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The employer makes regular payments to the employee for the work done. Such regular payment is termed as the salary. The employment contract specifies the wages, usually made each month. The components of the salary structure are:
Basic Salary: The employee’s basic income is around 40%-50% of the total salary. The employer pays the employee for his skill, experience, and qualifications. The basic salary is a fixed component of the CTC (Cost To Company) package.
House Rent Allowance (HRA): It is the component of the salary offered by the employer to the employees who reside in rented accommodation. The house rent allowance or HRA is partially or fully exempt from taxes under Section 10(13A) of the Income Tax Act. However, HRA is fully taxable if you don’t live in rented accommodation.
Leave Travel Allowance (LTA): The employer gives an allowance to the employee for travel expenses called the leave travel allowance. Employees must submit proof of travel to claim the allowance. A salaried employee can claim the LTA exemption under Section 10(5) of the Income Tax Act.
Special Allowance: The component in your salary structure called the special allowance is fully taxable in your salary.
Bonus: The employer may pay a performance incentive to the employee called the bonus. It is a part of the gross salary and is fully taxable in the employee’s hands.
Employee contribution to the provident fund: Both the employer and the employee contribute 12% of the employee’s basic salary each month to the EPF or employee provident fund. The contribution made by the employee towards the EPF is available for a deduction under Section 80C of the Income Tax Act, 1961.
Professional Tax: Professional tax is the tax on employment levied by the state. The state can charge the maximum amount of Rs 2,500 as a professional tax in a financial year.
The salary calculator is a simulation that calculates your take-home salary. It is the total salary an employee gets after all the necessary deductions. The salary calculator consists of a formula box, where you enter the Cost To Company (CTC) and the bonus included in the CTC.
The salary calculator will show you the deductions such as the employer and employee provident fund, professional tax, employee insurance, and the take-home salary.
To calculate the take-home salary, you must enter the Cost To Company (CTC) and the bonus, if any, as a fixed amount or a percentage of the CTC.
For example, your Cost To Company (CTC) is Rs 8 lakh. The employer gives you a bonus of Rs 50,000 for the financial year. Then your total gross salary is Rs 8,00,000 – Rs 50,000 = Rs 7,50,000 (the bonus is deducted from the Cost to Company).
Gross Salary = Rs 8,00,000 – Rs 50,000 = Rs 7,50,000.
The gross salary deducts the professional tax of Rs 2,400 a year (this is the professional tax in Karnataka). It then deducts the contributions of both the employer and you (employee) towards the Employee Provident Fund (EPF).
EPF contribution is computed on a maximum salary limit of Rs 15,000 per month. It translates to 12% of Rs 15,000 = Rs 1,800 a month or Rs 21,600 per year.
So, you have Rs 21,600 as a yearly contribution made by the employee towards the EPF and a similar contribution of Rs 21,600 by the employer towards the EPF (8.33% of the employer’s contribution gets diverted to the employee pension scheme). In addition, you also have a yearly deduction of Rs 3,000 towards employee insurance.
Total Deductions = Professional tax + EPF (Employee Contribution) + EPF (Employer Contribution) + Employee Insurance.
Total Deductions = Rs 2,400 + Rs 21,600 + Rs 21,600 + Rs 3,000 = Rs 48,600.
Take Home Salary = Gross Pay – Total Deductions
Take Home Salary = Rs 7,50,000 – Rs 48,600 = Rs 7,01,400.
The ClearTax Salary Calculator shows you the take-home salary in seconds.
To use the ClearTax Salary Calculator:
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