According to the Section 14 of the Income Tax Act of 1961, there are five main income tax heads for a person. Income tax calculation is a crucial step that must be done in accordance with an individual's income. The income must be correctly classified in order to avoid any confusion throughout the calculating process. Hence, first let us understand the five income tax heads.
The five main income tax heads are as follows:
- Income from Salary
- Income from House Property
- Income from Profits and Gains of Profession or Business
- Income from Capital Gains
- Income from Other Sources
Out of these five heads, in this article we will focus only on the first head i.e., Income from Salary.
What is Income from Salary?
The income or payment that a person receives in exchange for providing services or signing contracts is known as “income from salary”. This section simply incorporates the compensation that an individual receives for the services that he provides under the employment contract.
However, it is important to note that the payment received by the person will be regarded as income for the purpose of the Income Tax Act only if – there is an “employer-employee relationship” between the parties providing the payment and the party receiving it.
What is employer and employee relationship?
If there is an employer-employee relationship between the payer and the receiver, any payment received by the employee (the receiver) will be regarded as income under the Income Tax Act. Both must be in a master-servant relationship in order for income to be considered to be earned on a salary. Where a servant is someone who is responsible for carrying out the work in the manner instructed by his master (employer), a master is someone who guides his servant (employee) as to what has to be done and how it should be done.
Meaning of Salary
The salary for the purpose of calculation of income from salary includes:
- Wages;
- Pension;
- Annuity;
- Gratuity;
- Advance Salary paid;
- Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
- Annual accretion to the balance of Recognized Provident Fund;
- Leave Encashment;
- Transferred balance in Recognized Provident Fund;
- Contribution by Central Govt. or any other employer to Employees Pension A/c as referred in Sec. 80CCD.
What is CTC?
One of the vague words used to describe salaries is CTC. Cost To Company is referred to as CTC. It is the sum that the organization will spend on bringing on and keeping an employee.
CTC covers an employee's income as well as any other perks they receive, such as meal vouchers, office space rent, Provident Fund contributions, medical insurance, House Rent Allowances (HRA), and any other expenses incurred by the firm.
It should be remembered that CTC contains variables more than the actual salary that a person is receiving, hence CTC differs from the actual income from salary that a person receives.
Components of Income from Salary
| Components | Sub-Categories and Examples |
|---|---|
|
Fixed Pay |
Your base salary and a dearness allowance are included in this. You are qualified to receive this sum regardless of any goals, etc. |
|
Variable Pay |
Bonuses and performance-based incentives are part of variable pay.
|
|
Allowances |
The allowances typically make up the remaining portion of your overall CTC. Different categories of allowances and job benefits are divided up. The most common allowances are the Home Rent Allowance (HRA), medical allowance, travel allowance, leave allowance, and transportation allowance. |
|
Perquisites |
A perquisite is an additional benefit provided on top of the pay. A perquisite may either be monetary or non-monetary in nature. In the hands of the employees, a monetary requirement is taxable subject to exemptions. A non-monetary perk is taxable in the employer's hands. Some of the popular non-monetary perquisites are rent-free housing, ESOP/Sweat equity shares, employer contribution to superannuation fund, loan for a 0% or lower interest rate, free food, and so on. |
|
Retirement Benefits |
The employer's contribution to an established provident fund, pension plan, or gratuity are known as retirement benefits. |
|
CTC Cost To Company |
Your total CTC is the total amount of your fixed pay, variable pay, perquisites, allowances, and retirement benefits. |
CTC vs Take Home Salary
Up until this point, we have learnt about the elements of your salary that make up your CTC. However, your pay is not equal to your CTC when you receive it at the end of the month. What happens, then?
Your CTC, for instance, is Rs 12,00,000. You won't get just Rs 1,00,000 per month (Rs 12,00,000 divided by 12 months). This is due to the fact that your CTC is subject to various deductions. Your employer's deductions for taxes and exemptions account for the difference between your take-home pay and CTC.
Hence, your take home salary will be:
- Gross Cost To Company CTC
- Minus - Medical Insurance, Reimbursement of food coupons, other perquisites, contribution to provident fund, Professional Tax and so on.
- Minus - Net tax payable by the employee. Net tax liability is calculated by deducting the deduction under Chapter VIA (Section 80C, Section 80D, Section 80DDB, etc.) and applying the tax slab.
Taxability of Components of Salary
We now know what goes into salaries and what determines your take-home pay. To assist you in planning your taxes, let's now examine the taxability of each salary component.
- Taxability of Salary Income
| Component of Salary | Taxability |
|---|---|
|
Fixed Pay |
Fully Taxable |
|
Variable Pay |
Fully Taxable |
|
Allowances |
Fully Taxable, Fully Exempt, Partially Exempt Subject to Conditions |
|
Perquisites |
Fully Taxable, Fully Exempt, Partially Exempt Subject to Conditions |
|
Retirement Benefits |
Fully Exempt, Partially Exempt Subject to Conditions |
- Tax on Allowances
| Allowances | Taxability |
|---|---|
|
House Rent Allowance HRA |
The lowest of the following is exempt:
|
|
Children education allowance |
Up to Rs 100 per month per child up to a maximum of 2 children is exempt |
|
Hostel expenditure allowance |
Up to Rs 300 per month per child up to a maximum of 2 children is exempt |
|
Transport Allowance |
Given to an employee to cover the cost of travel between their place of home and their location of employment: An employee who is blind, deaf and dumb, orthopedically challenged, or has an impairment of the lower extremities is given Rs. 3,200 per month. |
|
Allowance given to an employee in the transportation industry to cover personal expenses while performing duties related to the operation of such transportation from one location to another, if the employee is not receiving the daily allowance. |
Amount of exemption shall be lower of following:
|
|
Leave Travel Concession or Assistance (LTC/LTA), extended by an employer to an employee for going anywhere in India along with his family* |
The exemption is only applicable for fare of two trips within India with family members within a period of four years.
|
|
- City Compensatory - Fixed Medical - Tiffin - Lunch Dinner or Refreshment - Servant - Project - Overtime - Telephone - Holiday - Any Other Cash Allowance |
Fully Taxable |
|
- Any benefits provided by the government to its employees who are Indian citizens working abroad. - Allowances for Supreme Court/High Court judges. - Allowances for Supreme Court/High Court judges. - Allowances given to UNO staff members. - For serving Chairman/Member of UPSC, rent-free official house, transportation amenities including transport allowance, sumptuary allowance, and leave travel concession |
Fully Exempt |
- Tax on Perquisites
| Perquisites | Taxability |
|---|---|
|
Rent free unfurnished accommodation provided to Central and State Government employees |
License fees will be regarded as the taxable value of perquisites if they are assessed in accordance with the government's guidelines for house allocation. |
|
Rent free furnished accommodation |
The following calculations must be used to determine the taxable value of perquisites: a) Tax-deductible value of perquisite assuming that the employee will receive an unfurnished apartment; b) Add 10% of the original cost of furniture and fixtures (if the employer owns them); or actual higher fees paid or payable (if these are taken on rent by the employer). c) The amount of rent, if any, that is collected from the employee will be deducted (minus) from the value that has been assessed. |
|
Unfurnished rent free accommodation provided to other employees |
Taxable Value of Perquisites If the employer owns real estate, the following is the taxable value of the perquisite: - 15% of income if the city where housing is offered has a population greater than 25 lakhs - 10% of pay if the city where home is given has a population greater than 10 Lakhs but fewer than 25 Lakhs. - 7.5% of the income, if housing is provided in another city If an employer leases or rents a house, the taxable amount of the perk is the lesser of: - The lease rent paid or payable by the employer or - 15% of the salary |
How to Calculate Taxable Income from Salary?
Gather all the documentation relevant to salary income first. Your monthly pay-slips, Form 16 Parts A and B, and Form 26AS are required here.
| Particulars | Amount |
|---|---|
|
Gross Salary Received |
XXX |
|
Less: Exemptions on Allowances |
XXX |
|
Net Salary |
XXX |
|
Less: Tax Deduction (Example- section 80C, section 80D, section 80G and so on) |
XXX |
|
Less: Tax Rebate and Relief |
|
|
Net Taxable Salary |
XXX |
|
Less: TDS Already Deducted |
XXX |
|
Less: Taxes Already Paid |
XXX |
|
Net Tax Payable |
XXX |
Suggested Read: How to Calculate Income Tax on Salary with Example
Tax Relief and Tax Rebate
Tax Rebate – You may be eligible for a tax rebate (refund) of up to Rs12,500 if your total taxable income is up to Rs 5,00,000. After taking into account all applicable deductions, exemptions, and allowances, the total taxable income is determined. Both the old and new tax regimes allow for tax rebate.
However, Union Budget 2023 has proposed that if the Assessee has opted for New Regime then he/she is eligible for a tax rebate (refund) of up to Rs 25,000 if your total taxable income is up to Rs 7,00,000. The same is applicable from Financial Year 2023-24 i.e Assessment Year 2024-25.
Tax Relief – If you received any salary delays during the fiscal year, you may be eligible for tax relief under Section 89.
Standard Deduction
The exemption from refund for travel expenses and medical expenses has been replaced by the standard deduction. The exemptions have been combined. Beginning with the 2019–20 fiscal year, you are eligible to deduct up to Rs 50,000 from your travel and medical expenses. No receipts or other written documentation supporting the costs must be provided. However, the new tax system does not allow for standard deductions.
If your only source of income for the entire fiscal year is a salary, you can use the aforementioned method. You might also make money from other sources, such as rental income, business or professional income, or income from capital gains. In this scenario, you must add the income from all of these sources before calculating the net tax due.
Important Documents to File Tax on Income From Salary
The following are the some of the important documents to file tax on income from salary:
- Form 16
At the end of the financial year, an employer gives Form 16 to its employees. For the purpose of calculating taxes that are due and taxes that are refundable, Form 16 includes information on gross salary, deductions, exemptions, and TDS. In addition, every taxpayer is required by the Income Tax Act of 1961 to submit Form 16 prior to the deadline.
There are two parts of Form 16, such as follows:
- Your employer's information, including TAN, PAN, address, and firm name, is contained in Form 16 Part-A.
- The information on salary, deductions, and net tax payable is contained in Form 16 Part-B.
As you are completing and submitting your income tax return, you must make use of your Form 16.
- Form 26AS
A tax credit statement called Form 26AS lists the TDS that your employer and other taxpayer have deducted from your pay. It also includes information on any advance taxes or self-assessment taxes you may have paid. To confirm that your employer is truly deducting and paying the TDS deducted to the account (credit) of the Central Government, you must refer to Form 26AS. You will not be eligible to claim the TDS refund until and unless your employer is paying the TDS deducted to the credit of the Central Government.
- Capital Gain Statement
Your investments in ULIPs, mutual funds, company shares, stocks, etc. would have generated returns for you. When you sell multiple units of mutual funds or shares, it is frequently challenging to determine the capital gain. In this situation, it is preferable to ask the asset management company for mutual funds or the broker for shares for a capital gain statement. You can simply determine the overall capital gains for tax purposes in this method.
- Income Tax Return ITR
Every taxpayer who has taxable income that is greater than the standard exemption amount is required to file an income tax return. The kind of taxpayer and the categories of income earned during the financial year determine whether the ITR is applicable.
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