The term “Salary“ refers to a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is typically paid at regular intervals, such as monthly or biweekly, in exchange for the services that the employee provides to the company. Salary is usually determined on an annual basis but is expressed as a monthly or weekly rate.
Salary forms the basis for employment decisions and reflects the value of the skills, experience, and potential contributions of the employee to the organization. Unlike hourly wages, which are paid based on the number of hours worked, a salary is generally not directly tied to the number of hours worked. Employees on a salary typically continue to receive the same amount regardless of the actual hours worked, which might include overtime hours not specifically paid for.
In addition to the basic component, a salary package may include bonuses, benefits, and allowances, such as health insurance, retirement contributions, and paid vacation. In the context of taxation, the salary is considered taxable income, and employers are required to withhold income tax and other payroll deductions according to applicable laws.
In India, salary structures are often comprehensive, including various allowances and perquisites that supplement the basic salary. These components are not only crucial for attracting and retaining employees but also have significant implications for tax planning and liability for both employees and employers. Here’s a detailed look at the allowances and perquisites commonly included in salary packages in India:
Allowances
Allowances are fixed monetary amounts paid by an employer to an employee over and above the basic salary to meet specific types of expenditures.
-
House Rent Allowance (HRA):
Provided to meet the cost of rented accommodation. Tax exemption for HRA is available under Section 10(13A) of the Income Tax Act and is subject to certain conditions.
-
Dearness Allowance (DA):
Offered to employees to offset the impact of inflation. In some cases, DA forms a part of the retirement benefit salary computation.
-
Conveyance Allowance:
Granted to employees to cover travel expenses from home to work and vice versa.
-
Medical Allowance:
Given for medical expenses. However, from AY 2019-20 onward, the standard deduction has replaced medical and transport allowances.
-
Leave Travel Allowance (LTA):
Provided for travel costs when the employee is on leave from work. LTA is tax exempt under specific conditions related to travel expenses incurred by the employee during the leave period.
-
Special Allowance:
A catch-all category that includes various allowances not specifically provided for elsewhere, which can vary widely between organizations.
Taxation of Allowances
-
House Rent Allowance (HRA):
HRA is partly exempt from tax under Section 10(13A) of the Income Tax Act. The exemption is the least of the following:
- Actual HRA received.
- 50% of salary (for metro cities) or 40% for non-metro cities.
- Rent paid minus 10% of salary.
-
Dearness Allowance (DA):
While DA forms a part of the salary, it is fully taxable unless it is a part of retirement benefits.
-
Conveyance Allowance:
Exempt to the extent of expenditure incurred on commuting between home and office.
-
Leave Travel Allowance (LTA):
Exempt to the extent of expenses incurred on travel costs for the employee and his family twice in a block of four years.
-
Medical Allowance:
This allowance is fully taxable. However, medical reimbursement against actual bills up to INR 15,000 per annum used to be tax-exempt, which was replaced by a standard deduction in the recent tax reforms.
-
Special Allowance:
Any special allowance is generally taxable unless specified otherwise.
Perquisites
Perquisites, or perks, are benefits provided to employees in addition to their regular salaries and allowances. These are often related to the position of the employee and can be either monetary or non-monetary. Some perquisites are taxable under the head ‘Salaries’ in the hands of the employee, while others might be tax-exempt.
-
Company Car:
Use of a company-provided car for personal and official purposes. This can be taxable depending on the usage.
- Accommodation:
Company-provided accommodation. This is taxable based on certain conditions related to the location and type of accommodation.
- Stock Options:
The option to purchase company stock at a reduced price. The taxation rules for stock options are specific and depend on the type of plan and the timing of exercise and sale of stocks.
-
Education Facilities:
Free or subsidized education facilities for children, which might be taxable beyond a certain limit.
-
Club Membership:
Free or subsidized membership to clubs, generally taxable unless used strictly for business purposes.
-
Health Insurance:
Often provided for employees and their families, typically not taxable as a perquisite.
Taxation of Perquisites
- Accommodation:
Perquisites such as company-provided accommodation are taxed on a concessional value, which depends on factors such as the location of the property, owned or leased by the employer, and the salary of the employee.
- Company Car:
If a car is provided by the employer and used for both personal and official purposes, the taxable value of the perquisite is determined based on the engine capacity of the car and the extent of personal use.
- Stock Options:
Taxation of stock options (ESOPs) occurs at two instances: exercise and sale. At exercise, the difference between the exercise price and the fair market value of the shares is taxed as a perquisite. At sale, the gains are taxed as capital gains.
- Education Facilities:
Free or subsidized education provided to the children of the employee is taxable if it exceeds a certain limit.
- Club Memberships:
Taxable if provided free or at a subsidized rate, unless used exclusively for business purposes.
-
Health Insurance:
Generally, it is not taxable as a perquisite if paid by the employer.