The term “Salary” refers to the payment received by an employee from an employer in exchange for the services rendered. It is a form of compensation provided to employees for their work. The definition and legal framework governing salaries in India are primarily outlined in the Payment of Wages Act, 1936 and the Code on Wages, 2019.
According to Indian law, a salary typically includes several components, which may vary depending on the employment agreement or industry practices. These components may include:
- Basic Salary: It is the fixed portion of the salary and forms the core of the compensation. It is usually a specified amount paid to the employee on a regular basis, such as monthly or annually.
- Dearness Allowance (DA): DA is an allowance provided to employees to counteract the impact of inflation. It is calculated as a percentage of the basic salary and is subject to revision based on changes in the cost of living index.
- House Rent Allowance (HRA): HRA is an allowance provided to employees to meet their rental accommodation expenses. The amount of HRA may vary based on factors such as the employee’s salary level and the city of residence.
- Conveyance Allowance: This allowance covers transportation expenses incurred by employees for commuting to and from work. It is meant to reimburse the cost of travel between the employee’s residence and workplace.
- Medical Allowance: It is an allowance given to employees to cover their medical expenses. The amount may vary depending on the employer’s policy.
- Special Allowances: These allowances are additional components that may vary based on the employer’s discretion and industry norms. They can include components like food allowances, entertainment allowances, and other similar benefits.
It’s important to note that the specific structure and components of a salary package may differ from one organization to another. Employers are required to adhere to the legal provisions related to minimum wages, timely payment of salaries, and deductions as per the relevant labor laws in India.
Please keep in mind that labor laws and regulations can evolve over time, so it’s advisable to refer to the latest applicable laws and consult with legal experts or official government sources for the most accurate and up-to-date information.
Conditions of Chargeability
The “conditions of chargeability” refer to the criteria or conditions that determine whether an individual’s salary is subject to income tax. The Income Tax Act, 1961 provides the framework for determining the chargeability of salary income in India. The following are the key conditions that determine the chargeability of salary for income tax purposes:
- Residential Status: The individual’s residential status plays a crucial role in determining the chargeability of salary income. In general, an individual can be classified as a resident or a non-resident for tax purposes based on the number of days spent in India during the financial year.
- Income Threshold: The income threshold determines the minimum level of income above which an individual becomes liable to pay income tax. This threshold is subject to periodic revision by the government. Different income tax slabs and rates apply based on the total income earned during the financial year.
- Source of Income: Salary income earned by an individual is chargeable to income tax in India if it is derived from a source within the country. Salary received for services rendered in India is considered taxable regardless of the individual’s residential status.
- Exemptions and Deductions: Certain exemptions, deductions, and allowances provided under the Income Tax Act can reduce the taxable portion of salary income. These exemptions and deductions include House Rent Allowance (HRA), Leave Travel Allowance (LTA), deductions for investments in specified savings schemes, medical expenses, and others.
- Reporting and Compliance: To determine the chargeability of salary income, individuals are required to report their income accurately in their income tax return filings. Compliance with tax filing deadlines and providing accurate information is essential to determine the chargeability of salary income and calculate the appropriate tax liability.
- House Rent Allowance (HRA): This allowance is provided to employees to cover their rental accommodation expenses. The amount of HRA can vary based on factors such as the employee’s salary level and the city of residence. HRA may be partially or fully taxable, depending on certain conditions and exemptions.
- Dearness Allowance (DA): DA is an allowance provided to employees to counteract the impact of inflation. It is calculated as a percentage of the basic salary and is subject to revision based on changes in the cost of living index. DA is fully taxable.
- Conveyance Allowance: Conveyance allowance is given to employees to cover their commuting expenses between their residence and workplace. A specific amount of conveyance allowance may be exempt from tax, subject to certain limits and conditions.
- Medical Allowance: This allowance is provided to employees to cover their medical expenses. It may be partially or fully taxable unless specific exemptions are applicable.
Perquisites are non-monetary benefits or facilities provided by the employer to the employee. These perquisites can be taxable based on their nature and value. Some common perquisites include:
- Rent-free or concessional accommodation provided by the employer.
- Company-provided vehicles or car lease arrangements.
- Club memberships or facilities provided by the employer.
- Interest-free or low-interest loans given by the employer.
- Employee stock options (ESOPs) and share purchase plans.
- Provision of household goods or services.
- Free or subsidized meals provided by the employer.
- Gift vouchers or non-monetary rewards provided by the employer.
The value of perquisites is generally calculated based on specified rules and guidelines provided by the tax authorities, and they are added to the employee’s taxable income.
Deductions and Exemptions
Deductions and exemptions are provisions in the tax laws that allow taxpayers to reduce their taxable income, thereby reducing their overall tax liability. These deductions and exemptions are aimed at providing relief to taxpayers by recognizing certain expenses, investments, or situations that warrant a reduction in taxable income. Here’s an overview of deductions and exemptions in the Indian tax system:
- Standard Deduction: Employees are eligible for a standard deduction from their salary income, which is a flat amount allowed as a deduction without the need for any specific expenditure. The standard deduction was introduced in the Finance Act, 2018, and is applicable to salaried individuals and pensioners.
- Section 80C Deductions: This section allows individuals to claim deductions for certain investments and expenses up to a specified limit, currently set at ₹1.5 lakh per financial year. Some common deductions under Section 80C include investments in Provident Fund (PF), Public Provident Fund (PPF), National Savings Certificates (NSC), Equity-Linked Saving Scheme (ELSS), and payment of life insurance premiums.
- Home Loan Interest: Deductions are available on the interest paid on home loans under Section 24(b) of the Income Tax Act. For self-occupied properties, the maximum deduction allowed is ₹2 lakh per year. In the case of let-out or deemed let-out properties, there is no upper limit on the deduction.
- Medical Insurance Premiums: Deductions can be claimed for premiums paid towards health insurance policies under Section 80D. The deduction limits vary based on the age of the insured individuals and their family members.
- House Rent Allowance (HRA) Exemption: If an employee receives HRA as part of their salary, a portion of it may be exempt from tax, subject to certain conditions. The exemption is based on factors such as actual rent paid, HRA received, and the city of residence.
- Leave Travel Allowance (LTA) Exemption: Employees can avail of an exemption on expenses incurred on leave travel as per the provisions of Section 10(5) of the Income Tax Act. The exemption is subject to certain conditions and limitations.
- Gratuity Exemption: Gratuity received by employees at the time of retirement, resignation, or death is exempt from tax, subject to certain limits and conditions mentioned in the Payment of Gratuity Act.
- Transport Allowance: A fixed amount of transport allowance received by an employee can be exempt from tax, subject to certain limits.
Computation of Taxable Income from Salary
The computation of taxable income from salary in India involves several steps. Here’s an overview of the process:
- Determine Gross Salary: Start by calculating the gross salary, which includes the total income earned from employment before any deductions or exemptions. This includes the basic salary, allowances, perquisites, bonuses, commissions, and any other income received as part of the salary package.
- Exclude Exempted Allowances and Perquisites: Identify any allowances and perquisites that are exempt from tax as per the provisions of the Income Tax Act. Some common exemptions include HRA, LTA, and certain components of the conveyance allowance. Exclude the exempted amounts from the gross salary.
- Calculate Taxable Salary: Subtract the exempted allowances and perquisites from the gross salary to arrive at the taxable salary.
- Include Taxable Perquisites: Determine the value of any taxable perquisites provided by the employer, such as rent-free accommodation or car facilities. Add the value of these perquisites to the taxable salary.
- Deduct Standard Deduction: If you are an employee, you can claim the standard deduction provided under the Income Tax Act. Deduct the standard deduction amount from the taxable salary.
- Consider Deductions: Identify the eligible deductions under various sections of the Income Tax Act. Common deductions include those under Section 80C for investments in specified schemes, Section 80D for medical insurance premiums, and Section 24(b) for home loan interest. Subtract the total eligible deductions from the taxable salary after applying the limits specified for each section.
- Arrive at Net Taxable Income: After deducting the eligible deductions from the taxable salary, you will arrive at the net taxable income from salary.
- Apply Applicable Tax Slab: Determine the applicable income tax slab based on your total income, which includes income from other sources, if any. Calculate the income tax liability as per the applicable slab rates.
- Consider Rebates and Tax Credits: Consider any applicable tax rebates or tax credits available under the Income Tax Act. Examples include the rebate under Section 87A for individuals with lower income or the credit for taxes paid under the Advance Tax, TDS, or self-assessment tax.
- Calculate the Final Tax Liability: Deduct the applicable rebates and tax credits from the income tax liability calculated in step 8 to arrive at the final tax liability.
|Salary Components||Amount (in INR)|
|Dearness Allowance (DA)||50,000|
|House Rent Allowance (HRA)||60,000|
|Exempted Allowances||Amount (in INR)|
|Conveyance Allowance (Exempt)||9,600|
|Medical Allowance (Exempt)||10,000|
|Taxable Salary||Amount (in INR)|
|– HRA (Exempted)||-36,000|
|– Conveyance Allowance (Exempt)||-9,600|
|– Medical Allowance (Exempt)||-10,000|
|Tax Deductions||Amount (in INR)|
|Section 80C Deductions||150,000|
|Section 80D Deductions||25,000|
|Net Taxable Income||Amount (in INR)|
|– Total Deductions||-225,000|
|Net Taxable Income||354,400|
Assuming the applicable tax slab rates for the financial year are as follows:
- 10% for income up to 500,000
- 20% for income between 500,001 to 1,000,000
|Tax Calculation||Amount (in INR)|
|Income up to 500,000||500,000 * 10%|
|Tax @ 10%||50,000|
|Income between 500,001 to 1,000,000||54,400 * 20%|
|Tax @ 20%||10,880|
|Total Tax Liability||60,880|