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Who is this Guide for?

If want to understand your salary components or want to learn how you can save tax on your salary income, this guide is for you.


Section I: Your Payslip Explained

Go through the elements that make up your payslips such as HRA, medical reimbursement, bonus, and professional tax in this section.

Read more…

How are Employee Benefits Taxed?


Section II: Deduce Your Take Home Salary from Your CTC

Ever wondered why your take home salary is a lot lower than what you were told on your offer letter?

Read more…


Section III: Retirement Benefits

Read up on retirement benefits such as the exemption on leave salary, gratuity, and pension.

Read more…


Section IV: Income Tax Basics for Salaried Individuals

  • What income am I taxed for?
  • How much tax do I have to pay?
  • What is Form 16?
  • What is Form 26AS?
  • How can I bring down my taxable income with deductions?
  • Do I have to file an income tax return?

Read more…

 

Section I: Your Payslip Explained

The first step in understanding taxes should start with knowing what goes into your payslip. Your monthly payslip will show you what’s been paid to you and what deductions have been made.

1. Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions of your salary, hence the name. It is usually a large portion of your total salary. HRA is also defined as a percentage of this basic salary. Your PF is deducted at 12% of your basic salary.

2. House Rent Allowance

Salaried individuals who live in a rented house/apartment can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation.

If you receive HRA and don’t live on rent your HRA shall be fully taxable.

Read more about how to claim HRA exemption.

 

Case Study: Samiksha works at an MNC in Bangalore. Her company provides her with a house rent allowance. But she doesn’t live in a rented accommodation as she lives with her parents.

How Can Samiksha Make Use of this Allowance?

Samiksha can pay rent to her parents and claim the allowance provided they own the place they currently live in. All she has to do is enter into a rental agreement with her parents and transfer money to them every month.

This way Samiksha can make a nice gesture and give back to her parents, and two, save some taxes.

But remember: Samiksha’s parents will have to show the rent she paid in their income tax returns.

 

3. Medical Reimbursement

If your company provides you with medical reimbursement of Rs 15,000 towards medical expenses, you must submit bills to your employer to claim this. These expenses could be incurred towards consultation with a doctor, medicines, medical tests, etc.

Deductions can also be claimed against medical expenses of your dependents. Please check about this with your company.

Make sure to keep all the bills safely and submit them to your employer for reimbursement on time.

The Rs 15,000 you can claim is for each tax year, starting on April 1st and ending on March 31 next year.

My company provides me with ‘medical reimbursement’ of Rs 15,000 as part of my salary. I have only claimed medical expenses worth Rs 6,000 during the year. How much tax will be deducted if I don’t submit medical proofs for the remainder of the Rs.15,000?

The IT Department allows medical reimbursement of up to Rs 15,000. You must, however, furnish the necessary bills to your employer to claim this. The remaining unclaimed amount of the Rs 15,000 is added to your taxable salary. Your taxable salary is taxed at the slab rate you belong to. The bills must be between April last year to March this year.

4. Conveyance Allowance

Conveyance allowance is given to the employees to meet travel expenses from residence to work. The conveyance allowance for up to Rs 9,600 per annum is exempt from tax.

Starting FY 2015-16, this limit has been increased to Rs 19,200 per annum.

5. Leave Travel Allowance (LTA)

Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip.

This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives.

This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

Read more about how to claim this exemption.

6. Special Allowance

Any number in your salary by the name of ‘special allowance’ is fully taxable. This is usually the leftover component of your salary, after allocating to basic, HRA, LTA, and transport allowance.

7. Bonus

BonusThe bonus usually paid once or twice a year. Bonus, performance incentive, whatever may be its name is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

8. Employee Contribution to PF

Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward employee’s pension and provident fund. An interest of about 8.5% gets accrued on it. This is a retirement benefit that companies with over 20 employees must provide.

9. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.

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Section II: How is Take Home Different from CTC?

Your job may entitle you to some benefits in the form of food coupons or a cab service apart from your salary. The total cost to the company is the sum of all the benefits offered plus your salary.

Below is an example of components of your CTC that is on your offer letter.

CTC
Components Amount
Basic salary Rs 3,00,000
Special allowance Rs 1,00,000
HRA Rs 80,000
Medical reimbursements Rs 15,000
Medical insurance for you and your family Rs 5,000
PF (12% of basic) Rs 36,000
Performance bonus
(range between 50,000 to 75,000 based on performance ratings)
Rs 75,000
Total CTC Rs 6,11,000

Whereas this is how your payslip will look for the CTC mentioned above.

Taxable Salary
Components Amount
Basic salary Rs 3,00,000
Special allowance Rs 1,00,000
HRA (less exemption on producing of rent receipts) Rs 50,000
Bonus received Rs 70,000
Total salary Rs 5,20,000
Less: 12% PF Rs 36,000
Less: Tax payable* Rs 12,875
Take home salary Rs 4,71,125

Broadly your CTC will include:

  • Salary received each month.
  • Retirement benefits such as PF and gratuity.
  • Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

Your take-home salary will include:

  • Gross salary received each month.
  • Minus allowable exemptions such as HRA, LTA, conveyance allowance etc.
  • Minus income taxes payable (calculated after considering Section 80 deductions).
*Tax Payable
Total salary Rs 5,20,000
Less: Deduction under Section 80C Rs 1,25,000
Taxable salary Rs 3,95,000
Tax payable (includes cess; excludes interest payable) Rs 12,875

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Section III: Retirement Benefits

Exemption on Leave Salary

Check with your employer about their leave encashment policy. Some employers allow you to carry forward some amount of leave days and allow you to encash them while others prefer that you finish using them.

The amount received as compensation for leave days accumulated is referred to as leave encashment and it is taxable as salary.

When is Leave Encashment Exempt from Tax?

It is fully exempt for Central and State government employees

For non-government employees, the least of the following three is exempt-

  1. 10 months average salary preceding retirement or resignation
    (where average salary includes basic and DA and excludes perquisites and allowances)
  2. Leave encashment actually received
  3. Amount equal to salary for the leave earned
    (where leave earned should not exceed 30 days for every year of service)
  4. Rs 3,00,000

The amount chargeable to tax shall be the total leave encashment received minus exemption calculated as above. This is added to your income from salary.

Relief under Section 89(1)

You are allowed tax relief under Section 89(1) when you have received a portion of your salary in arrears or in advance, or have received a family pension in arrears.

Calculate the Tax Relief Yourself

    1. Calculate the tax payable on the total income, including additional salary in the year it is received.
    2. Calculate the tax payable on the total income, excluding additional salary in the year it is received
    3. Calculate the difference between Step 1 and Step 2
    4. Calculate the tax payable on the total income of the year to which the arrears relate, excluding arrears
    5. Calculate the tax payable on the total income of the year to which the arrears relate, including arrears
    6. Calculate the difference between Step 4 and Step 5
    7. The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note that if the amount at Step 6 is more than the amount at Step 3 no relief shall be allowed.

Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received upon voluntary retirement or seperation is exempt from tax as per Section 10(10C) when the following conditions are fulfilled

  • Compensation received is towards voluntary retirement or separation
  • Maximum compensation received does not exceed Rs 5,00,000.
  • The recipient is an employee of an authority established under the Central or State Act, local authority, university, IIT, state government or central government, notifued institute of management, or notified institute of importance throughout India or any state, PSU, company or cooperative society.
  • The receipts are in compliance with Rule 2BA.

No exemption can be claimed under this section for the same AY or any other if relief under Section 89 has been taken by an employee for compensation of voluntary retirement ot seperation or termination of services.

Note: Exemption can only be claimed in the assessment year the compensation is received.

Pension

Pension is taxable under the head salaries in the income tax return. Pension is paid out periodically on a monthly basis usually. You may also choose to take pension as a lump sum (also called commuted pension) instead of a periodical payment.

At the time of retirement, you may choose to receive a certain percentage of your pension in advance. Such pension received in advance is called commuted pension. For e.g.- At the age of 60, you decide to receive in advance 10% of your monthly pension of the next 10 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, Rs.10% of 10000x12x10 = 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70 and post 70 years of age, you will be paid your full pension of Rs 10,000.

Uncommuted pension or any periodical payment of pension is fully taxable as salary. In the above case, Rs 9,000 received by you is fully taxable. Rs 10,000 starting the age of 70 years are fully taxable as well.

When is Commuted and Uncommuted Pension Exempt from Tax?

Commuted pension or lump sum received may be exempt in certain cases. For a government employee, commuted pension is fully exempt.

Uncommuted pension or any periodical payment of pension is fully taxable as salary. In the above case Rs 9,000 received by you is fully taxable. Rs 10,000 starting the age of 70 yrs are fully taxable as well.

For a non-government employee, it is partially exempt. If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received if 100% of the pension was commuted is exempt from commuted pension and remaining is taxed as salary. If only the pension is received, gratuity is not received – ½ of the amount of pension that would have been received if 100% of the pension was commuted is exempt.

Pension received by a family member though is taxed under income from other sources in the income tax return. If this pension is commuted or is a lump sum payment it is not taxable. Uncommuted pension received by a family member is exempt to a certain extent. Rs 15,000 or 1/3rd of the uncommuted pension received – whichever is less is exempt from tax.

Pension that is received from UNO by its employees or their family is exempt from tax. Pension received by family members of Armed Forces is also exempt.

How is Gratuity Taxed?

Gratuity is a retirement benefit that employers provide for their employees. The employee is entitled to receive gratuity when he completes five years of service at that company. It is however only paid on retirement or resignation.

Gratuity received on retirement or death by a central, state or local government employee is fully exempt from tax for the employee or his family.

The tax treatment of your gratuity is different depending on whether your employer is covered by the Payment of Gratuity Act. Check with your company about its status and then proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the following three is tax-exempt.

  • 15 days salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months. For simplicity sake, this is calculated as last drawn salary x number of years in employment x 15/26.
    (where last drawn salary is Basic salary and DA and number of years in service is rounded off to the nearest full year)
  • Rs 10,00,000
  • Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the least of the following three is tax-exempt.

  • Half month’s salary for each completed year of service. While calculating completed years, any fraction of a year shall be ignored. For example – if you have worked in an organization for 14 years and 9 months, the number of years of employment shall be considered to be 14 years. Here salary is taken as the average salary of the 10 months immediately before the month in which the person retires.
  • Rs 10,00,000
  • Gratuity actually received

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Section IV: Income Tax Basics

1. What Income am I Taxed for?

Your income is not equal to your salary. You could earn income from several other sources other than your salary income.

Your total income, according to the Income Tax Department, could be from house property, profit or loss from selling stocks or from interest on a savings account or on fixed deposits.

All these numbers get added up to become your gross income.

Income from Salary All the money you receive while rendering your job as a result of an employment contract
Income from house property Income from house property you own; property can be self-occupied or rented out.
Income from other sources Income accrued from fixed deposits and savings account come under this head.
Income from capital gains Income earned from the sale of a capital asset (mutual funds or house property).
Income from business and profession Income/loss arising as a result of carrying on a business or profession. Freelancers income come under this head.

2. How Much Tax do I Have to Pay?

Income from Salary

Add up all your income from the heads listed above. This is your gross total income. From your gross total income, deductions under Section 80 are allowed to be claimed. The resulting number is the income on which you have to pay tax.

ClearTax’s app lets you determine your tax refund or dues for the year. Download the app here.

Your tax is calculated as per the slabs mentioned below.

Income Tax Rates for taxpayers under 60 years of age in FY 2015-16, FY 2014-15 and FY 2013-14.

Tax Slab FY 2015-16
FY 2014-15
Tax Rate
Tax Slab FY 2013-14
Tax Rate
Up to Rs 2,50,000 No tax Up to Rs 2,00,000 No tax
Rs 2,50,000 – Rs 5,00,000 10% Rs 2,00,000 – Rs 5,00,000 10%
Rs 5,00,000 – Rs 10,00,000 20% Rs 5,00,000 – Rs 10,00,000 20%
Rs 10,00,000 and beyond 30% Rs 10,00,000 and beyond 30%
Surcharge: 10% of the income tax, where total income exceeds Rs. 1 crore.
Education Cess: 3% on the sum of total income tax and surcharge.

The minimum tax exemption limit for senior citizens — those who are 60 years or older — is at Rs 3,00,000 for FY 2015-16, FY 2014-15; and Rs 2,50,000 for FY 2013-14.

 

Rohit’s total taxable income for FY 2015-15 is Rs 8,00,000. How will the tax slabs be applied to him?

Income up to Rs 2,50,000 Nil
Income between Rs 5,00,000 – Rs 2,50,000 10% of (Rs 5,00,000 – Rs 2,50,000) = Rs 25,000
Income between Rs 10,00,000 – Rs 5,00,000 20% of (Rs 8,00,000 – Rs 5,00,000) = Rs 60,000
Total Rs 85,000
Education cess
(3% on sum of total income tax)
Rs 2,550
Tax payable Rs 87,550

Skip the steps and use our updated income tax calculator instead.

3. Your Employer Deducts Tax from Your Salary and Pays it to the IT Department on Your Behalf

It’s called TDS. TDS is tax deducted at source. Your employer cuts a portion of your salary every month and pays it to the Income Tax Department on your behalf.

Based on your total salary for the whole year and your investments in tax-saving products, your employer determines how much TDS has to be cut from your salary each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax payment. Your employer will provide you with a TDS certificate called Form 16 typically around June or July showing you how much tax was deducted each month.

Understand your Form 16 better here.

Your bank may also deduct tax at source when you earn interest from a fixed deposit. The bank deducts TDS at 10% on FDs usually. A 20% TDS is deducted when the bank does not have your PAN information.

 

4. What is Form 16?

Form 16 is a TDS certificate. Your employer is required by the IT Department to deduct TDS on your salary and deposit it with the government.

The Form 16 certificate contains details about the salary you have earned during the year and the TDS amount deducted.

It has two parts – Part A with details about the employer and employee name, address, PAN and TAN details and TDS deductions.

Part B includes details of salary paid, other incomes, deductions allowed, tax payable.

Did you know that Form-16 is all you need to e-file your income tax returns on ClearTax?

E-file with your Form 16

5. Form 26AS

View Form 26AS

Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is provided by the Income Tax Department.

It shows details of tax deducted on your behalf by deductors, details on tax deposited by taxpayers and tax refund received in the financial year. This form can be accessed from the IT Department’s website.

6. Bring Your Taxable Income Down by With Deductions

The lower your taxable income, the lower taxes you ought to pay. So be sure to claim all the tax deductions and benefits that apply to you.

Section 80C of the Income Tax Act can reduce your gross income by Rs 1,50,000/- There are a bunch of other deductions under Section 80C to 80U that reduces your tax liability.

7. Show the Income Tax Department You Have Paid All Your Taxes

Any individual whose income exceeds Rs 2,50,000 (for FY ending March 31, 2015), is required to file their income tax return in India.

I have paid all my taxes, do I still need to file my Income Tax Return? Yes.

Refer to our guide to learn more.

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  5. Find out the difference between Form 16 and Form 16A. Form 16 is for only salary income while Form 16A is applicable for TDS on Income Other than Salary.
  6. Is Pension Taxable? Check out the example mentioned with calculations to find out when the pension is and when it is not taxable.
  7. Find out what is form-16? and how to fill form-16? Know about form 16A and form 16B. Upload your Form-16 and start filing Tax retuns.
  8. Find out what is AY - Assessment Year & FY - Financial Year. Know the difference between AY and FY. Check out the recent years under AY & FY.
  9. Gratuity Exemption calculation. How much tax to pay on Gratuity. When is Gratuity applicable.
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  11. File Income Tax Returns online with ClearTax. ClearTax is fast, safe and very easy to use. Save money. ClearTax handles all cases of Income from Salary, Interest Income, Capital Gains, House Property, Business and Profession. ClearTax maximize your deductions by handling all deductions under Section 80 like section 80C, 80D, 80CCF, 80G, 80E, 80U and the rest. You can use your digital signature to e-file. Our products are trusted by hundreds of CAs and corporations for filing taxes and TDS.
  12. File Income Tax Returns online with ClearTax. ClearTax is fast, safe and very easy to use. Save money. ClearTax handles all cases of Income from Salary, Interest Income, Capital Gains, House Property, Business and Profession. ClearTax maximize your deductions by handling all deductions under Section 80 like section 80C, 80D, 80CCF, 80G, 80E, 80U and the rest. You can use your digital signature to e-file. Our products are trusted by hundreds of CAs and corporations for filing taxes and TDS.
  13. File Income Tax Returns online with ClearTax. ClearTax is fast, safe and very easy to use. Save money. ClearTax handles all cases of Income from Salary, Interest Income, Capital Gains, House Property, Business and Profession. ClearTax maximize your deductions by handling all deductions under Section 80 like section 80C, 80D, 80CCF, 80G, 80E, 80U and the rest. You can use your digital signature to e-file. Our products are trusted by hundreds of CAs and corporations for filing taxes and TDS.
  14. Clear up your confusion on this most commonly asked question!
  15. Form 12BB is a tax-saving declaration statement that employees have to submit to employers. Read more about Form 12BB and download it.
  16. All you need to know about Form 16. Upload your Form 16 and prepare income tax return automatically. Understand what is Part A & Part B of Form 16 with example. We support multiple Form 16.
  17. Your job may entitle you not only to a salary but also to some benefits in the form of food coupons or a cab service. The total cost to the company to hire you is the sum of all the benefits offered plus your salary
  18. Tax treatment of stipend income depends on whether it is considered a scholarship or a salary.
  19. Guide to understanding your Form-16A. Form-16A also called the TDS Certificate contains information about the TDS deducted by a deductor on payments to you. Form-16A is on TDS for non-salary payments.
  20. Form 16 is a TDS certificate for salary income you receive from the employer while Form 16A is applicable in cases where TDS is deducted on income other than salary
  21. You can claim tax relief under Section 89(1) on salary arrears.
  22. A detailed guide to understanding your salary income & its tax implications

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