Not all that you earn is taxed

The cost to company you receive comprises taxable as well as non-taxable components

Many salaried people, especially younger ones, incorrectly believe they pay tax based on what their CTC is. The reason for this much prevalent misconception is that the Income Tax Department speaks a language very different from the commonly spoken one. They are not particularly concerned about a person’s CTC. What they do care about is something they call ‘income from salary’. It’s one of the ways the Tax Department identifies income sources.

CTC or cost to the company is what a company considers the total money it directly spends on an employee. For example, the company’s contribution to an employee’s EPF is part of their CTC, along with the employee’s personal contribution. The important point to note is that there are elements which are part of CTC, but not considered income from salary, for tax purposes.

Your CTC generally includes the following components — Basic Salary, House Rent Allowance (HRA), Special Allowance, bonus, employer’s contribution to EPF (this is up to 12 per cent of your basic salary), employer’s contribution to gratuity, etc, medical allowance, Conveyance Allowance and meal coupons.

The taxed portion

Not all of these components are taxed. A person’s taxable income doesn’t include the following: medical allowance of up to ₹15,000, provided you submit medical bills; and conveyance allowance of up to ₹19,200.

These two components have been subsumed into a new standard deduction of ₹40,000 that was introduced in the Budget, and will be applicable from this fiscal.

No separate deduction for medical and conveyance allowances will be applicable.

Food coupons of up to ₹26,400 in a year are also not taxed. If your employer pays you more than this, the excess amount is added to taxable income.

Other non-taxable components are: employer’s contribution to EPF (please note that your personal contribution is counted), employers’ contribution to gratuity and HRA.

When these excluded numbers add up, a person’s taxable income from salary may be significantly less than their CTC.

Let us better understand the income part from among the figures in our salary slips.

Basic salary

This is the most important component of a salary slip and generally comprises 35-50 per cent of one’s total salary.

Most of the other components are structured around it. It is 100 per cent taxable.

HRA

This is an allowance to pay one’s house rent. Normally, HRA is 40-50 per cent of the basic salary, based on one’s location. One can get tax exemption on HRA based on the lowest of the following figures: (a) 40 per cent of basic pay; (b) actual rent minus 10 per cent of basic; (c) the HRA component specified in salary slip.

LTA

Employers provide LTA to cover an employee’s travel cost while on leave. You will need proof of journey to avail yourself of this deduction, subject to certain limits. All other expenses incurred during the trip, apart from travel costs, do not count towards your LTA tax exemption. The exemption is applicable only for two journeys undertaken in four calendar years.

Bonus and special allowance

This is given to reward/encourage employee performance, and varies depending on performance/company guidelines. It is 100 per cent taxable.

What has been discussed here is a very basic salary structure and its taxation aspect. Various companies offer many other components, especially for mid- and senior-level employees. In such cases, the taxation aspect would significantly differ and be a lot more complex.

The author is CEO and co-founder of Scripbox

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