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Tax Implications on Your Salary Income
Tax Implications on Your Salary Income
1. To whom is this guide relevant?
If you are earning income from salary and want to know ways to minimize your tax burden, then this guide will help you in reducing the tax liability by understanding all components of your CTC with regard to taxation.
Go through the guide and start planning your investments in a way that you get maximum benefit.
2. What are the basic terms related to salary?
- Cost to Company (CTC) This is the total cost that an employer incurs for receiving services of employees. This includes all the monetary and non-monetary benefits you receive from your employer during a particular period (normally calculated for one year).
For example: If Company ABC Limited quotes that CTC of its new joinee Mr. Keshav shall be Rs. 35 lacs, it means company shall incur Rs. 35 lacs in a year on Mr. Keshav; which will include all monetary/ Non-monetary benefits, incentives etc. granted to Mr. Keshav.
- Take Home Salary (THS) This is the cash portion of salary received by an employee at the end of every month.
Take Home Salary = Monetary benefits granted by employer Deductions on account of provident fund etc. Income Tax (TDS) deducted on salary
- Perquisites These are the value of Non-monetary benefits received by employee. For e.g.: Rent Free Accommodation, free food etc.
- Allowances These are the fixed monetary amount paid by employer for meeting some expenses. For.eg. House Rent Allowance, Travelling Allowance, DA etc.
- Deductions These are the amounts deducted from employee's taxable salary before calculating the tax liability. For E.g.: Investments under section 80C like Life Insurance Premium, Children fees, PPF.
3. But why my Take Home Salary (THS) is less than my CTC?
Your CTC comprises of various monetary and non-monetary benefits including the retirement benefits. While some benefits are granted directly (like children education allowance), other benefits are granted in indirect form to the employee (like food coupons, PF etc).
At the time of paying your actual salary, your employer deducts those indirect benefits, retirement benefits, deductions made on account of contribution to provident fund etc. from your CTC;
Income tax deducted by your employer in form of TDS also creates a gap between Take Home Salary and CTC.
Expert Advice: You can check CTC from offer letter and Take Home Salary from Pay-Slip.
|Add:||Pension, Bonus, Commission||***|
|Add:||Arrears & Advances of Salary||***|
|Add:||House Rent Allowance||***|
|Add:||Rent free Accommodation||***|
|Add:||Interest free loans||***|
|Cost to the Company (CTC)||***|
|Less:||Retirement & Other Non-Monetary Benefits||***|
|Take Home Salary (THS)||***|
4. Useful Tips to increase my Take Home Salary with regard to my current CTC?
At the end of the month, cash inflow matters the most so here's how you can select the best CTC that increases your Take Home Salary and subsequently helps in reducing your tax liability:
- Ensure maximum claim of leave travel concession as it is not taxable if all related conditions are fulfilled;
- Opt for conveyance allowance instead of using transportation facility of the company;
- Opt for mobile reimbursement instead of mobile allowance;
- Opt for medical reimbursement instead of medical allowance;
- Opt for child education allowance and hostel expenditure allowance.
- Opt for food coupons facility.
- Plan your investments in tax saving schemes like public provident fund, pension scheme, medical insurance etc.
- Ensure that dearness allowance and dearness pay form part of basic salary since it minimises tax incidence on HRA, gratuity and commuted pension.
5. What are the impacts of perks and allowances on your tax liability?
You may be receiving additional benefits and allowances from your employer. These are all subject to tax. But don't worry; they are equally effective in reducing your tax burdens. Let's look upon all perks and allowances one by one and understand the benefits that you receive from such perk or allowance and how tax affects those benefits.
Before we begin let us understand the difference between perks and allowances: If you receive non-monetary benefits, they are termed as perquisites, and if you receive monetary consideration from your employer to meet expenses or needs are termed as allowances. So getting a car facility from company is a perquisite, whereas receiving conveyance allowance in cash is an allowance.
6. What are the tax implications attached to perquisites?
While some perquisites are fully taxable, others are taxable only for certain employees who meet the given criterion. The most ideal situation also arises when the employee not only receive perquisites but also not pay any tax on them. Let's understand the nitty-gritty of each perquisites and the tax implication attached with them:
- Employee Stock Option Plan
ESOP is a management tool for retaining talented employees in their company by issuing the company's shares at a price lesser than market price. This is an optional facility provided by the company, wherein it is employee's prerogative to opt for it. However, A lock-in period is defined during which employee needs to serve the company and only then he is issued such shares. The employee can then trade such shares in open market and can earn profits.
Taxability of ESOPs arises on two stages: Stage 1: At the time of allotment of shares, It is added in the perquisite of the employee and taxable under head "Salary"; Stage 2: When the employee sells such shares, then profit is taxable under "Capital Gains".
Expert Advice: This is a major booster to the salary. Don't get fooled by lucrative offer, carefully read all the terms & conditions and future tax liability attached with them.
- Motor Car or Conveyance Facility
Often the companies provide car for fully/ partly official or personal purpose or both. It may also happen that the employer asks the employee to use his own vehicle and reimburses the petrol and maintenance expenses. Driver may also be provided or his expenses may be borne by the employer. Value of perquisite differs according to ownership of the motor car (whether owned by employee or owned/ hired by employer), person meeting the expenses of car (employer or employee), purpose of using the car (official/ personal/ partly both) and the cubic capacity of the motor car.
- Free Meal Allowance
If you are receiving free food/beverage from your employer, then it is taxable after exceeding the specified limit.
What is the specified limit?
- Any tea/snack at business premises is fully tax free;
- Free meals provided in remote area or an off-shore installation is also fully tax free;
- Free meals & non-alcoholic drinks provided in the business premises or through non-transferable paid vouchers useable at eating joints are tax free up to Rs. 50 per meal;
- Use of Movable Asset Provided by the Employer
If you have received any movable asset (like furniture etc.) from your employer, you have to pay tax on such perquisite and the value of perquisite shall be either 10% of cost of asset or rent charges, paid by employer as the case may be. But if you have received any computer or laptop, then don't worry; you don't have to pay any tax on it.
- Transfer of Movable Asset
In the case above, it was mere letting of asset to employee, here the employer actually transfers the ownership of asset to the employee or member of his household.
Taxability arises as follows:
S. No. Transfer of Movable Asset Taxable Value 1. Computer and other electronic item Actual cost of asset (-) 50% Depreciation on the written down value (WDV) of asset for each completed year of asset 2. Motor Car Actual cost of Car (-) 20% Depreciation on the written down value(WDV) of asset for each completed year of Car 3. Any other asset Actual cost of asset (-) 10% Depreciation on the Straight line basis(SLM) for each completed year of asset Asset transferred Car Laptop Furniture Actual cost of The Asset (Rs.) 4,84,000 50,000 1,00,000 Date of Purchase by employer 1-Aug-2010 1-Aug-2011 1-Aug-2010 Date of sale to employee 1-Dec-2014 1-Sep-2014 30-Jul-2013 Sale price (Rs.) 1,20,000 5,000 15,000 Asset transferred Car Laptop Furniture Actual cost of The Asset (Rs.) 4,84,000 50,000 1,00,000 Less: Depreciation Year I 96,800 25,000 10,000 Year II 77,440 12,500 10,000 Year III 61,952 6,250 NIL Actual Cost – Accumulated Depreciation 2,47,808 6,250 80,000 Less: Recovered 1,20,000 5,000 15,000 Taxable Value 1,27,808 1,250 65,000
- Interest Free Loan
If your employer grants you any interest free loan for meeting any emergency or otherwise, then the taxability of such perquisite shall arise as under If the loan is taken for treatment of any specified disease or the amount of loan is Rs. 20,000 or less, then such perquisite shall not be taxable. In other cases, it shall be deemed to be a non-interest free loan and interest on loan calculated as per SBI rates shall be taxable.
Let's understand this concept with the help of an illustration:
Case No. Nature of Loan Amount of Loan (Rs) Interest Rate (Assuming given by SBI) Taxable amount under salary (Rs) 1. Specified disease 15,000.00 N.A. Tax free 2. Specified disease 50,000.00 N.A. Tax free 3. General purpose 15,000.00 N.A. Tax free 4. General purpose 18,000.00 N.A. Tax free 5. General purpose 50,000.00 12 % p.a. 6000.00
- Medical Facility
If your employer has provided any medical facility to you or any member of your family (spouse, children, dependent parents, dependent brothers and sisters) or has reimbursed the medical expenses then taxability shall arise as under:
Case Taxability Medical facility in hospital maintained by the employer or in any government or approved hospital No tax Employer pays the insurance premium or reimburses the amount of premium as approved by Central Government or IRDA. No tax Expenses are reimbursed by employer Tax free up to Rs. 15,000 per annum
- Education Facility
If your employer provides education facility to your children, value of such perquisite shall be calculated as follows:
- If children are studying in an institute owned by employer Cost of education that would be incurred in similar institute (-) Rs. 1,000 per month per child
- If any other family member is studying in institute owned by employer, then the deduction of Rs. 1000 shall not be granted.
- But, if the institute is not owned by the employer then amount of tuition fees less Rs. 1000 per month, shall be the value of perquisite.
- If your children receive any scholarship from the employer, then such amount shall be exempt from tax.
Employer may provide gift to the employee in cash or in kind. If you (or your family member) receive any gift in cash from your employer, then amount of gift shall be fully taxable. But if any gift is received in kind, then enjoy tax free gift if value of gift is less than or equal to Rs. 5,000.
Please note when the value of gift is more than Rs. 5,000, then the entire amount become taxable.
The following table gives an understanding the taxability of gifts under different scenarios:
Case No. Form of Gift Amount or Value of kind (Rs) Taxable Amount (Rs) 1. Cash 4,000 4,000 2. Cash 25,000 25,000 3. Kind 3,000 Nil 4. Kind 5,000 Nil 5. Kind 8,000 8000
- Some Other Fringe Benefits Available
Fringe Benefits Taxable Value Benefits in relation to Health Club & Sports Club for personal use of employee Actual amount paid by employer Club Membership fees of employee paid by employer Actual fees paid by employer Credit Cards payment of employee borne by employer Actual bill of card including all fees i.e. membership fee and annual fee
7. What are the tax implications attached to allowances?
Some of the allowances granted by your employer are fully exempt i.e. no tax is to be paid on such allowances to the extent of actual amount received or the amount spent for official purpose whichever is less. These are:
- Conveyance allowance
- Travelling allowance
- Uniform Allowance
- Academic Research Allowance
- Helper Allowance (for office purpose)
- Daily Allowance
Further for some specific persons allowances received from their employers are fully exempt from tax:
- Allowances to Indian citizen who is a government employee and rendering services outside India;
- Allowances to employees of UNO;
- Allowances to high court judges under Section 22A(2) of High Court Judges (Conditions of Service) Act,1954;
- Sumptuary Allowances to High Court and Supreme Court Judges
Some of the allowances are partially taxable i.e. they become taxable after a certain limit. These are:
House Rent Allowance
If your employer is paying you House Rent Allowance to meet your accommodation expenses, then you have to pay tax on such house rent allowance after deducting the exempt amount as follows:
Least of the three shall be exempt from tax:
- Actual HRA received from the employer;
- Actual rent paid by employee (minus) 10% of salary;
- 50% of salary (for metro cities)/ 40% of salary (for non-metro cities)
Some important points to be kept in mind are:
- You can claim HRA only if you are actually paying the rent;
- For the purpose of calculation, Salary = Basic salary + Dearness allowance (to the extent it forms part of retirement benefits) + Fixed commission on sales
- Delhi, Mumbai, Chennai and Kolkata are metro cities.
To calculate your House Rent Allowance Exemption, you can try our free HRA calculator.
Leave Travel Concession
When your employer pays the travelling expenses of your vacations with family to any place in India, it is covered under this head. Normally, it is included in your CTC in the form of Leave Travel Concession or Assistance (LTC /LTA).
Least of the three shall be exempt from tax:
- Actual amount paid by employer as LTA;
- Actual expense incurred by employee;
- Amount calculated as per specified limit
What is the meaning of Specified Limit?
- For Air Journey Air Economic Fare of National Carrier by shortest route.
- For Rail Journey Rail fare of AC first class by shortest route.
- For any other Mode (e.g. car etc.) If recognized public transport system exists then bus fare of Deluxe/AC by shortest route and if no recognized transport system exists, then Rail fare of AC first class by shortest route assuming the travel by rail.
Other conditions attached to the exemption:
- Exemption can be claimed for the journey of self, spouse, children (maximum 2), dependent parents, brother and sister;
- In case an employee has one elder child and younger twin children then all 3 children shall be eligible for exemption;
- Exemption can be claimed twice in a block (span) of 4 years. In case the employee is unable to travel and thereby can't claim any of the two or both the exemptions; then he can carry forward one exemption and can claim it successive year of end of block. The current block is from 2014 to 2017.
Amount paid by your employer for commuting between residential area and office is covered under this allowance. Amount to an extent of Rs. 1600 p.m. is not liable to tax and any amount over and above Rs. 1600 p.m. shall be liable to tax. For handicapped employees, this limit is Rs. 3200 p.m.
Children Education Allowance & Children Hostel Allowance
Amount paid by your employer for meeting education expenses of your children is exempt up to Rs. 100 per month per child for a maximum of 2 children. Allowance granted by your employer for meeting hostel expenditures of your children is exempt up to Rs. 300 per month per child for a maximum of 2 children.
8. What are the retirement benefits and their tax implications?
Pension is the consideration paid by the employer to the employee after his retirement as a reward for his services for the organisation. It can be payble on a lump sum basis (known as commuted pension) or on a monthly basis (known as non-commuted pension).
Pension received by family members of army personnel is exempt from tax.
What will be the taxability, in case of non-commuted pension?
- Fully taxable for all employees;
- In case of receiving of pension after death of employee, pension amount shall be taxable in hands of legal representative. In this case, amount of exemption will be Rs. 15,000 or 1/3 of Pension received, whichever is lower.
What will be the taxability, in case of commuted pension?
- Fully exempt for government employees;
- For non-government employees:
- If gratuity received along with pension, amount of exemption = 1/3 of total amount of pension i.e. 2/3 of pension amount is taxable.
- If gratuity not received along with pension, amount of exemption = of total amount of pension.
- For the purpose of calculation, total amount of pension = (Amount of commuted pension received percentage of commuted pension received)
Example: Rakesh, an employee of XYZ Limited on retirement, was set to receive Rs. 12,000/- as pension per month along with gratuity and he decides to commute 50% of his pension. He received Rs. 3,00,000/- as commuted pension and his monthly pension was set at Rs. 3,000/-. In this case, for the purpose of calculating the exemption of pension, his total amount of pension will be equal to Rs. 6,00,000/- (3,00,000 50%). As per law, Rakesh will be getting an exemption of Rs. 2,00,000/- (6,00,000 1?3) and his taxable pension will be Rs. 1,00,000/- (3,00,000-2,00,000).
Retrenchment compensation means an amount paid by the employer to employee at the time of his retrenchment under the eligible schemes.
What will be the Taxability in case of Retrenchment Compensation?
- 15 days average pay for each completed year of continuous service or any part in excess of six months; or
- Rs. 5,00,000; or
- Actual amount received.
Thus, if you have completed 12.6 years of service, it shall be termed as 13 years for the purpose of calculation of exemption.
Every company grants some leaves to an employee during the year. The unused leaves at the end of year either lapse or are carried forward. Some Companies grant option to either avail the accumulated leaves during the service tenure or en-cash them at the time of retirement or resignation from job.
Leave encashment received during employment shall be fully taxable.
Leave encashment received on retirement will be taxable as follows:
- If you are a government employee, no tax will be levied on leave encashment.
- If you are a non-government employee, lower of following shall be exempt and the balance amount received shall be liable for tax:
- Actual amount received;
- Rs. 3,00,000;
- 10 months average salary immediately preceding the retirement;
- Average Salary multiplied by leaves in credit (assuming 30 leaves in a year)
- If your legal heir receives any leave encashment amount, after your death then it is exempt from tax.
What you should care of?
- Salary = Basic Pay + Dearness Allowance (if it is a part of retirement benefits) + turnover based fixed commission
- Average Salary = Total of salary in last 10 months just preceding the date of retirement 10
- Leaves in Credit = Actual Leave Entitlement (taking 30 days or actual leave entitlement whichever is lower) Completed Years – Leaves Availed)
Voluntary Retirement Scheme (VRS)
When company gives you an option of retirement before your due age of retirement in lieu of a lump sum consideration, then it is termed as voluntary retirement scheme; it is a method used by companies to lay off staff.
How much exemption can you claim? You can claim lower of the following 2 amounts:
- Amount actually received under Voluntary Retirement Scheme; or
- Rs. 5,00,000
Are there any conditions attached? You can avail the exemption only in one particular year; exemption in subsequent year is not allowed.
Approved Superannuation Fund
These are funds established under a trust by the company, for the benefit of its employees. It is approved by the Commissioner of Income Tax. The objective of the establishment is to pay amount to employees on retirement or to their legal heir after their death. Both the employer and the employee contribute a part of salary in the superannuation fund.
How much exemption can you claim? You can claim exemption as follows:
- For employee's contribution, deduction of the payment is available under section 80C.
- For employer's contribution, contribution up to Rs. 100,000/- per employee per annum shall be exempt. On any excessive contribution, tax is to be paid by the employee.
- Any interest on accumulated balance is exempt from tax.
What are the tax implications at the time of payment from superannuation fund? Payment from fund is exempt in following cases:
- On death of an employee;
- On retirement of an employee.
In event of payment in other cases, tax is to be paid by employee.
Provident fund is a monthly contribution made by the employer and the employee both. It is a very important part of corpus to support you after your retirement. Provident fund is of different types and tax implications and benefits attached to each type of provident fund are also different.
Gratuity is received by the employee from employer in appreciation of past services rendered to the organization. You are eligible to receive gratuity only if you have rendered continuous service for a period of more than 5 years. Taxability of gratuity arises according to two criteria namely:
- Status of employer (whether Government or Non-Government employer); and
- Whether the employee is receiving gratuity under Payment of Gratuity Act, 1972 or not.
Some other Deductions and Allowances
Entertainment Allowance: The deduction of entertainment allowance is allowed only to a Government Employee. The entertainment allowance received is first added in the salary of the employee; then deduction is allowed from it as follows:
- Actual amount received; or
- 20% of basic salary; or
- Rs. 5000.
Professional Tax: Professional tax means tax payable to the state government by employees having some specified qualification. It shall be allowed as a deduction only if it is actually paid. If the employer pays the tax on behalf of employee, then the payment shall be first added in the salary of the employee and then it shall be deducted from the net salary income. Maximum professional tax cannot exceed Rs. 2500 per annum.
9. What is the Tax Treatment of other payments received from employer?
Any bonus received on occasion of Deepawali or as a token of your meritorious performance is fully taxable.
- Salary in Lieu of Notice Period
If the employer is paying the salary to the employee in lieu of notice period, it shall be fully taxable in the year in which salary is actually received.
- All other Payments
Any profit in lieu of salary, fees or commission or any overtime payment received from employer is fully taxable.
10. What are the clauses related to arrear or advance payment of salary?
- Arrears of Salary or Advance Salary
Your employer might pay salary in advance or arrear (i.e. outstanding or salary of previous year) salary. In such cases, you have to pay tax on such salary in the year of receipt.
- Salary from more than one Employer
If you are receiving salary from two or more employers, then you need to furnish correct/complete details to the present/ chosen employers.
Let's take an example to understand the things better: A is working with two employers namely ABC & XYZ. Now A chooses to furnish details of all incomes two XYZ. In such case he shall submit the details related to salary received and TDS deducted by ABC to XYZ in writing. In such case since XYZ has all details, he shall compute the tax on entire income (salary from XYZ + Salary from ABC) after deducting the eligible deductions. XYZ shall deduct the TDS already deducted by ABC from the tax computed and shall deduct the balance TDS.
Please note that the limits specified for gratuity, pension and various perks and allowances is cumulatively checked for both the employers for a particular financial year.
A big congratulations on reading this guide as now you know the nitty-gritty of your CTC and its tax impact. If you still have queries or require any kind of tax-assistance, feel free to reach us and our experts shall be more than happy to assist you. Your Tax Saving is our ultimate motto.