December 9, 2011

Calculation of Salary Income

Hi,

Welcome to my world of financial planning. I wish to start this journey with helping you how to calculate your own salary income. I selected this topic, as these few months are hectic to salaried to know their tax liability.

Here I will start with basic things, then in future I will update as and when I find important and informative information. This will make all of you familiar with calculation of your salary income.

In Salary Income, there are mainly three components, which are as below

1) Salary Payments

2) Allowances

3) Perquisites

However, today I will make you familiar with Salary Payments and allowances.

Salary Payments

In Salary Payments, again there are sub categories like taxable, partially taxable and fully exempt salary payments. The list of all those are as follows.

1) Fully Taxable Salary payments:-

  • Basic
  • Advance Salary
  • Arrears of salary
  • Fee
  • Commission
  • Contractual Bonus
  • Annuity (Pension)
  • Remuneration for extra work
  • Salary in lieu of notice period

2) Partial Taxable Salary Payments 

  • Gratuity (Gratuity received during the period of service is fully taxable and any death cum retirement for Govt Employees is fully exempt).
  • Leave Salary (Leave Salary received during the period of service is fully taxable and any death cum retirement for Govt Employees is fully exempt).
  • VRS-To calculate it few conditions are there which I will deal with them in my future posts.
  • Leave Travel Concession-Is partial but again few conditions are there to satisfy that.

3) Fully Exempt Salary Payments

  • Any payment from Approved Superannuation Fund
  • Salary from UNO
  • Salary to NRI Technicians
  • Remuneration to consultants and to employees of such consultants
  • Remuneration to foreign citizen

However, generally fully exempt salary payments are not applicable to many.

Allowances

Here also few are fully taxable, partial and fully exempt. Let us categorize them.

1) Taxable Allowances 

  • Dearness Allowances
  • Overtime Allowances
  • Fixed Medical Allowances
  • City Compensatory Allowances
  • Interim Allowances (to meet increased cost of living in cities)
  • Servant Allowances
  • Project Allowances
  • Tiffin/Lunch/Dinner Allowances
  • Any type of Cash Allowances
  • Warden Allowances
  • Non Practicing Allowances

2) Partial Taxable Allowances

  • HRA-If you are residing in your own house or not paying any rent then it is taxable. However, you are residing in rental then the calculation is as follows.

Note:-Salary for calculating HRA is Basic+DA (If it is provides in terms of employment for retirement benefit) +Commission as a percentage of turnovers.

Least of the following is exempt.

1) Allowance actually received

2) Rent Paid-(minus) 10% of salary for the relevant period

3) 50% of salary for the relevant period (For residents of Delhi, Kolkata, Mumbai and Chennai) for others it is 40% of Salary

3) Allowances, which are exempt to the extent of amount, received or the specified limit whichever is less.

  • Children Education Allowance-Rs.100 per child per month but maximum for two children;
  • Hostel Exp Allowance-Rs.300 per child per month and maximum for two children;
  • Transport Allowance-Rs.800 per month and for handicapped Rs.1600 per month.

I have not listed the other such allowances because I found them not that much relevant.

4) Allowances that are exempted either the amount received or amount spent whichever is less.

  • Travelling Allowance-Expenses on tour or on transfer;
  • Daily Allowance-Expenses, which allowed to meet while not on the place of work;
  • Conveyance Allowance-Meet the expenses of conveyance in performing the duties of an office;
  • Helper Allowance;
  • Allowance granted to meet the academic, research and training pursuits in educational institutions;
  • Uniform Allowance

Hope I covered most part of Salary Income. In future, I try to share the remaining part.

15 Comments

  1. Hi Basavaraj,

    This may sound novice but I was wondering whether you have written anything related to income tax.

    Say-basics about income tax, different slabs, recent changes, how one can calculate the deductions made by his/her employee (how to understand whether deductions are happening in accordance with your investment declaration), etc.

    If yes, then please let me know which article I need to go to.

    To be frank, I am still a little confused about my income tax liabilities (slab-related, deductions, etc).

    I am sure there must others too, around…:)

    Please help me (rather us) with some useful writing for better understanding.

    Thank you in advance.

    Reply
    • Mahesh-You get all information already on IT portal. Please go through it.

      Reply
  2. Dear Basavaraj,

    I need your advice on HRA that I can claim for this year. I have worked for 2 different Organisations this year and I have 2 form-16s with me. I left my previous company in the month of October 2014 and I forgot to submit my rent receipts while leaving the company. I had an HRA component in my salary but as I didn’t submit any rent receipts, I didnt get any HRA exemption in my form-16 at the end of the year. Is there any possibility to claim this HRA now?

    Also, in my current company, I didn’t see any HRA component in my salary breakup and again this is not reflected in my second form-16 too. However, the HR has asked me to submit the rent receipts and I have submitted them in the month of Jan 2015 while submitting the other tax proofs. Now, I am not getting proper response from HR regarding this and I am not sure even if they have a clear idea about this issue.

    Based on my internet search since last couple of days, what I understand is that, when there is no HRA exemption/component available, we can use the section 80GG and claim a total of 24000/- per year. But for this, do we need to give any declaration and if yes, how to send this declaration copy to IT department?

    Can you please suggest me what are all the possibilities I have for claiming the HRA now apart from 80GG?

    Thank you very much in advance!

    Regards,
    Shravan

    Reply
      • Hi sir, i am working for a company almost since 4 years. I started here 20,000.00 and now i am with 25,000.00 salary. Now its been april i was given a salary increment of 2000.00 rs which means my salary is 27,000.00 has a whole. Till date we didnt had any cutting like PF and all. Suddenly my management has held up my 10% of my salary and says they are going to cut PF from now on. Now we all the employees are not knowing what to do and how to proceed ahead. Pls help out to sort out this with validation point to talk with our mgmt.

        Reply
        • Srikanth-How can they suddenly start deducting EPF? Whether the company strength earlier was less than 20 and now it moved to 20?

          Reply
  3. Sir,
    What is the role of form 16 for a salaried person.

    Reply
    • Anil-This is the certificate issued by your employer which states details of the salary income you earned during the particular FY and also TDS done from your employer end.

      Reply
      • Sir,
        So if I have no other income than my salary and my employer has provided with form 16. Do I still need to fill ITR form or not.
        Thanks a lot for your great help.

        Reply
  4. Term Insurance is most preferred Life Insurance to mitigate the future unlikely financial crunch by family members however there are variety of Variable & Cash Value policies which yield required return as well as Life Insurance. In each LI policy, initial expenses are high however it continue to reduce over the period & after 7-10 years are tenure policy becomes more competitive especially Variable Plans (ULIP).
    Don’t take the new policy by surrendering the old one. Probably your policy may be at that stage when it started building up the corpus & any unwanted decision taken in haphazard manner can lead to loss making proposition.

    It would be advisable either to have a word on Toll Free Numbers of respective LI company or an official in branch office.

    Disclaimer:- It’s a personal opinion & undersigned does not have any intention to take any kind of profit with this advise.

    Neeraj Arya
    Training Manager,
    Life Insurance Company

    Reply
    • Neeraj-Whether expenses higher or lower. But while buying a product client always looks at average expenses. Your logic mainly applies to ULIPs. But how hard are they to track and come out? Regarding typical traditional plans, I still oppose to the logic you said. Do you feel anyone help to surrender or close LIC plans??

      Reply
  5. hi sir,
    my annual income is 4.3 lac.i am central govt employ. age 31 yr. previously i buyed two policy (lic-10 lac for 25 yr’s and bajaj allianz -4 lac for 15 yr’s) in 2012 and 2010 respectively for saving income tax.but now i want to close these two and want to buy term policy of 1 cr.please suggest is it right decision ?and also which is best and balanced sbi, lic reliance,aviva ?

    Reply
    • Ranjeet-Closing the existing plan will depends on plan feature and your own commitment to correct your financial mistakes. What do you mean by balanced term insurance?

      Reply
  6. Very good and informative. Thanks Basu!

    Reply

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