Started your professional career? Know the taxes!

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:

Difference between CTC and take home salary

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. 

Components of a 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.

ii) Allowances

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. 

iii) Retirals

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.  

Taxation of your income- income tax slabs

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%

TDS on your salary<

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.

How to minimise taxes?

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.