Understanding the components of one’s salary structure is very important because although a higher CTC (Cost to Company) is also an important aspect, a clarity on salary structure will give the employee many ways to save on taxes and thereby he/she will have a larger take-home salary amount.
CTC can be generally divided into four components:
Each of this component consists of different features that impact taxation and the total take home salary.
Basic salary is defined as the foundation income of a salaried individual. Basic salary is the amount paid to employees before any deductions or additions. This component of salary is a fixed amount paid to employees as the core of the salary, depending on the designation or experience of the individual. The base salary is the amount exclusive of bonuses, benefits or any other compensation from employers. If the employee is appointed on the basis of a pay scale, then his/her Basic Salary may increase every year.
In a salary slab, the Basic Salary is always taxable which is why its percentage is usually 40% of the Cost to Company (CTC). If the Basic Salary is however allotted a lower percentage then it will result in tax deductions from other constituents of the salary.
Dearness Allowance is that part of the salary structure whose purpose is to reduce the burden of inflation on salaried employees. The amount of Dearness Allowance is usually 5% of the total CTC and similar to the Basic component, it also influences PF, ESIC etc.
House Rent Allowance is an integral component of the salary structure which benefit employees to avail tax exemptions if they reside in rented accommodations. For taxpayers residing in metropolitan cities, the rate percentage which one can claim as a tax deduction under HRA cannot be more than 50% of the Basic Salary, the rate percentage is 40% for non-metro city residents.
HRA for salaried people is credited as per Section 10 (13A) of the Income Tax Act, with respect to Rule 2A of Income Tax Rules. Self-employed taxpayers cannot avail HRA tax exemption benefits under this section but they can claim tax benefits under Section 80GG of the Income Tax Act.
Leave Travel Allowance (LTA) is a reimbursement that an employee can avail for travel expenses incurred while traveling within one’s own country.
There are certain factors that determine the applicability of claim for tax benefits:
Medical allowance is the reimbursement amount credited to the employee for medical expenses. The amount which is tax deductible for Medical Allowance is Rupees 15,000 per year or Rupees 1,250 every month. To claim for tax benefits under this policy the employee must submit a proof of the medical expenses (example: a medical bill).
If the employee doesn’t claim the specified monthly Medical Allowance of Rupees 1,250, then the unclaimed amount is carried forward to the next month.
This allowance is a part of the salary structure which is paid to the employee towards tuition fees of his/her children. The tax-deductible amount is Rupees 100 every month, allotted for the educational fee of a maximum of two children. The maximum limit given for Child Education Allowance is Rupees 2,400 per year.
Special Allowance is the amount credited to an employee apart from the regular salary. Every allowance usually gets included in the total income of an employee unless the components are exempted. As per the guidelines under the Income Tax Act, Special Allowances are taxable.
Some of the common salary deductions are as follows:
PF contribution is defined as a savings policy where 12% of the Basic Salary of an employee and an additional 12% is contributed from the employer’s side, the amount is then deposited in the employee’s PF account. The whole of an employee’s 12% contribution goes into the EPF account, with that 3.67% of the employer’s contribution also goes into EPF account and the remaining balance i.e. 8.33% goes into your EPS (Employee’s Pension Scheme). PF funds also generate an interest of 8% - 12%, depending on the rate assigned as per the government and the Central Board of Trustees.
When an employee joins a new company then it is important that the employee provides his/her EPF number to the new employer and make sure that EPF details are updated as per the new company’s credentials.
When an employee earns a gross salary of more than Rupees 15,000 then deductions towards ESIC are mandatory. ESIC deduction is applicable only for companies with more than 20 employees whose gross salary falls within the Rupees 15,000 bracket. The employee must contribute 1.75% of the gross salary while the employer contributes 4.75% of the gross salary towards the employee’s ESIC.
The government in certain states of India imposes Professional Tax upon salaried employees. The list of states where Professional Tax is imposed are; Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh and Sikkim. The amount deducted against Profession Tax varies from one state to another.
Labour Welfare Fund is a contribution made towards benefiting the labour class citizens by salaried employees. Labour Welfare Fund is deducted in states like; Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, Haryana and Madhya Pradesh. Both the employer and the employee make contributions towards Labour Welfare Fund but, the employer contributes twice the amount contributed by the employee.