Understanding Salary Components: Which Parts Are Taxable and How to Minimize Tax?

I want to know which part of the salary breakup (i.e., basic, HRA, DA, allowances, etc.) is taxable. On which amount does the employee have to pay tax? Does a higher basic lead to higher tax? How can one minimize the amount paid as tax?

Please do help. ASAP.

Regards,
Neha Varma

As per my knowledge and the rules for payment of wages, Basic + DA and HRA are the taxable income for an employee. If you add medical and transport allowances to the salary structure, this is also taxable because PT is calculated on the Gross income.

In general, the income earned by employees is taxable. However, employees can avail exemptions permitted under the IT rules.

1. Conveyance allowance is exempt to the extent of Rs. 800 per month. Amounts paid over and above Rs. 800 are taxable.
2. Medical reimbursement is exempt from tax up to Rs. 15,000 per annum against the production of medical bills.
3. Leave Travel Allowance is exempt from tax if the employee avails LTA twice in a block of 4 calendar years. However, the employee has to provide proof of having availed travel (self and a member of his family).
4. Interest on Housing Loan is exempt from taxable income.
5. Likewise, if the employee invests a maximum of 1 Lakh in the form of PF, LIC, Principal on Housing Loan, PPF, Children's Education, etc., this is exempt from tax.
6. HRA is exempt from tax subject to certain conditions stipulated under the IT rules.

The list is not exhaustive and only gives an overview.

Regards,
M.V. KANNAN

Income Tax Calculation for Financial Year 2010-11

I shall insert an Excel worksheet for Income Tax Calculation on salary for the Financial Year 2010-11 (Assessment Year 2011-12). Prior to that, I wish to explain some details to get an idea of how to enter the inputs.

Applicable Deductions on Gross Salary

- Professional Tax
- House Rent in excess of 1/10th of salary subject to a ceiling equivalent to HRA
- Interest on Housing loan subject to a ceiling of Rs. 1,50,000
- Refund on Housing loan, savings, tuition fee for 2 children, etc., altogether subject to a ceiling of Rs. 100,000
- In addition, savings on infrastructure bonds up to Rs. 20,000
- Other than the above one lakh, Rs. 15,000 to Rs. 20,000 towards mediclaim premium, Rs. 40,000 to Rs. 60,000 towards treatment on specified diseases like Motor Neuron disease, Rs. 75,000 to Rs. 100,000 towards disability, etc., are also admissible for deduction.

Calculating Taxable Income

Taxable income can be calculated as follows:

Gross salary - total deductions = Taxable income

Taxpayer Categories

Taxpayers can be categorized into three groups:

1) Non-Seniors - Male
2) Non-Seniors - Female
3) Senior Citizens (65 years old & above)

If the taxable income is Rs. 2,40,000, a Senior Citizen is fully exempted from paying tax. A Non-Senior Female has to pay in excess of Rs. 1,90,000, and a Non-Senior Male in excess of Rs. 1,60,000.

Beyond the above income, one has to pay 10% up to Rs. 5,00,000, 20% thereafter up to Rs. 8,00,000, and 30% in excess of Rs. 8,00,000. In addition, an education cess @ 3% will be charged on Total Tax.

Example Calculation

Gross income of a Non-Senior Male - Rs. 12,00,000

Deductions (actual): Professional Tax - 12,000, Housing loan interest - 2,00,000, Total savings/deductions - 2,50,000, Savings on Infrastructure bond - 25,000, other deductions over 1,00,000 - 50,000.

Admissible total deductions (subject to ceiling limits) - 12,000 + 150,000 + 100,000 + 20,000 + 50,000 = 332,000

Taxable income, 1,200,000 - 332,000 = 868,000

Tax Calculation for Non-Senior Male

- Rs. 1,60,000 is exempted.
- For the next 340,000 (500,000-160,000), 340,000 x 10% = 34,000 -(1)
- For the next 300,000 (800,000-500,000), 300,000 x 20% = 60,000 -(2)
- For the next 68,000 (868,000-800,000), 68,000 x 30% = 20,400 -(3)

Tax - (1) + (2) + (3) = 114,400

Also, for Non-Senior Female Tax is, 114,400 - 3,000 = 110,400

and Senior Citizens Tax is, 114,400 - 8,000 = 106,400

Education Cess, 114,400 * 3% = 3,432

Total Tax - Rs. 1,17,832

See Excel Sheet. Enter gross salary and deductions/savings applicable in the green color column. Results will be shown in yellow. The red color is used for static data.

Regards,
ABBAS.P.S,
ITI Ltd, PALAKKAD - 678 623,
KERALA, INDIA.
Ph. [Phone Number Removed For Privacy Reasons]

Open the attachment and calculate for 2010-11 and Form 16.

All portions of the salary are taxable. Some of the elements where tax deductions are exempted are as follows:

- Production of receipts for 50% or 40% of basic as HRA (depending on Metro or Non-Metro)
- Production of bills for fuel reimbursement (based on the limits in the IT Act)
- Production of bills for kids' education (IT Act), etc.

Please check out the IT Act and compare it to your salary structure. Remember, a higher basic does not mean higher tax; it means higher HRA components and higher PF/Gratuity calculations.

Regards,
Sreeja

OK, I agree, but what does a typical salary consist of? For example, does it include Basic, DA, HRA, Special Allowances, etc.? Should Traveling allowances also be considered part of the salary?

Thank you for your message.

Hi, I need a salary breakup, i.e., components and percentage for minimum wage earners (e.g., gross $4500 per month). Please help me out.

Someone, please help me—Is the take-home salary subject to income tax? Or is it the total CTC, where two rows are seen in the appointment letter, gross and NETT total (your take-home)? Which part is received in the bank after the deduction of all taxes, PF, TDS? I hope it's NETT. Am I right?