Understanding Taxation Rules for Incentives and Salary Components

Hi,

I am designing salaries for the sales force, and I'm stuck on whether INCENTIVES ARE TAXABLE or how the salary is taxed. Just the basics or what else is included.

Smita

Dear Smita,

To determine what is taxable and what is not, you should refer to the Income Tax Ready Reckoner. However, it may not be easy to understand on your own. It would be better to discuss this with your Accounts/Finance person. Currently, there are very few benefits that are not taxable; almost everything is taxable. Basic Pay, DA, and Incentives are definitely taxable. PF (whether employee or employer's share) is not taxable. The same applies to Superannuation benefits. Additionally, there are some perks or benefits that do not attract Income Tax but may attract Fringe Benefit tax, which could be even higher than Income Tax. Therefore, it is advisable to consult your Finance person for further clarification.

KKT

All salary components that are allowances are taxed. However, reimbursements are tax-free. Conveyance allowance (above 800/- is taxable).

Medical allowance (above 1250/- is taxable).

LTA (above 1250/- is taxable).

Hi Smita,

Besides the above components, you can also provide:
- Meals Vouchers (Sodexho) Rs 1500/month, which is not taxable.
- Children education allowance - Rs 100 per child per month for up to two children.

Anyways, your query regarding taxation is still unanswered.

Basically, the taxable components are:
- Basic
- HRA (exemption as per the tax rules, lesser of three options)
- All allowances except the above-mentioned ones, which are exempted as mentioned by my colleagues
- LTA up to the amount of bills submitted
- Incentives

Deductions:
- Rs one lakh: Basic exemption (includes PF & investments in Insurance)
- Housing loan principal & interest payout
- Professional Tax

= Taxable income
% tax as per the tax bracket according to the IT Act.

Hope this helps.

Regards,
Rajat Joshi