Getting your first job is one of the most important milestones in your life. It adds more responsibilities on your shoulders, and you must know everything related to your finances. If you are not aware of the taxability already, then you must get to know it soon. We have covered the following in this article:
In your offer letter, you will find your CTC (the cost to the company), which is nothing but the cost incurred by the company to have you employed. CTC includes your in-hand salary, retirals (EPF or NPS contributions), food coupons, variable pay, incentives, bonus and all other components of your salary.
On the other hand, your in-hand salary is the amount of money that gets credited to your account after all deductions, including applicable taxes. Therefore, you must be aware of the sum that will be taken home after all the applicable deductions are made on your salary.
The following are the most common components of a salary in India:
i) Basic Pay
Basic salary is the fixed pay that is dependent on the organisation and the employee’s profile. All allowances such as house rent allowance and dearness allowance would be a certain percentage of the basic salary.
Allowances are a fixed pay given by the employers to the employees to meet certain expenses. The most popular allowances are dearness allowance, house rent allowance and leave travel allowance.
Retirals refer to the contributions made towards securing your retired life. In India, employees working with most employers are required to either subscribe under EPF or NPS. The monthly contributions made by both employee and employer are dependent on the basic pay of the employee.
iv) Medical insurance
Most employers offer insurance to employees. The premiums payable are nominal and would be collected at the time of paying salaries.
v) Professional tax
It is an indirect tax collected by state governments in India. The extent of personal tax levied varies across states and professions.
The income earned from your employment is termed as ‘salary’ and is taxed under the head of ‘income from salary’. The tax rate depends on your age, income, and tax system regime you choose to follow.
The following table shows the income tax slabs under the old tax system:
|Income Tax Slab||Individuals Below the Age Of 60 Years – Income Tax Slabs|
|Up to Rs 2.5 lakh||NIL|
|Rs 2.5 lakh -Rs. 5 lakh||5%|
|Rs 5 lakh – Rs 10 lakh||20%|
|> Rs 10 lakh||30%|
The following table shows the income tax slabs new tax regime:
|Income Tax Slab||New Regime Income Tax Slab Rates for FY 2020-21|
(Applicable for All Individuals & HUF)
|Up to Rs 2.5 lakh||NIL|
|Rs 2.5 lakh – Rs 3 lakh||5% (tax rebate u/s 87a is available)|
|Rs 3 lakh – Rs 5 lakh||5% (tax rebate u/s 87a is available)|
|Rs 5 lakh – Rs 7.5 lakh||10%|
|Rs 7.5 lakh – Rs 10 lakh||15%|
|Rs 10 lakh – Rs 12.50 lakh||20%|
|Rs. 12.5 lakh – Rs 15 lakh||25%|
|> Rs 15 lakh||30%|
Depending on the regime of tax system you choose to follow, your income tax liability will be calculated by your employer, and taxes will be deducted from your salary accordingly. TDS, or tax deducted at source, is the procedure of collecting taxes at the source. In the case of income from salary, your employer deducts TDS and deposits the same to the government on your behalf.
TDS provisions exit as the government wants to eliminate tax avoidance and drive tax compliance among the country’s salaried class. Your employer would require you to declare other income sources such as income from bank deposits, rental income, capital gains and so on towards the end of the financial year. Most tax liability is collected and deposited to the government’s account on your behalf by the employer.
To minimise your tax outgo, you have to have a sound financial plan. You have to claim deductions and exemptions that you are eligible for, and doing so would help you reduce your taxable income. Section 80C covers a wide range of investment products that provide tax deduction of up to Rs 1.5 lakh a year. Read more to understand how to save taxes here.