CloudFare image
Support support image
Name is required.
Please enter valid Name.
Email ID is required.
Please enter valid Email.
Phone Number is required.
Please enter valid Phone Number.
Message is required.
Submit

Faster, easier and secure gateway to e-file income tax return

Heading Tax icon

Unravelling the Salary Structure in India

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:

  • Basic Salary.
  • Allowances.
  • Perquisites.
  • Retirement benefits or PF contributions.

Each of this component consists of different features that impact taxation and the total take home salary.

Basic 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.

Tax Liability on Basic Salary

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 (DA)

Basic-Salary image

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.

Guidelines to understand while setting the amounts for Basic and DA

  • A Higher percentage of Basic Salary and DA will increase the tax liability of the employee, as these components of the salary are fully taxable. A higher percentage will also affect the tax liability of the employer because the employer will be required to make higher contributions for PF, ESIC etc.
  • In the case of very low percentage of Basic Salary or Dearness Allowance, the employee will not be able to fulfill the minimum pay norms set by the government. As minimum wages get updated regularly, the employee will be at risk of falling below the recommended wage limit.

House Rent Allowance (HRA)

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.

hra-rent image

Leave Travel Allowance (LTA)

Leave Travel Allowance (LTA) is a reimbursement that an employee can avail for travel expenses incurred while traveling within one’s own country.

lta image

Upon LTA, an employee can claim for tax benefits for the commuting expenditures invested during the holiday for oneself as well as for his/her family.

There are certain factors that determine the applicability of claim for tax benefits:

  • Under LTA only travel fare expenses can be claimed, whereas lodging or food should be covered by the individual himself/herself.
  • The allowance is reimbursed only for travel within India and not for travel fare amounted whilst traveling out of India.
  • Only immediate family members who are dependent on the employee will be covered under Leave Travel Allowance policy.

Conveyance Allowance

  • Conveyance Allowance is the component of the salary structure which is given to an employee for his/her travel expenses between the home and workplace. The maximum tax-deductible amount under Conveyance Allowance is Rupees 1,600 per month or Rupees 19,200 per year.
  • Conveyance Allowance is only eligible for tax deductible if the organization where the individual is employed do not provide any means of transport to its employees. If the employer provides pick and drop facility to its employees the Conveyance Allowance cannot be claimed.

Medical Allowance

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).

medical image

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.

Child Education Allowance

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

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.

Deductions

Deductions are part of the CTC but are deducted from the in-hand salary that employees receive.

Some of the common salary deductions are as follows:

Provident Fund Contribution

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.

Employees State Insurance Corporation (ESIC)

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.

Professional Tax

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

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.

Frequently Asked Questions

Q. What does Perquisite mean?
Perquisite is defined as any sort of benefit and facility provided free of cost or at a concessional rate by an employer to the employee, such as:
  • Company apartment or flat.
  • Company vehicle.
  • Reimbursement of gas.
  • Free electricity and Water provision.
  • Club membership.
  • Domestic help service.
  • Interest subsidy on loan.
  • Medical insurance etc.
Q. Are perquisites taxable?
Perquisites are not cash benefits which is why it cannot be taxed directly. The Income Tax Acts have instead proposed certain value attached to the perquisites and taxes are charged on it. The taxability rate varies from one perquisite category to another.
Q. What are the type of deductions from the salary of an employee?
There are two type of deduction made from the salary of an employee:
  • Compulsory deduction: It includes deductions such as Provident Fund Contribution, Income Tax, Professional Tax (if applicable).
  • Optional deduction: Optional deductions include deductions like Recovery for Advance, Interest paid on Loan and Voluntary Contribution to Provident Fund.