How do I calculate my income tax in India, when I am new to salary components?

Written by : Knowledge Centre Team

2024-08-02

1098 Views

Locate branch

Resume journey

Pay Premium

One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.

As tax season is right round the corner, this is the right time to learn how to calculate your income tax liability using your salary component. This will also help you make the right investments in smart tax-saving instruments such as term life insurance, health insurance and unit linked insurance plans (ULIPs).

Let’s begin by understanding the important components in your salary structure and how they help you calculate and save taxes.

Understanding salary components in your pay slip

Basic salary
Basic salary is the most important part of your salary slip. Other key tax saving components such as house rent allowance (HRA) and employee provident fund (EPF) contribution is calculated on the basis of your basic salary.
House rent allowance (HRA)
If you live in a rented house, you can claim HRA deduction from your taxable income. The amount of income tax deduction you can get under HRA are based on the below factors:

Total HRA mentioned on your salary slip
50% of basic salary + dearness allowance (DA) in metro cities
40% of basic salary + DA in non-metro cities
Actual rent paid minus 10% of basic salary + DA

Remember, if you are making rent payments in excess of Rs. 1 lakh in a year, you have to furnish your landlord’s PAN number to claim deduction.

Leave and travel allowance (LTA)
LTA is also a tax saving component in your salary structure. As a salaried employee, you can avail tax deduction for a trip taken only with your spouse, children and dependent parents and siblings within India. The extent of exemption is equal to the actual expenses incurred on the trip which has to be claimed by submitting original bills. LTA exemption is available for only two journeys within a span of four years.
Contribution to Employees Provident Fund (EPF)
The EPF is a Government of India initiative to provide retirement benefits to workers. Under the EPF Act, both employee and employer are required to contribute 12% of the basic salary to the fund every month. EPF contribution from your salary is eligible for tax deductions under income tax rules.

Example of Salary Components in Your CTC

CTC
Components Amount
Basic Salary Rs 3,00,000
Social allowance Rs 1,00,000
HRA Rs 80,000
Medical Insurance Rs 5,000
PF(12% of Basic) Rs 36,000
Performance bonus Rs 75,000
Total CTC Rs 5,96,000

CTC
Components	Amount
Basic Salary	Rs 3,00,000
Social allowance	Rs 1,00,000
HRA	Rs 80,000
Medical Insurance	Rs 5,000
PF(12% of Basic)	Rs 36,000
Performance bonus	Rs 75,000
Total CTC	Rs 5,96,000

Standard deduction

Before the 2018 budget, employees were eligible to claim deductions on conveyance and medical allowances. Employees are now eligible to claim a flat standard deduction of Rs. 50,000 from your total income.

For example, if your total annual income is Rs. 5,50,000, your taxable income will be considered as Rs. 5,00,000 after applying standard deduction.

Deductions on investments available for salaried employees

You can also invest in various tax saving instruments such as term life insurance, ULIPs and whole life insurance to save taxes. By investing in a ULIP plan such as Invest 4G from Canara HSBC Life Insurance, you can save taxes under Section 80C up to Rs. 1.5 lakh, get life insurance protection and secure your retirement through market-linked returns.

Tax deducted at source (TDS) on salary

You must also know that your employer deducts TDS from your salary and pays it to the Income Tax Department. TDS is deducted based on your salary and the investment declarations that you made in the beginning of the year to your employer. Therefore, it’s important to make declarations carefully and on time.

During June or July or every year, your employer will provide you a TDS certificate with details of tax deducted and submitted to the tax department. This certificate is known as Form 16 . If your yearly income only constitutes salaried income, you can just use the Form 16 to file your tax return.

However, if you earn rental income, earn interest or dividends on your investments, or have sold securities such as stocks or bonds in the financial year, you also need to mention that in your income tax return filing.

The ability to decode your salary structure or CTC is a skill that will help you in your financial and professional life. Understanding your salary component not only helps you save taxes but aids you in negotiating for a better salary. If you are not comfortable with these terms, you should ask your HR to explain it in detail.

Direct Taxes: How to Avoid Being Overtaxed?

How to Pay Income Tax on Fixed Deposit (FD)?

Tax Savings - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.