INDEX
What is Salary
Components of Salary
How to Check Your Tax Deductions from Salary?
Example of Calculation of Income tax on Salary
Tax Saving Options for Salaried Professionals
Retirement Benefits and Tax Exemptions
Income from Salary
What is Salary?
Salary refers to the payment an individual (employee) receives from an organization (employer) in exchange for specific services. Your salary slip outlines all the components of your income, such as allowances, which are calculated according to your company’s policies.
Components of Salary
Understanding the meaning of income from salary becomes easier when you know the components that make up the salary. Below are some common salary components:
Basic Salary
Basic salary is the mandatory component of income and typically forms 35%-50% of the gross salary. It is a fixed amount and excludes bonuses, incentives, overtime, and allowances. This amount depends on factors like designation, seniority, functional area, and industry. Basic salary is fully taxable.Allowances
Employers offer various allowances depending on the company’s policies. Some common allowances include:- Dearness Allowance (DA): This allowance is linked to inflation and is usually paid by the government to its employees.
- House Rent Allowance (HRA): This allowance helps employees cover rent expenses, with exemptions available for rent paid to landlords.
- Conveyance Allowance: This is meant to cover travel expenses between home and work. As of 2018, conveyance and medical allowances have been replaced with a standard deduction of ₹40,000.
- Leave Travel Allowance (LTA): If you travel within India, the cost of travel can be exempt from tax under specified limits.
- Books and Periodicals Allowance: If you purchase books, periodicals, or newspapers, the government allows tax exemption for these expenses.
Provident Fund (PF)
A Provident Fund is a retirement savings scheme. Both employees and employers contribute to it. Employees contribute a portion of their salaries, while employers make matching contributions.
Perquisites (Perks)
Perquisites refer to non-monetary benefits provided by an employer, such as a company car, accommodation, or premium club membership. The value of these perks is added to taxable income.
Checking Your Tax Deductions
- Form 16: This form is issued by your employer and provides details of salary income and tax deducted at source (TDS).
- Form 26AS: This form can be accessed through the TRACES website, showing whether your TDS is correctly deposited with the government.
Tax Saving Options for Salaried Professionals
Salaried professionals have several tax-saving options to consider. These include:
- Term Insurance: Premiums paid for term life insurance are deductible under Section 80C.
- Health Insurance: Premiums for Mediclaim policies are deductible under Section 80D.
- Unit Linked Insurance Plans (ULIPs): ULIPs provide both insurance and investment benefits, with premiums deductible under Section 80C.
- Public Provident Fund (PPF): Contributions to a PPF account are deductible under Section 80C.
- National Pension Scheme (NPS): Contributions to NPS are deductible under Sections 80C and 80CCD(1B).
These options help reduce tax liability while ensuring long-term financial security.
Tax Calculation on Old & New Tax Regime on Salary (AY 2024-25)
Employee Details:
- Basic Salary: ₹6,00,000
- HRA: ₹1,80,000
- Bonus: ₹50,000
- LTA: ₹25,000
- EPF Contribution: ₹72,000
Here’s a detailed salary breakdown for both the Old Tax Regime and New Tax Regime for FY 2023-24 and FY 2024-25, incorporating the salary components you’ve provided.
Old Tax Regime Calculation (for FY 2023-24 & FY 2024-25):
| Particulars | FY 2023-24 (Assessment Year 2024-25) | FY 2024-25 (Assessment Year 2025-26) |
|---|---|---|
| Basic Salary | ₹6,00,000 | ₹6,00,000 |
| House Rent Allowance (HRA) | ₹1,80,000 | ₹1,80,000 |
| Bonus | ₹50,000 | ₹50,000 |
| Leave Travel Allowance (LTA) | ₹25,000 | ₹25,000 |
| EPF Contribution | ₹72,000 | ₹72,000 |
| Gross Salary | ₹9,27,000 | ₹9,27,000 |
| Less: Deductions | ₹50,000 (Standard Deduction) + ₹72,000 (EPF) +25000 = ₹1,47,000 | ₹50,000 (Standard Deduction) + ₹72,000 (EPF) +25000 = ₹1,47,000 |
| Taxable Salary | ₹9,27,000 – ₹1,47,000 = ₹7,80,000 | ₹9,27,000 – ₹1,47,000 = ₹7,80,000 |
| Income Tax Calculation | ||
| – Up to ₹2.5 lakh | ₹0 | ₹0 |
| – ₹2.5 lakh to ₹5 lakh (5%) | ₹2,50,000 * 5% = ₹12,500 | ₹2,50,000 * 5% = ₹12,500 |
| – ₹5 lakh to ₹7.80 lakh (20%) | ₹2,80,000 * 20% = ₹56,000 | ₹2,80,000 * 20% = ₹56,000 |
| Total Income Tax | ₹12,500 + ₹56,000 = ₹68,500 | ₹12,500 + ₹41,100 = ₹68,500 |
| Health and Education Cess (4%) | ₹68,500 * 4% = ₹2,740 | ₹68,500 * 4% = ₹2,740 |
| Total Tax Payable | ₹68,500 + ₹2,740 = ₹71,240 | ₹68,500 + ₹2,740 = ₹71,240 |
New Tax Regime Calculation (for FY 2023-24 & FY 2024-25):
| Particulars | FY 2023-24 (Assessment Year 2024-25) | FY 2024-25 (Assessment Year 2025-26) |
|---|---|---|
| Basic Salary | ₹6,00,000 | ₹6,00,000 |
| House Rent Allowance (HRA) | ₹1,80,000 | ₹1,80,000 |
| Bonus | ₹50,000 | ₹50,000 |
| Leave Travel Allowance (LTA) | ₹25,000 | ₹25,000 |
| EPF Contribution | ₹72,000 | ₹72,000 |
| Gross Salary | ₹9,27,000 | ₹9,27,000 |
| Less: Deductions (Standard Deduction) | ₹72000 (EPF) +50000 (Standard deduction in new Tax Regime)=122000 | ₹72000 (EPF)+ 75000 (Standard deduction in New Tax Regime)=147000 |
| Taxable Salary | ₹8,05,000 | ₹7,80,000 |
| Income Tax Calculation | ||
| – Up to ₹3 lakh | ₹0 | ₹0 |
| – ₹3 lakh to ₹6 lakh (5%)/ ₹3 lakh to ₹7 lakh (5%) | ₹3,00,000 * 5% = ₹15,000 | ₹4,00,000 * 5% = ₹20,000 |
| – ₹6 lakh to ₹8.05 lakh (10%)/ ₹7 lakh to ₹7.80 lakh (10%) | ₹2,05,000 * 10% = ₹20,500 | ₹80,000 * 10% = ₹8,000 |
| Total Income Tax | ₹35,500 | ₹28,000 |
| Health and Education Cess (4%) | ₹35,500 * 4% = ₹1,420 | ₹28,000 * 4% = ₹1,120 |
| Total Tax Payable | ₹36,920 | ₹29,120 |
Summary of Tax Calculation:
Under the Old Tax Regime for FY 2023-24 and FY 2024-25:
- The taxable salary is ₹7,80,000.
- The total tax payable is ₹71,240 (including cess).
Under the New Tax Regime for FY 2023-24 and FY 2024-25:
- The taxable salary is ₹8,05,000 & 7,80,000.
- The total tax payable is ₹36920 & ₹29120 (including cess).
The Old Tax Regime offers more opportunities for deductions (such as EPF contributions and the standard deduction), but the New Tax Regime has lower tax rates and is simpler as it removes most deductions. However, in this case, the New Tax Regime results in a lower tax payable, despite no deductions being allowed.
Retirement Benefits and Tax Exemptions
Leave Encashment
- Government Employees: Fully exempt.
- Non-Government Employees: Exempt for the least of 10 months’ average salary, ₹3,00,000, or leave earned in old tax regime.
Tax Relief under Section 89(1)
This applies if salary is received in arrears or advance. Relief is calculated based on the difference in tax payable with and without the additional salary.Voluntary Retirement Exemption (Section 10(10C))
Exemption applies to compensation received for voluntary retirement or separation, with a maximum of ₹5,00,000.Pension
- Uncommuted Pension: Fully taxable as salary.
- Commuted Pension:
- Government Employees: Fully exempt.
- Non-Government Employees: Partially exempt (1/3rd of the pension amount).
Gratuity
- Government Employees: Fully exempt on retirement or death.
- Non-Government Employees: Exempt the least of 15 days’ salary for each year of service, ₹20,00,000, or actual gratuity received.