Major Salary Components
Money received under an employer-employee relationship is called salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. In such cases, your income would be treated as income from business and profession.
The salary consists of the following parts:
Basic Salary
As the name suggests, this forms the very basis of salary. This is the core of the 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 the basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, and leave travel allowance. Some of these allowances are tax-free up to a certain limit, and some of them depend on your actual spending. It is the amount received by an individual paid by his/her employer in addition to the 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. Allowances can be fully taxable, partly taxable, or non-taxable.
Dearness Allowance (DA)
The Dearness Allowance is paid out to compensate for the increase in the general cost of living due to inflation. DA is paid out every month and is a taxable component of your salary.
Conveyance Allowance
Conveyance allowance is paid out to meet your expenses on commute-related transportation. It is paid out every month. Conveyance allowance up to 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 salary. It is paid out every month and can be tax-free, subject to certain conditions. For more on the 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. It can be paid out monthly or yearly and is a fully taxable component of your salary. However, if you receive reimbursement of your medical expenses against the submission of bills, such medical reimbursement is tax-free up to 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. It is usually paid out once a year. LTA / LTC can be tax-free, provided certain conditions are met. For more on the 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
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. Incentives are usually paid out monthly. A bonus can be paid out monthly or once a year. Incentives and bonuses are fully taxable. Refer to the Bonus Payment post for 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 they 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 a concessional rate, such as a 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 charge 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 purposes 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 deductions include Provident Fund, Income Tax, and Professional Tax (where applicable). Optional deductions include 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 the employee’s contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when he retires or resigns. There is also the employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on the 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 the target, but it forms a part of your CTC, fattening it up.
Different Types of Salary
Gross Salary
Gross Salary is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary
Net Salary is what is left of your salary after deductions have been made.
Take Home Salary
Take Home Salary is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company
Companies use the term “Cost to Company” to calculate the total cost to employ, i.e., all the costs associated with an employment contract. A major part of 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 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 paycheck.
The salary structure varies from 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
Statutory
1) PF
- 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 Gross
- 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 a lump sum 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 of 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 Certificate under which the payment in respect of taxes deducted from employees' salaries can be made. Also, as a firm, the organization is required to obtain an Enrolment Certificate and pay Profession tax on its behalf.
Periodicity of Returns
For employers holding a Registration Certificate, the period of returns to be filed on the 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 the 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 have been passed in the budget, 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 and 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 February
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, Engineers, R.C.C. Consultants, Tax Consultants, Chartered Accountants, Actuaries, and Management Consultants: 2500 per annum
- (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): 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 recognized under the Forward Contracts (Regulations) Act, 1952: 2500 per annum
- (b) (i) Member of Stock Exchanges recognized under the Security Contracts (Regulation) Act, 1956: 2500 per annum
- (b) (ii) Remisiers recognized by the Stock Exchange: 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, and Banking 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 notification is issued under the second proviso to sub-section (2) of section 3: 2500 per annum
Note: 1.
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.
Note: 2.
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 a 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 5 years of service in the organization. It can be shown as a part of CTC.)
OT Calculation = (basic + da) / 26 / 8 * no. of hrs * 2
If employees come under high salary, then you can again split up the amount in Spl Allow as:
1) Food coupons
2) Car Hire
3) Petrol and Maintenance for Car
4) LTA
FBT is applicable apart from LTA.
The Variable Pay % also differs from company to company based on the policy. In my previous organization, it is 12.5% of the CTC for all the departments except Sales. For sales, it will be 15%.
PaySlip
A paycheck is a document/record issued by an employer to an employee which shows how much money an employee has 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.
Form 16
If you are a salaried employee in an organization, then you get the salary after deducting tax by the employer. This process is called Tax Deduction at Source (TDS). The company must issue a Form 16 which contains the details about the salary earned by that employee and how much tax was deducted. The tax deducted is paid to the government by the company. Form 16 is the proof of the employee’s income and tax paid to the government. It is issued under section 203 of the Income Tax Act for Tax. The taxpayer has to use Form 16 to file the Income Tax return every financial year.
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