Not many people look at their salary slip too closely, except to see what they’re getting in hand each month. But this could be an oversight that could cost you money. There are many types of allowances in salary slip, including taxable and non-taxable allowances. If the taxable component of your salary slip is high, you will end up paying more income tax. So you should take a close look at your salary slip and negotiate with your employer to increase the non-taxable portion so that your tax outgo does not go through the roof.
The main part of a salary slip is what is called the basic salary, which is taxable. Then there are several types of allowances in the salary slip, including dearness allowance, leave travel, house rent, conveyance, medical allowance etc. Then there are the deductions, which include income tax, professional tax, and your contribution to the Employees Provident Fund (EPF).
Let’s help you in understanding your payslip by looking at each of these components.
The biggest component of your salary slip will be the basic salary, which could go up to 50 percent or more of the total. This component of your salary is fully taxable. It’s important to look at this component closely since the income tax you pay will depend to a large extent on the quantum of basic salary. All the other allowances are usually calculated as a percentage of the basic salary, so make sure you take a close look at this.
Dearness allowance is given to employees to negate the effect of inflation. For example, if the inflation rate is 7 percent, the real value of your income will fall to that extent each year. So DA is granted to negate the inflation effect. It is usually calculated a percentage of basic salary, and fixed by the Pay Commission. Like basic salary, DA too is fully taxable. Generally, DA is prevalent in government jobs and less common in the private sector. Different rates are applicable for employees in urban, semi-urban and rural areas.
Among the different types of allowances in salary slip is house rent allowance, or HRA. Since this allowance enjoys some tax benefits, you must make sure that your pay slip has a high HRA component. Since housing costs in most cities are quite high, this will ensure that you don’t suffer a tax hit as well as pay high rent. The HRA component could be as high as 40-50 percent of your salary. You can claim an income tax deduction on HRA even if you are self-employed.
Under Section 10-13A of the Income Tax Act, income tax deduction on HRA will the lowest of the following:
Remember that you can still claim income tax deduction on rent paid even if you don’t get HRA from your company. Under Section 80GG, your available deduction will be the lowest of the following:
Another thing to note is that you will be able to claim rent you may have paid to your parents while living with them. But, then you must also remember that the rent you have paid to them will constitute their income, and hence will be taxable. You may also have to enter into a rent agreement with your parents.
Another allowance from which you can claim a deduction from income tax is leave travel allowance or LTA under Section 10(5) of the Income Tax Act. Many companies offer LTA, and if yours does, you would benefit from having a larger LTA component in your salary slip.
There are two things to remember about LTA.
One is that the income tax concession is offered only on the travelling component – that is the actual amount that you have spent on travel by air, train, bus or car. It does not include hotel stay or other expenses that you may incur. You may claim deduction for yourself, your spouse, children and dependent parents and siblings. You will be able to claim only economy class air fare of Air India, or AC first class train fare. The concession is available only for journeys within India and not to foreign destinations.
Another thing to note is that you will not be able to claim LTA deduction every year. It is only available for two journeys in a block of four years. In effect, you can claim it only on alternate years. You can carry forward the deduction for one journey if you have failed to claim it in one four-year block to the next block of four years. That is, you will be able to claim three deductions in the subsequent four year block. However, this claim has to be made in the first year of that block.
Many companies offer reimbursement of medical bills. Earlier, you were able to claim a deduction of Rs 15,000 from your taxable income. However, this has been discontinued with effect from FY 2018-19. So there is no tax benefit available on such reimbursements. Therefore, it may not be wise to include it in your cost to company package.
Companies provide some amount of conveyance allowance to meet travelling expenses, or simply because it has a tax benefit and therefore will reduce your tax burden. While there’s no limit to how much conveyance allowance a company can pay to its employees, there’s certainly a limit on how much you can deduct from your taxable income.
The maximum deduction you can claim from your conveyance allowance is Rs 1,600 per month, or Rs 19,200 a year under Section 10(14(ii)). This is not based on actuals, but on a lump sum, so you don’t have to produce receipts in order to claim the allowance or deductions. Those with disabilities can claim Rs 3,200 per month.
Any company with over 20 employees is bound by law to register with the Employees Provident Fund Organisation (EPFO) and offer EPF to its employees Your employer will deduct a certain portion of your salary to contribute to your EPF account, and offer a matching contribution. The amount deducted is 12 percent of basis salary (plus DA in the case of government employees), and the company contributes 12 percent.
Of the company contribution of 12 percent, 8.33 percent will go into the Employees’ Pension Scheme (EPS). The calculation gets a little complicated here. If your basic pay is over Rs 15,000, the amount put in EPS is limited to Rs 1,250 each month, and the rest will go into EPF. If it is under Rs 15,000, 8.33 percent will be deposited in EPS.
Contribution to EPS is fully deductible from tax under Section 80C. The interest too is free from tax. The entire corpus on withdrawal is also free from tax if you leave the job after five years. The tax rebate can also be claimed if the company folds up, or if you have resigned due to ill-health.
There’s a long list of taxable and non-taxable allowances, but when you negotiate with your employer, make sure the largest chunks have tax benefits. This will mean more money in your pocket. Heads like entertainment allowance, overtime, meals allowance etc. are all taxable, there’s no great benefit in having them on your salary slip.
There is a vital difference between reimbursements and allowances that you must understand. Allowances are generally intended as a benefit to employees and are for fixed sums. Some may be fully taxed, while others partially or fully exempt.
Reimbursement are payments made for actual expenses and are paid on production of receipts. They are not subject to income tax, since they are considered costs and not income. Sometimes reimbursements can be better than allowances. For instance, if your work involves a lot of travelling, it’s better to have reimbursements than an allowance.
Remember that benefits like free transport from home to office, free meals, fee health check-ups etc. will reduce your monthly costs and thus indirectly add to your income. Make sure you consider these too while negotiating a pay package with a company.
Your company will make certain deductions from your payslip, for income tax and professional tax. You can avail of various deductions under the Income Tax Act to reduce your tax burden. For instance, you can reduce Rs 1.5 lakh from your taxable income under Section 80C by investing in equity-linked savings schemes (ELSS), Public Provident Fund, National Savings Certificates etc.
The company then consider these investments before cutting tax at source. You have to submit an investment declaration statement for that. So, make sure you submit it on time. Otherwise, the tax will be deducted, and you will have to claim a refund after you have filed income tax returns.
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