Taxes for salaried individuals

Who is this guide for?

If you earn salary and want to understand its components and 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 payslip such as HRA, Medical Reimbursement, Bonus, 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 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 to understanding taxes should start with knowing what goes in to 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 pay check and forms the basis of other portions of your salary and hence the name. It is usually a large portion of your total salary. HRA is also defined 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 taxes. This can be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation.

If you receive HRA and dont live on rent your HRA shall be fully taxable.

Read more about how to claim HRA exemption here.

How can Samiksha make use of this allowance?

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 timely to your employer for reimbursement.

The Rs.15,000 you can claim is for each tax year that starts on April 1 and ends 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?

4. Conveyance Allowance

Conveyance allowance is given to 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

Salaried employees can avail exemption for a trip within India under Leave Travel Allowance. The exemption is only for 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 here.

6. Special Allowance

Any number in your salary by the name of ‘special allowance’ is fully taxable. This is usually the left over component of your salary, after allocating to Basic, HRA, LTA, Transport Allowance etc.

7. Bonus

Bonus is 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 production 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 these

  • 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 u/s 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.

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?

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 family pension in arrears.

Click here to calculate the tax relief yourself

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?

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.

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

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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 sale of a capital asset, say 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 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?

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 I-T 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 I-T 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 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

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 I-T 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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