Salary is defined as a fixed regular payment, typically paid on a monthly basis but often expressed as an annual sum. The gross salary one gets would be sum of the following components: i.e. Basic salary, allowances, bonuses, gratuity, leave encashment, perquisites, annuity, pension, provident fund etc. Let’s look at these individual components.
The basic salary is mainly a value which is around 40-50% of one’s cost to Company and varies from Company to Company. Employees at a junior level are given a higher proportion of a basic pay compared to their senior counterparts. The basic pay is taxable and higher is the amount greater is an amount available to tax. This component is linked to the HRA and the EPF and plays a crucial role in the calculation of their taxability.
It is an additional amount or a benefit as a part of the salary. These allowances are added to the salary and taxed. However certain allowances qualify for an exemption. These allowances need to be carefully noted and claimed. One can claim an exemption on allowances up to certain limits based on an exemption provided or a set of conditions.
HOUSE RENT ALLOWANCE (HRA): In order to claim an exemption for this allowance a certain set of conditions needs to be satisfied and one needs to consider the least among the three amounts.
One has to pay tax on the actual HRA received from the employer minus the amount which is the least among the above three categories. One needs to show supporting documents in order to claim the HRA exemption. If the HRA is less than INR 3,000 then no supporting documents from the landlord are necessary.
MEDICAL ALLOWANCE : One gets a medical allowance as part of the salary. This amount is tax exempt up to INR 15,000 per annum. One needs to submit medical bills in order to claim this amount. One can claim an amount only up to INR 15,000 per annum.
CONVEYANCE ALLOWANCE : One gets this allowance for commuting or travel from ones home to the office. An amount of up to INR 800 per month is tax exempt. One can also use this allowance for travel related to his work.
LEAVE TRAVEL ALLOWANCE : Leave travel allowance is obtained by one from the employer for vacation travel. In order to obtain leave travel one needs to actually travel. Under rail travel one gets reimbursed for AC First class travel by the shortest route or the amount spent whichever is lesser. Economy class airfare on the National Carrier of India by the shortest route also qualifies. The Government of India has fixed a block of 4 years during which leave travel allowance can be claimed twice. The current block is the year 2010-2013.This is not the fiscal year but the calendar year of 1st January to 31st December. One can claim Leave Travel Allowance twice in the block of 4 years but not in the same year.
ENTERTAINMENT ALLOWANCE : One might get this allowance from his employer to avail of entertainment services. This can be availed only by Central and State Government employees. This deduction is on the gross salary which also includes the exemption allowances. For a central or a state Government employee the least of the following is tax deductible :
SPECIAL ALLOWANCE : One gets an allowance for carrying out duties in his official capacity and the expenses actually incurred are tax exempt. These could be uniform allowance, travel allowance or research allowances.
HOSTEL ALLOWANCE : Hostel expenditure allowance is granted to meet hostel expenses of a child. This amount is exempt from tax to the extent of INR 300 per month per child. The maximum allowable limit is INR 600 per month for the hostel expenses of two children.
CHILDREN’S EDUCATION ALLOWANCE : Children’s education allowances are tax exempt up to an amount of INR 100 per month per child for a maximum of 2 children.
In addition there are provisions of providing remote area allowance, hilly area allowance, border area allowance, counter insurgency allowance, tribal area allowance etc.
FULLY EXEMPT ALLOWANCES :
FULLY TAXED ALLOWANCES DEARNESS ALLOWANCE : A dearness allowance is provided to protect an employee from the effects of inflation . This amount might form a part of one’s salary related to retirement benefits.
CITY COMPENSATORY ALLOWANCE : This allowance is given to employees posted in big cities in order to tide over their expenses.
OVERTIME ALLOWANCE : One gets an overtime allowance from the employer if he works above the limit of working hours.
In addition one might get servant allowances and deputation allowances which are fully taxable.
Bonus signifies an employee’s worth to an organization. Bonus is usually given out once a year. If one obtains a bonus in his salary, this amount is fully taxable.
One obtains a gratuity when he completes five or more years of full time service with the employer. If one receives the gratuity amounts from his employer on retirement or if one is incapacitated before his retirement these amounts are not taxed. If one is terminated from employment or on his death the gratuity amount is received by his widow these amounts are not taxed. If one is a state or a central Government employee or in the defense services any death or a retirement gratuity received under the pension rules of the Central and State Government is not taxable.
One gets different kinds of leave such as sick leave, annual leave or casual leave. Sometimes this leave remains unused maybe due to a busy schedule. Companies sometimes pay an amount based on the leave standing in ones credit or may allow the leave to accumulate and pay it on the resignation or the retirement of the employee. If one receives the leave encashment amounts while in service these amounts are fully taxable.
Colloquially known as “Perks”, these might be a rent free accommodation, a vehicle and a driver, servants, watchman, guards, as well as furniture, fridge or a television provided by the employer. Insurance and a gym membership might also be provided by ones employer.
COMPANY ACCOMODATION : If one is provided with a company accommodation, then whichever is lesser among these amounts is eligible for a deduction. Either the actual expense incurred by the employer or 15% of the basic salary of the employee, along with all other allowances for the period of accommodation.
COMPANY CAR : If one is eligible for a car from one’s Company then these perks are taxed. Let us consider that one owns his/her personal car but the fuel and maintenance expenses are provided by the employer. If one uses the car partly for official use and partly for personal use then the following rules apply. As per the tax rules INR 1,800 per month is taxable as a perquisite if the cubic capacity (cc) of the vehicle does not exceed 1.6 liters. For a vehicle with an engine capacity exceeding the capacity of 1.6 liters the amount is INR 2,400 per month. If a chauffeur is provided with the car for use by the employee INR 900 is added to the above mentioned amount which is same irrespective of the capacity of the car.
The taxable amounts are the actual expenses incurred by the employer minus the expenses recovered from the employee .One then subtracts the amounts either INR 1,800 or INR 2,400 based on the cubic capacity of the car and if a chauffeur is provided a further INR 900. If car is used only for official purposes it is not considered as a perquisite. If one uses the car only for private travel then the amount one pays is deducted from the actual expenses incurred by the employer .If the motor car is owned by the employer and the fuel and maintenance charges are paid by the employer and the car is used by the employee for official purposes then it is not a perquisite.
FOOD COUPONS AND GIFT VOUCHERS : Retaining of employees is the prime focus of Companies today. Food coupons are an attractive option for the employers to retain talent. Hot food provided at office premises helps to avoid the hassle of carrying a hot tiffin from home. The value of the food or refreshments received is tax free in ones hands. The expenses incurred by the employer are allowed as a deduction as per the income tax act. Ones employer will not have to pay a fringe benefit tax if food, tea or snacks is provided on the office premises or through food coupons. If ones employer gives a gift voucher at festivals or birthdays it is treated as a tax free benefit in ones hands. Health club facilities, gym and so on are treated as tax free perks in ones hands. The employer would have to pay a fringe benefit tax at the rate of 16.83% for both the gift voucher and the health club facilities provided to the employee.
EMPLOYEE STOCK OPTIONS : Employee stock options are a benefit one receives from his Company where he has the first right to purchase the shares of the Company or subscribe at a future date the shares offered by the Company at a predetermined price called exercise price .The value of the shares received will be taxed as a perquisite in the hands of the employee.
FURNITURE : In some cases one is provided furniture for use by the employer. The furniture which is a movable asset is owned by the employer. The perquisite is taxed at 10% of the cost of the asset. In case the asset is taken on rent or on hire by the employer and given as a perk to the employee then the actual rent paid for the asset be it a fridge ,television or furniture is taxed as a perquisite in the hands of the employee. If one pays an amount towards the use of these assets to the employer those amounts are deducted before tax is calculated on the perquisite.
It is good to remember that “ Unless you are completely retired earning money is the best form of wealth preservation”.
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