Money that is received under Employer-Employee relationship is called Salary . If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such case your income would be treated as income from business and profession)
The salary consists of following parts
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure. It is a fixed part of one’s compensation structure. And the complete amount becomes a part of your in-hand salary.
Allowances: Apart from basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, leave travel allowance. Some of these allowances are tax free up to a certain limit and some of them are dependant on your actual spending. It is the amount received by an individual paid by his/her employer in addition to basic salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Children’s Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or non taxable.
Dearness Allowance (DA)
The Dearness Allowance is paid out to compensate for increase in the general cost of living due to inflation.
DA is paid out every month. It is a taxable component of your salary.
Conveyance allowance is paid out to meet your expenses on commute related transportation.
Conveyance allowance is paid out every month.
Conveyance allowance upto Rs. 800 per month (Rs. 9,600 per year) is tax-free. Any amount over it is taxable.
House Rent Allowance (HRA)
House Rent Allowance (HRA) is paid out to meet full or part of your expenditure on renting a house.
HRA may be expressed as a percentage of your basic.
House Rent Allowance is paid out every month.
HRA can be tax-free, subject to certain conditions. For more on taxation of HRA, please read “Income Tax (IT) treatment of House Rent Allowance (HRA)”.
Medical Allowance (Reimbursements)
Medical allowance is paid out to help you with the amount that you spend on medical treatment and medicines.
Medical allowance can be paid out monthly or yearly.
Medical allowance is a fully taxable component of your salary.
However, if you receive reimbursement of your medical expenses against submission of bills, such medical reimbursement is tax-free upto Rs. 15,000 per year.
Leave Travel Allowance / Concession (LTA / LTC)
LTA is paid to encourage you to take periodic vacations and travel with your family.
Leave Travel Allowance is usually paid out once a year.
LTA / LTC can be tax-free, provided certain conditions are met. For more on taxation of LTA / LTC, please read “LTA | hrmexpress
Telephone / Mobile Allowance
This is an allowance given to you so that you can maintain a telephone (landline or a cell phone).
It is usually paid out monthly, and is taxable.
Special Allowance can be given out to pay money that doesn’t fit into any other head!
Such allowances are paid out monthly, and are taxable.
Incentive / Bonus
Incentives or bonuses are paid out depending on your performance (and, at times, depending on the company’s / division’s performance as well). This is to reward employees for their better performance.
Incentive is usually paid out monthly. A bonus can be paid out monthly or can be paid out once a year.
Incentive and bonus are fully taxable.
Refer to the Bonus Payment post for the detailed info
Claims or Perquisite: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance etc. There is a maximum limit set to these components and are paid when you submit your bills. These are usually tax free. It is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.
How are perquisites taxed? Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.
Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) . Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc
Provident Fund Contribution: Provident fund contribution has two sides – the employer’s contribution and employee’s contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund(PF) account and paid to employee when he retires or resigns.There is also employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)
Performance linked pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of target, but it forms a part of your CTC, fattening it up.
Different types of salary:
Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Taxes: Taxes are an unavoidable evil and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your pay cheque.
The Salary structure varies company to company based on their policies. Some of the common Pay heads used are
1) Basic – 35% – 50% of Gross
2) HRA – 40% of Basic for Non metro & 50% of basic for Metro(Delhi, Mumbai, Chennai or Kolkata)
3) Con – Max Rs. 800/ P M which is Max of Rs. 9600 P A
4) Medical Reim – Max Rs. 1250 / PM which can be max of Rs 15000 PA
5) Spl Allow – Balance of Gross will be provided as Spl Allow
Emp Contribution - 12% on Basic (can be subjective to 780, which is 12% of the min basic salary i.e. 6500)
Emp’r Contribution - ( EPS – 8.33% (subject to a ceiling of Rs. 541)
PF – Rest of the amount out of 12% (can be subjective to 780, which is 12% of the min basic salary i.e. 6500)
PF administration charges – 1.1%
EDLI – 0.5% (subject to a ceiling salary of Rs. 6500)
EDLI administration charges 0.01% “
2) ESI - Applicable to employees whose Gross Salary is less than or equal to Rs.15000
Emp Contribution - 1.75% on Grorss
Emp’r Contribution - 4.75% on Gross
PT - It Varies State to state
Profession Tax in Maharashtra
In Maharashtra (Maharashtra State Tax on Professions, Trades, Callings and Employments Act, 1975), Profession Tax is applicable both on Individuals & Organizations (Company, Firm, Proprietary Concern, Hindu Undivided Family (HUF), Society, Club, Association Of Persons, Corporation or any other corporate body in Maharashtra per the provisions of the Maharashtra Professional Tax Act of 1975.
Profession Tax For Individuals in Maharashtra
Every person residing in Maharashtra engaged in any profession, trade, calling or employment is liable and has to obtain a Certificate of Enrolment from the Profession Tax Authority.
Once this certificate is obtained, the person can discharge their individual tax liability for five years by paying lumpsum amount equal to the amount of Profession Tax for four years in advance, getting relief for one year’s payment.
Exempted Individuals in Maharashtra
The following persons are exempted from the provisions of the Profession Tax Act in Maharashtra :
Senior Citizen above 65 years age.
Handicapped Person with more than 40 % disability or parent of a physically disabled or mentally retarded child.
Profession Tax For Organizations:-
An employer organization is required to get registered under the Profession Tax Act and obtain a Registration Certificateunder which the payment in respect of taxes deducted from employees salaries can be made.
Also as a firm, the organization is required to obtain Enrolment Certificate and pay Profession tax on it’s behalf.
Periodicity of Returns
For employers holding Registration Certificate, the period of returns to be filed on basis of annual tax liability amounts are as follows :
Annual Profession Tax Liability < Rs. 5000 - Annual Return.
Annual Profession Tax Liability >= Rs. 5000 but < Rs. 20000 - Quarterly Returns.
Annual Profession Tax Liability >= Rs. 20000 - Monthly Returns.
Returns are required to be filed on or before the last date of the month to which the return relates.
It should contain details of salaries paid and the amount of tax deducted in respect of the month immediately preceding the month to which the return relates.
Due dates for payment of Profession Tax and for filing the returns in Maharashtra:-
For the persons holding Enrolment Certificate - 30th June.
For any delay in the same, interest @ 1.25% per month will be charged.
Bank payment challans to be received by all Enrolment Certificate holders by mid June.
Profession Tax Penalties
Delays in obtaining Enrolment or Registration Certificate – Penalty of Rs. 2/= (Rupees Two) per Day.
Providing false information regarding enrolment – Penalty of 3 times tax amount.
Non-payment of profession tax – Penalty equal to 10% of the amount of tax can be imposed.
Schedule of rates of tax on professions, trades, callings and employments after Budget:
Although new rates been passed in budget but they shall come into force on such date as the state Government may, by notification in the Official Gazette, appoint. ((Government of Maharashtra appointed the 1st July 2009 to be the date from which new profession rates will come into force)
Class of Persons
Rate of Tax
1 Salary and wage earners. Such persons whose monthly salaries or wages,
(a) exceed rupees 5,000 but do not exceed rupees 10,000 175 per month
(b) exceed rupees 10,000 2500 per annum, to be paid in the following manner: -
a) rupees two hundred per month except for the month of February;
b) rupees three hundred for the month of
2 (a) Legal Practitioners including Solicitor and Notaries; 2500 per annum
(b) Medical Practitioners, including Medical Consultants and Dentists; 2500 per annum
(c) Technical and Professional Consultants, including Architects, 2500 per annum
Engineers, R.C.C. Consultants, Tax Consultants, Chartered Accountants, Actuaries and Management Consultants;
(d)Chief Agents, Principal Agents, Insurance Agents and Surveyors and Loss Assessors registered or licensed under the Insurance Act, 1938, U.T.I. Agents under U.T.I. Scheme, N.S.S. agents under postal Scheme; 2500 per annum
(e)Commission Agents, Dalals and Brokers (other than estate brokers covered by any other entry elsewhere in this Schedule); 2500 per annum
(f)All types of Contractors (other than building contractors covered by any other entry elsewhere in this Schedule); and 2500 per annum
(g)Diamond dressers and diamond polishers; having not less than one year’s standing in the profession. 2500 per annum
3 (a) Members of Association recognised under the Forward Contracts (Regulations) Act, 1952 2500 per annum
(b) (i) Member of Stock Exchanges recognised under the Security Contracts (Regulation) Act, 1956; 2500 per annum
(b) (ii) Remisiers recognised by the StockExchange; 2500 per annum
4 (a) Building Contractors; 2500 per annum
(b) Estate Agents, Brokers or Plumbers, having not less than one year’s standing in the profession. 2500 per annum
5 Directors (other than those nominated by Government) of Companies registered under the Companies Act, 1956, andBanking Companies as defined in the Banking Regulation Act, 1949,Explanation : The term ‘Directors’ for the purpose of this entry will not include the persons who are Directors of the companies whose registered offices are situated outside the State of Maharashtra and who are not residing in the State of Maharashtra. 2500 per annum
6 (a) Bookmakers and Trainers licensed by the Royal Western India Turf Club Limited; 2500 per annum
(b) Jockeys licensed by the said Club 2500 per annum
7 Self-employed persons in the Motion Picture Industry, Theatre, Orchestra, Television, Modelling or Advertising Industries, as follows:
(a) Writers, Lyricists, Directors, Actors and Actresses (excluding Junior Artists), Musicians, Play-back Singers, Cameramen, Recordist, Editors and Still-Photographers, 2500 per annum
(b) Junior Artists, Production Managers, Assistant Directors, Assistant Recordists, Assistant Editors and Dancers. 1000 per annum
8 Dealers registered under the Maharashtra Value Added Tax Act, 2002, or Dealers registered only under the Central Sales Tax Act, 1956, whose annual turnover of sales or purchases,-
(i) is rupees 25 lakh or less 2000 per annum
(ii) exceeds rupees 25 lakh 2500 per annum
9 Occupiers of Factories as defined in the Factories Act, 1948, who are not covered by entry 8 above 2500 per annum
10 (1)(A) Employers of establishments as defined in the Bombay Shops and Establishment Act, 1948, where their establishments are situated within an area to which the aforesaid Act applies, and who are not covered by entry 8 – Such employers of establishments,-
(a) where no employee is employed 1000 per annum
(b) where not exceeding two employees are employed 2000 per annum
(c) where more than two employees are employed 2500 per annum
(B) Employers of establishments as defined in the Bombay Shops and Establishments Act, 1948, where their establishments are not situated within an area to which the aforesaid Act applies, and who are not covered by entry 8 –
Such employers of establishment,-
(a) where no employee is employed 500 per annum
(b) where not exceeding two employees are employed, 1000 per annum
(c) where more than two employees are employed 2500 per annum
(2) Persons owning / running STD / ISD booths or Cyber Cafes, other than those owned or run by Government or by physically handicapped persons; 1000 per annum
(3) Conductors of Video or Audio Parlours, Video or Audio Cassette Libraries, Video Game Parlours; 2500 per annum
(4) Cable Operators, Film Distributors; 2500 per annum
(5) Persons owning / running marriage halls, conference halls, beauty parlours, health centres, pool parlours; 2500 per annum
(6) Persons running / conducting coaching classes of all types 2500 per annum
11 Owners or Lessees of Petrol / Diesel / Oil Pumps and Service Stations / Garages and Workshops of Automobiles 2500 per annum
12 Licensed Foreign Liquor Vendors and employers of Residential Hotels and Theatres as defined in the Bombay Shops and Establishments Act, 1948. 2500 per annum
13 Holders of permits for Transport Vehicles granted under the Motor Vehicles Act, 1988, which are used or adopted to be used for hire or reward, where any such person holds permit or permits for,-
(a) three wheeler goods vehicles, for each such vehicle 750 per annum
(b) any taxi, passenger car, for each such vehicle 1000 per annum
(c) (i) goods vehicles other than those covered by (a) 1500 per annum
(c) (ii) trucks or buses 1500 per annum
for each such vehicle :
Provided that the total tax payable by a holder under this entry shall not exceed rupees 2,500 per annum.
14 Money lenders licensed under the Bombay Money-lender Act, 1946 2500 per annum
15 Individuals or Institutions conducting Chit-Funds 2500 per annum
16 Co-operative Societies registered or deemed to be registered under the Maharashtra Co-operative Societies Act, 1960 and engaged in any profession, trade or calling –
(i) State level Societies 2500 per annum
(ii) Co-operative sugar factories and spinning Mills 2500 per annum
(iii) District level Societies 750 per annum
(iv) Handloom weavers co- operative societies 500 per annum
(v) All other co-operative societies not covered by clauses (i), (ii),(iii) and (iv) above. 750 per annum
17 Banking Companies, as defined in the Banking Regulation Act, 1949. 2500 per annum
18 Companies registered under the Companies Act, 1956 and engaged in any profession, trade or calling. 2500 per annum
19 Each Partner of a firm (whether registered or not under the Indian Partnership Act, 1932) engaged in any profession, trade, or calling. 2500 per annum
20 Each Co-parcener (not being a minor) of a Hindu Undivided Family, which is engaged in any profession, trade or calling. 2500 per annum
21 Persons other than those mentioned in any of the preceding entries who are engaged in any profession, trade, calling or employment and in respect of whom a 2500 per annum
notification is issued under the second proviso to sub-section (2) of section 3
Notwithstanding anything contained in this Schedule, where a person is covered by more than one entry of this Schedule, the highest rate of tax specified under any of those entries shall be applicable in his case. This provision shall not be applicable to entry 16(iv) of the schedule.
For the purposes of Entry 8 of the Schedule, the Profession Tax shall be calculated on the basis of the “turnover of sales or purchases” of the previous year. If there is no previous year for such dealer, the rate of Profession Tax shall be Rs. 2000. The expressions “turnover of sales” or “turnover of purchases” shall have the same meaning as assigned to them, respectively, under the Maharashtra Value Added Tax Act, 2002. ”
Net Salary = Gross – PF (Emp Cont) – ESI (Emp Cont) – PT
CTC = Gross + PF (Emp’r Cont) – ESI (Emp’r Cont)
Gratuity = (Last Drawn Basic+ DA)/26*15*(no. of years- It is payable to the employee who completes 5yrs of service in the organisation. It can be showed as a part of CTC.)
OT Calculation = (basic+da)/26/8*no.of hrs * 2
If Employees coming under high Salary Then you can again split up the amount in Spl Allow As
1) Food coupons
2) Car Hire
3) Petrol and Maint for Car
FBT is applicable Apart from LTA.
The Variable Pay % also differs company to company based on the Policy. In my previous organization it is 12.5% of the CTC for all the Dept except Sales. For sales it will be 15%.
A paycheck is a document/record issued by an employer to an employee which shows how much money an employee have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions taken out of the gross amount to arrive at the final net amount of the pay.
If you are salaried employee in an organization, then you get the salary after deducting tax by the employer. This process is called as Tax Deduction at Source (TDS). Company must issue a Form 16 which contains the details about the salary earned by that employee and how much tax deducted. The Tax deducted is paid to government by the company. Form 16 is the proof of employee’s income and tax paid to the govt. It is issued under section 203 of Income Tax Act for Tax. Tax payer has to use the Form 16 to file the Income Tax return every financial year.
Thank and regards,
28th July 2014 From India, Mumbai