Income from Salaries
- Basic Salary:
- Definition: Basic salary is the fixed amount of compensation paid to an employee by an employer before any extras, such as bonuses, are added.
- Tax Treatment: Fully taxable under the head ‘Income from Salaries’. It forms the basis for other allowances and deductions.
- House Rent Allowance (HRA):
- Definition: HRA is an allowance provided by employers to employees to meet their rental accommodation expenses.
- Tax Treatment:Exemption available under Section 10(13A) of the Income Tax Act. The exempt amount is the least of:
- Actual HRA received.
- 50% of salary (for metro cities) or 40% of salary (for non-metro cities).
- Rent paid minus 10% of salary.
- Leave Travel Allowance (LTA):
- Definition: LTA is an allowance provided by employers to employees for travel within India.
- Tax Treatment: Exemption available for actual travel expenses incurred on a trip with family (spouse, children, and parents). Limited to economy class airfare or AC first-class rail fare.
- Bonus:
- Definition: Bonus is an additional payment made to employees, often as a reward for good performance or as part of profit-sharing.
- Tax Treatment: Fully taxable under the head ‘Income from Salaries’. Tax is deducted at source (TDS) when paid.
- Employee Contribution to Provident Fund (PF):
- Definition: PF is a retirement savings scheme mandatory for employees covered under the EPF Act, 1952.
- Tax Treatment: Employee’s contribution qualifies for deduction under Section 80C. Interest earned is tax-free. Withdrawals are tax-exempt under specified conditions.
- Standard Deduction:
- Definition: Standard deduction is a flat deduction allowed from gross salary income to reduce taxable income.
- Tax Treatment: Introduced in 2018 budget, currently Rs. 50,000. Replaces earlier allowances like transport allowance and medical reimbursement.
- Professional Tax:
- Definition: Professional tax is a state-level tax levied on income earned by salaried individuals.
- Tax Treatment: Deducted by the employer and allowed as a deduction under Section 16(iii) of the Income Tax Act.
- Leave Encashment:
- Definition: Leave encashment is the payment received by employees for their unused leaves at the time of retirement or resignation.
- Tax Treatment: Taxable in the hands of employees, unless exempt under specific conditions (e.g., government employees).
- Voluntary Retirement Compensation (VRS):
- Definition: VRS refers to compensation received by employees on voluntary retirement.
- Tax Treatment: Exempt from tax up to Rs. 5,00,000 under Section 10(10C), subject to certain conditions like completion of minimum service.
- Pension:
- Definition: Pension is a periodic payment made to retired employees.
- Tax Treatment: Taxable as ‘Income from Salaries’ when received periodically. Commuted pension may have partial exemption based on employee type.
- Gratuity:
- Definition: Gratuity is a lump-sum payment made by employers to employees on retirement or resignation.
- Tax Treatment: Fully exempt from tax under the Payment of Gratuity Act, if the employer is covered. Otherwise, partially exempt based on service period.
- Form 16:
- Definition: Form 16 is a TDS certificate issued by employers to employees reflecting details of salary earned and taxes deducted.
- Tax Treatment: Crucial for filing income tax returns (ITR). Contains Part A (employer and employee details) and Part B (salary details, deductions, and taxes).
- Form 26AS:
- Definition: Form 26AS is a tax credit statement reflecting details of taxes deducted on behalf of the taxpayer (TDS), taxes paid by the taxpayer, and refunds received.
- Tax Treatment: Accessed online via the Income Tax Department’s website. Essential for verifying tax credits before filing ITR.
- Deductions (Section 80C, 80D, etc.):
- Definition: Deductions under various sections of the Income Tax Act allow taxpayers to reduce their taxable income by investing in specified instruments or expenses.
- Tax Treatment: Section 80C allows deductions up to Rs. 1.5 lakhs for investments in instruments like PPF, EPF, life insurance premiums, etc. Other sections (like 80D for health insurance premiums) offer additional deductions.
Understanding these components helps individuals optimize their tax planning by leveraging exemptions and deductions provided under the Income Tax Act, thereby reducing their overall tax liability.