Salary Income

What does Salary mean and comprise?

The payment made by the employer in exchange of services rendered by an employee is salary. It is a cost to the company since it is an expense that the company pays out to its employees for a particular year.

Your salary component depends upon your pay structure. Broad and general components of salary could be:

Payslip explained

The monthly payslip describes the amount of money paid to the employee and deductions made from it.

A basic payslip might contain the following components

1.Basic Salary

The amount of salary which is fixed component in the payslip. It is the amount of salary in which no components are added or deductions made. This is fully taxable

2.House Rent Allowance

This is an allowance given to meet the rental expenditure of an employee. The allowance is for expenses related to rented accommodation. Check the taxability of HRA here

3.Medical Reimbursement

If an employee is offered with medical reimbursement of Rs.15, 000 towards medical expenses, employee must submit bills to the employer to claim this. These expenses can be incurred for consultation with a doctor, medicines, medical tests etc. The Rs 15,000 can be claimed for each tax year that starts on April 1 and ends on March 31 next year.

Deductions can also be claimed against medical expenses of the employees’ dependents. Please check about this with your company. All the bills should be kept safely and submitted timely to the employer for reimbursement.

4.Conveyance Allowance

Conveyance allowance is given to employees to meet travelling expenses from residence to work. Check the taxability of conveyance allowance here

5.Leave Travel Allowance

Allowance given to an employee for a trip with family within india. This allowance can help you reduce your taxable income, employee can claim this allowance for a trip taken with spouse, children and parents, but not with other relatives. Check the taxability of Leave travel allowance here

6.Special Allowance

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

7.Bonus

Bonus is usually paid once or twice a year. Bonus, performance incentive, that is performance bonus refers to an employee’s performance during a period which is based on the company policy whatever may be its name is 100% taxable.

8.Employee Contribution to PF

12% of the employee’s basic salary every month is contributed by both the employee and employer towards 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

When tax is levied by a state, it is tax on employment. Similarly tax levied by the central government is income tax. 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. Professional tax can be claimed as a deduction from salary income.

Taxability of Salary

Salary as explained above is taxed on due basis or receipt basis whichever occurs earlier

How are Advance Salary and Arrears of Salary treated?

Any salary received in advance or any amount received as arrears of salary are taxed in the year of receipt. However, an employee can claim relief under section 89

Tax treatment of amount received before joining the job

Amount received before joining the job is also considered as salary and taxes are levied in the same manner.

General- Common Salary Allowances

Specific- uncommon Salary Allowances

TDS on Salary

An employer at the time of payment of salary would deduct TDS each month at average rate of income tax of the taxpayer. This rate is different for each individual and keeps on varying based on the estimated income of the employee.

At the end of financial year, the employer would issue form 16 which is the TDS certificate. Also an employee can check tax deducted through form 26AS.

When do you need to file your return of income?

Return of income should be filed up to 31st July of the year next to financial year. For financial year 2015-16, return should be filed by 31st July 2016.

Let’s understand whether it is mandatory to file an Income Tax Return in India

Under the following situations, it is mandatory to file the income tax return

  • If gross total income (before any deductions under section 80C to 80U) exceeds the exemption limit i.e. Rs.2,50,000 in the financial year that begins on 1st April and ends on 31st March.
    This limit is Rs 3,00,000 for senior citizens (who are more than 60 years old but less than 80 years old) or Rs 5,00,000 for super senior citizens (who are more than 80 years old)
  • To claim an income tax refund: An income tax return must also be filed if you are seeking a refund of excess tax deducted at source (TDS) on your income. The only way to claim a refund is by filing a return.
  • If losses have to be carry forward under a head of income: Tax payers who want to carry forward loss under a head of income must also file a return. Most losses are allowed to be carried forward to subsequent years and adjusted against income when a return is filed specifying the details of this loss.
  • When a resident individual has an asset or financial interest in an entity situated outside of India filing return becomes mandatory.
  • When an individual is a Resident and a signing authority in a foreign account.
  • To apply for a loan or visa one has to present a proof of return filing.
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