If you are a salaried employee, you would be aware that your taxable salary is not the same as your gross salary. There are some components that are partially exempt from tax, and others that are tax-free salary components.
To help you better understand how your salary income is taxable, in this blog, let’s take a closer look at the taxable, non-taxable and partially taxable components of salary.
Basic Salary
The basic salary is what you earn before adding any allowances or perks. It is the basic amount you get to take home each month, and it is on this sum that various other allowances are calculated. This component is fixed and is fully taxable. The tax on your basic salary is levied at the income tax slab rate applicable to you.
What is Allowance?
Allowances refer to specific monetary benefits or payments provided by an employer to employees in addition to their regular salary or wages. These additional payments can serve various purposes and may be structured differently depending on the organization and the nature of the job.
List of Taxable Allowances
Below is a list of taxable allowances or taxable components in your salary in India:
- Dearness Allowance (DA)
- Dearness Allowance (DA)
- Entertainment Allowance
- Overtime Allowance
- City Compensatory Allowance
- Tiffin/Meals Allowance
- Servant Allowance
- Interim Allowance
- Warden Allowance
- Cash Allowance
- Project Allowance
- Non-Practicing Allowance (NPA)
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Allowance
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Description
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Dearness Allowance (DA)
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Dearness Allowance is usually given to employees to mitigate the impact of inflation on their salaries. In India, DA is considered as a taxable component of salary.
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Entertainment Allowance
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Entertainment Allowance is provided to employees for expenses related to entertainment and is taxable as per the Income Tax Act. However, it is subject to certain exemptions and deductions under specific sections of the Act as per section 16 (ii) but have a limit of the following - 1) 20% of gross salary (excluding all other allowance, benefits, and perks), 2) Actual entertainment allowance and 3) INR 5000
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Overtime Allowance
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Overtime Allowance is the additional payment made to employees for working beyond their regular working hours. It is generally considered taxable income.
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City Compensatory Allowance
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City Compensatory Allowance is given to employees working in cities with a higher cost of living. It is usually taxable, but the amount can vary based on the rules and exemptions applicable in a particular city.
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Tiffin/Meals Allowance
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Tiffin or Meals Allowance is often given to employees to cover meal expenses during working hours. This allowance can be taxable, but there are exemptions available based on actual expenditure and the rules set by the employer.
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Servant Allowance
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Servant Allowance provided by employers to their employees for hiring domestic help or servants is generally considered taxable.
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Interim Allowance
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The taxability of Interim Allowance depends on its nature and purpose. If it is treated as a part of regular salary, it is taxable. However, if it is given for specific reasons, such as relocation expenses or temporary work assignments, there may be some tax exemptions.
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Warden Allowance
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Warden Allowance is given to individuals who take on the responsibility of overseeing and managing hostels or residential facilities. It is typically taxable income.
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Cash Allowance
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Cash Allowance, if given as part of the salary package, is generally taxable. However, certain allowances, like House Rent Allowance (HRA), may have specific exemptions.
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Project Allowance
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Project Allowance is typically considered taxable income unless there are specific provisions or exemptions in the Income Tax Act that apply to it.
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Non-Practicing Allowance (NPA)
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NPA is provided to doctors and professionals who are not practicing their profession while in employment. It is usually taxable but may have specific provisions and exemptions for medical professionals.
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List of Partially Taxable Allowances
Below is a list of partially taxable allowances or partially taxable components in your salary in India:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Conveyance Allowance
- Medical Bills Reimbursement Allowance
- Education Allowance
- Hostel Allowance
- Special Allowance
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Allowance
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Description
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House Rent Allowance (HRA)
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HRA serves the purpose of covering the employee's housing expenses. It enjoys a partial exemption under Section 10(13A), with the remaining portion being subject to taxation.
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Leave Travel Allowance (LTA)
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This allowance is extended to employees for official travel within India. The company may contribute a portion of the travel fare, while the balance is considered taxable.
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Conveyance Allowance
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Employees receive this allowance to cover commuting expenses between their residence and workplace. Any amount exceeding Rs.1,600 per month is subject to taxation.
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Medical Bills Reimbursement Allowance
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Employers provide this allowance to cover medical expenses for the employee or their family. If the reimbursement exceeds Rs.15,000, it becomes taxable.
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Education Allowance
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Employees receive this allowance to support their children's education in India. If the allowance exceeds Rs.100 per month per child (up to a maximum of 2 children), it becomes subject to taxation.
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Hostel Allowance
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This allowance provides Rs.300 per month per child for hostel expenses, and it can be claimed for a maximum of 2 children.
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Special Allowance
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Under Section 14(i), this allowance is granted to employees based on their performance and contributions, and it may be subject to taxation as per applicable rules.
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List of Non-Taxable Allowances
Below is a list of non-taxable allowances or non-taxable components in your salary in India:
- Medical Insurance Premium
- Phone and Internet Bills
- Meal Coupons
- Books, Periodicals, Newspapers, Journals
- Gadgets
- Recreational and Medical Facilities
- Gifts in Kind
- Other Non-Taxable Allowances
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Allowance
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Description
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Medical Insurance Premium
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If the company covers the medical insurance premium for the employee or family, it's tax-exempt.
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Phone and Internet Bills
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Reimbursement for phone and internet bills is tax-exempt, within reasonable limits set by the company.
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Meal Coupons
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Meal coupons like Sodexo, up to Rs.50 per meal, are tax-free.
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Books, Periodicals, Newspapers, Journals
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Subscriptions for skill enhancement are tax-free, based on employer discretion.
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Gadgets
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Tablets, laptops, computers provided by the company for professional and personal use are tax-free.
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Recreational and Medical Facilities
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Medical check-ups and workplace recreational/health club memberships are fully exempt from income tax.
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Gifts in Kind
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Gifts in kind, valued up to Rs.5000 per year, are not taxable.
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Other Non-Taxable Allowances
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- Allowances paid by the government to employees abroad
- Allowances for judges of Supreme Court and High Court
- Allowances for retired UPSC Chairman/Members
- Allowances from the UNO to its employees
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Conclusion
In conclusion, understanding the various components of a salary and their tax implications is crucial for salaried employees. Additionally, certain allowances are fully taxed or partially taxed based on their utilisation for official purposes. Lastly, there are specific tax-free salary components for certain categories of individuals. It is essential for employees to be aware of these components and their tax implications to effectively manage their finances.
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Frequently Asked Questions
1. How is tax calculated on your salary?
Tax is calculated on salary after providing the necessary deductions and exemptions for the non-taxable components. In other words, you will only have to pay tax on the components that form a part of the taxable salary.
2. How much of your salary is exempt from tax?
This depends on your salary structure and how much you earn. However, broadly speaking, the non-taxable components and partly-taxable components of your salary like house rent allowance, leave travel allowance and other such allowances are exempt from tax either completely or partially.
3. Which components of salary are not taxable?
Some components of salary, such as the House Rent Allowance (HRA), conveyance allowance, special allowance etc. are partly exempt from tax.
4. Which salary is taxable: gross or net?
The gross salary (minus the eligible deductions) is the taxable amount. Meanwhile, the net salary is what you get after deducting the income tax, pension, professional tax and other such amounts.
5. How can I make my salary tax-free?
While you cannot make your salary entirely tax-free, you can maximise your tax savings by claiming all the deductions and exemptions offered under the Income Tax Act, 1961. If your total taxable income after these deductions is less than the basic exemption limit, you will not have to pay any taxes, effectively making your salary tax-free.
