If you are a salaried employee, you should 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, let’s take a closer look at the different components of a salary and how they are taxed.
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.
This allowance is paid by employers to help employees meet the rising costs of living over time. It helps mitigate the impact of inflation on your expenses. Typically, only government employees are entitled to receive Dearness Allowance as a part of their salary. This is a fully taxable component and is taxed at your applicable tax slab rate.
Your employer may also occasionally pay out a bonus or commission depending on the nature of your job and your performance at work. The components are variable and they are added to your total income. Any bonus and commission earned during the year are fully taxable.
The House Rent Allowance (HRA) is paid to help employees meet the cost of rental accommodations. Most employers include HRA as a part of your salary and is generally offered as a percentage of the basic salary. HRA is taxed depending on whether you pay rent or not. If you do not pay any rent, the HRA you receive is fully taxable.
On the other hand, if you live in rented accommodations, the least of the following amounts is exempt from tax:
Here, salary is computed as follows:
Leave travel allowance (LTA) is a kind of monetary benefit paid by employers to help employees meet the cost of traveling within India, either alone or with their families. Here, the term ‘family’ includes your spouse, children and dependent brother, sister or parents. However, it does not include more than two children born on or after October 1, 1998.
LTA is partially exempt from tax. To claim this exemption, you need to keep the following conditions in mind:
If the above conditions are met, the following exemption is available for the LTA earned as a part of the salary, depending on the mode of transport you take.
This is an allowance that some employers pay their employees in order to help them fund the cost of their children’s education. This allowance is exempt up to ₹100 per month per child. You can claim this deduction for a maximum of 2 children.
This allowance may be a part of your salary if your employer wishes to compensate you for any hostel expenses you may incur for your children. It is exempt up to ₹300 per month per child. You can claim this deduction for a maximum of 2 children.
There are some allowances and components of your salary that are exempt only to the extent spent for official purposes. Here is a list of such allowances.
Apart from the above allowances, which may be paid to different categories of employees, there are some allowances paid to specific kinds of employees that are fully exempt from tax. These tax-free salary components are typically paid to the following categories of individuals:
Aside from the allowances discussed above, if you receive any of the following payments from your employer as a part of your salary, they will be fully taxable:
Now that you know how to go about calculating your taxable income, you can understand your salary structure better and estimate your tax liability more accurately. Remember to avail all the deductions and exemptions that the Income Tax Act, 1961 offers for salary income to maximize your tax savings.
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.
The taxable components of your salary iwill depend on how it is structured. For instance, you will have to pay tax on the basic salary, dearness allowance, medical allowance and profits in lieu of salary.
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.
The tax liability on a salary of ₹50,000 can only be determined based on how this amount is broken up among different components. However, if ₹50,000 is the total of all the taxable components of your salary, and if you have no other taxable income, you need not pay any income tax because your income is below the annual basic exemption limit of ₹2.5 lakh.
Some components of salary, such as the House Rent Allowance (HRA), conveyance allowance, special allowance etc. are partly exempt from tax.
No. Salary income is not exempt from income tax. The tax applicable on your salary depends on the components and the breakup of the total income you earn.
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.
To calculate your taxable income, add all the income that you earn from your employer and account for the complete or partial deductions. This will leave you with the taxable salary income.
To calculate the tax for FY 2022-23, find out your total income, choose a tax regime (old or new), and apply the deductions that you are eligible for to arrive at the taxable income. Then, on this amount, apply the income tax slab rate pertaining to your income to calculate the tax.
No salary is entirely tax-free. Instead, certain components of salary are partially exempt from tax, such as House Rent Allowance (HRA) and conveyance allowance.
While you cannot make your salary entirely tax-free, you can maximize 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.
No. Tax is calculated on the basic salary plus all the other taxable components of the salary earned.
1. Your take home salary breakup explained using memes
2. Salary structure : Components and how to calculate them
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