behalf and advance tax or self-assessment tax you have paid. You will also see details of high-value transactions. You can get this form through the income tax e-filing portal. You must verify the deductions and ensure they match the records.
Salary Slip
Salary slips are provided monthly by our employer. It provides a detailed breakdown of earnings as well as deductions. It is essential to cross-verify the information in Form 16 and ensure that the salary components are properly put in the ITR.
Pension Certificate
The pension certificate or pension payslips are needed by retirees who will receive a pension. This is proof of pension income, which is received during the year. It is essential for filing ITR, especially when assistance forms a significant part of your final income.
PF Passbook
The PF passbook has details of PF contributions you made and your employer. This is important for ITR filing if you have withdrawn from your PF account during the financial year. These may be taxable under some conditions.
Form 12BB
Form 12BB is a specific claim made by an employee for a tax deduction. It is used to declare expenses and investments (HRA, LTA, and interest) eligible for tax deductions. Your employer will submit this form to ensure you claim all eligible deductions while filing ITR.
FAQ
Q1 How do you calculate income from salary?
You must consider different components of your salary package to calculate income from your salary. So, first of all, begin with your gross salary. This would include the basic pay, allowances, and bonuses. Then, you must subtract mandatory deductions such as Employee Provident Fund (EPF) contributions and taxes. The final result is your net salary or the final pay you will take home. You also need to consider any taxable and non-taxable allowances the employer provides.
Q2 What is the Salary Act Income?
The “Salary Act income” is the income that is regulated under different salary or wage laws. This could be the Payment of Wages Act or Minimum Wages Act in certain countries. These laws help understand the payment of salaries, which includes time, mode, and calculation of wages, to ensure fair compensation for employees.
Q3 Which part of the salary is taxable?
All the components that are part of the salary come under tax. However, certain parts might be exempted under the Income Tax Act. This would include basic salary, dearness allowance, house rent allowance, etc. Specific components, such as HRA, can be partially exempt but under some conditions.
Q4 What is HRA?
HRA is also known as House Rent Allowance. It is a component of the salary provided to employees. This is given to cover the rental cost. It is possible to get some exemption, but only under certain conditions, like salary, actual rent paid, and residential location.
Q5 How much tax do I have to pay?
How much tax you owe depends on your taxable income and the relevant tax slabs. Many nations have progressive income taxes. The rate increases as income increases. You can decrease the tax liability through different deductions as well as exemptions. However, you need to be aware of different tax laws.
Q6 Which are the components lined up with salary?
Some components are linked to salary. This would include basic pay and allowances such as DA, HRA, and TA, incentives, bonuses, and contributions to retirement funds such as EPF. These components together form the gross salary.
Q7 What is the CTC in salary?
CTC, or cost to company, is an employer's total cost for an employee. It includes benefits such as salary, bonuses, and allowances, as well as indirect costs like employer contributions to retirement funds, insurance premiums, and other benefits.
Q8 What are the fixed components of salary?
Fixed components of salary do not change with performance or profits. These include basic salary, DA, and other allowances such as HRA.
Q9 What does the term "provident fund" mean?
A provident fund PF is a government-based retirement savings scheme where employees and employers contribute some percentage of their salary. The fund provides financial security after retirement, including benefits like loans and life insurance.
Q10 What are the types of salary allowances?
There are various types of salary allowances. Some are -
House Rent Allowance (HRA)
Dearness Allowance (DA)
Conveyance Allowance
Leave Travel Allowance (LTA)
Medical Allowance
Special Allowance
Such allowances cover specific employee expenses and can have various tax implications.
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