Income From Salary Meaning Calculation Allowances

Income from Salary: Meaning, Calculation, Allowances

Understanding how salary is calculated and the different allowances available can empower you. Delve deeper into the intricacies of salary structures.

Written by : Nitin Bhatia

Reviewed by : Jasmeet Bedi

Jasmeet Bedi

2024-09-11

1614 Views

9 minutes read

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Employment provides a regular compensation more commonly called ‘income from salary’. Salary is one of the most basic motivations behind the qualified workforce and employers. However, it is not an informal understanding. In fact, your salary income is a part of a legitimate contract between you as an employee and your employer.

Table Of Content:

What is Income from Salary?

Salary means the money received by a person, referred to as an “employee” from an organisation, referred to as an “employer”, for offering specific services in connection with employment. Your salary slip details all the components of your income, including allowances. To understand how these allowances are calculated, you can refer to your company's policies or consult your HR department.

Salary Vs CTC

If you are a salaried person, the total expense incurred by your employer to avail your services for a year is called Cost to Company (CTC). CTC includes a basic salary, allowances, perquisites, a performance-linked-variable component, health insurance, provident fund, gratuity, etc. The CTC is different from income from salary. Income from salary is the net income that you take home. 

Components of Salary

The income from salary meaning is simple to understand when you know the following basic components of your salary: 

  1. Basic Salary: This is a mandatory component of salary income and generally comprises 35%-50% of the gross salary. It is a fixed component and excludes bonuses, incentives, overtime and allowances. The gross or basic salary amount earmarked depends on the designation, seniority, functional area, and industry. The basic salary is fully taxable.

  2. Allowances: There are a variety of allowances that employees/employers can pick from based on respective organisation policies and mutual understandings. Some of the standard allowances offered by a vast majority of employers are listed below:

  • Dearness Allowance (DA): DA, a certain percentage of basic salary, is linked to movement in inflation rates. DA is generally paid by the government to employees working in government departments and public sector undertakings.

  • House Rent Allowance (HRA): The HRA component is paid so that you can pay your rent with that amount. You can claim an exemption from taxes for rent paid to your landlord/landlady.

  • Conveyance Allowance: Conveyance Allowance, also called Transport Allowance, is paid to help you cover the costs of travel from your home to your workplace. Rs 1,600 per month or Rs 19,200 per annum is exempt from taxes. With effect from 2018, the conveyance (Rs 19,200) and medical (Rs 15,000) allowances have been replaced with a standard deduction of Rs 40,000.

  • Leave Travel Allowance (LTA): If you are planning to go on a vacation anywhere in India, the cost of travel via air, rail or road (public transport), subject to given limits, is exempt from tax. This exemption is offered under section 10(5) of the Indian Income Tax Act, 1961.

  • Books and Periodicals Allowance: If you love reading, the government supports your hobby by exempting your expended amount from any taxes. Expenses incurred for buying newspapers, periodicals and books are exempt from taxation.

3. Provident Fund (PF)

A provident fund (PF) is a retirement savings plan supervised by the government. It is mainly used in Asia and Africa. PF and pension funds also have certain similarities. Employees contribute a portion of their salaries to the PF. Employers also make contributions on behalf of their employees. Contributions may be required. 

Retirees or, in some situations, their surviving families may eventually withdraw the money from the fund, which is owned and administered by the government. In rare circumstances, the fund also provides payments to those who are disabled and unable to work.

4. Taxes

  • Income Tax: Depending on your investment declaration, your employer would compute your annual tax liability and deduct the same in equated amounts each month in that financial year. The tax deduction may be greater if you do not furnish evidence of investments made as you declared at the beginning of the financial year.

  • Professional Tax: Professional tax is levied by the state government and all salaried employees, and self-employed professionals such as chartered accountants, doctors, and lawyers are liable to pay the same. The maximum professional tax deducted from your salary, each financial year, would be Rs 2,500.Perquisites, called perks in common parlance, refer to fringe benefits that are offered by organisations to their key employees. Perks are generally not paid as money but as provisions to use certain facilities for personal use. For example, a company car with a driver, company accommodation or membership to premium clubs etc. The value of such perks gets added to the taxable income.

Must Read - Personal Finance

How to Check Your Tax Deductions from Salary? 

  • Form 16: Form 16 is issued by your employer and is a statement mentioning salary income and certifying that taxes have been deducted from your salary income. When you receive your Form 16, check whether your PAN is mentioned correctly so that the TDS reflects against your PAN in the income tax records.

  • 26AS: You may log in to either the TRACES website or your income tax filing account to check your 26AS Form or Annual Information Statement. You must validate whether the deducted amount has been deposited with the government.

Tax Saving Options for Salaried Professionals

There are a plethora of options for you to save taxes if you earn through salary income. You may consider a few of them listed below:

  1. Term Insurance: A term life plan pays out the sum assured to the beneficiary in case of your unfortunate, untimely demise. Term life plans are safety nets and will give you peace of mind that your family will continue to sustain you even if you are not around. Amounts paid towards premiums can be deducted from taxable income under section 80C.

  2. Health Insurance: Health insurance is much needed in today’s times when healthcare costs are increasing by the day. You may cover yourself and your family with a family floater Mediclaim/health insurance plan that will cover most hospitalisation expenses. You do not have to dip into your savings to pay those exorbitant medical bills. Health insurance premium payments are deductible from taxable income under section 80D.

  3. Unit Linked Insurance Plans (ULIPs): The returns from ULIPs are exempt from tax under section 10(10D). The money paid towards premiums can be deducted, under section 80C, from taxable income. 

ULIP investments offer the following added benefits:

  • Bonus additions for long-term investments (5 years+)

  • Diversified portfolio investment without affecting taxability

  • Tax-free partial withdrawals after five years

  • Invest up to the age of 99 (option available in Invest 4G ULIP from Canara HSBC Life Insurance). You can use the same plan to build a corpus until 60, then have a tax-free pension income for life. Upon your demise, higher of the corpus or sum assured it passed to your legal heirs.

4. Public Provident Fund (PPF): PPF is a Central Government guaranteed investment cum tax saving instrument, offering a 7.1% rate of interest. The amount deposited in PPF accounts is deductible, under Section 80C, from taxable income, whereas all withdrawals are exempt from taxes. Partial withdrawals are permitted only from the 7th year onwards.

5. National Pension Scheme (NPS): You must try and invest at least 10% of your income into NPS to build a corpus for your retirement. On retirement, you can withdraw 60% of this corpus and opt to get a pension from the balance of 40%. Contributions to NPS are also deductible, under sections 80C and 80CCD(1B), from taxable income.

Also Read - Is Pension Taxable?

Salary income can be structured in different ways so that you get maximum returns and at the same time reduce your tax liability. The breakup of your salary depends on the organisation and industry you work for. Needless to say, you can try negotiating with your employer so that you work out the most tax-efficient structure. On the other hand, putting your money in the right investment option will help you save on taxes further because such investments can be deducted from your taxable income before computing your final tax liability.

Did You Know?

With companies conducting more hiring drives after the pandemic, salaries in India increased significantly in recent years—an estimated 9% increase.

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Final Thoughts 

Income from salary refers to the earnings people receive from their employment/job, including wages, bonuses, and other perks. The calculation of this income typically involves assessing various allowances and deductions. Allowances can include basic pay, house rent allowance (HRA), and other benefits provided by the employer. Calculating income from salary involves factoring in these allowances along with any deductions, such as contributions to provident funds or taxes. Understanding these components is essential for individuals to manage their finances and plan for taxes effectively.

 

Glossary:

  • Performance-linked-variable component: The payments made by your employer in exchange for your assistance in growing their business.
  • Tax liability: The tax you owe the government based on your income. This is the total amount that you owe the tax authorities.
  • Diversified portfolio investment: Spreading your investments across various assets to reduce risk and increase potential returns.
  • Partial withdrawal: A feature that allows you to withdraw a portion of your investment fund without liquidating the entire investment.
  • Legal Heir(s): The person or group of people who are legally entitled to inherit the assets and property of the deceased.
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FAQ’s For Income from Salary

Salary consists of base pay or earnings, any pension or annuity, gratuity, advance pay, encashment of paid time off, allowances, and perks. 

An exemption is a certain sum that is subtracted from the gross wage of salaried individuals before computing income tax. You qualify for an income tax deduction under sections 10 and 54 if you are a salaried employee.

According to Section 14 of the Income Tax Act of 1961, income can be categorised into five categories: 

  • Income from capital gains, I

  • Income from house property, 

  • Income from salary,  

  • Income from profits and gains from business and profession

  • Income from other sources.

The three most common types of income are:

  • Active income: Payments including gratuities, commissions, salaries, and wages are examples of active income. 

  • Portfolio income: Income from a portfolio is derived from capital gains, dividends, interest, and royalties.

  • Passive income: Money received via a rental property, limited partnership, or other business venture in which you have no active involvement. 

Income is the amount received in exchange for providing services. It is not a set amount of money, and cash payment is not required. This covers a variety of items, such as commissions, dividends, tips, pay, and more. Your income is the product of your labour, whether it takes the form of cash, credit, or barter.