Basics of Income tax Act, 1961 (Related to Pay Slips)
September 18, 2019
1. Basic Salary
This is a fixed component in your paycheck and forms the basis of other portions of your salary, hence the name. For instance, HRA is defined as a percentage (as per the company’s discretion) of this basic salary. Your PF is deducted at 12% of your basic salary. It is usually a large portion of your total salary.
2. House Rent Allowance
Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income tax laws have prescribed a method for computing the HRA that can be claimed as an exemption.Also do note that, if you receive HRA and don’t live on rent your HRA shall be fully taxable.Case Study: Malvika works at an MNC in Bangalore. Her company provides her with a house rent allowance. But she doesn’t live in a rented accommodation as she lives with her parents.How can Malvika make use of this allowance?Malvika can pay rent to her parents and claim the allowance provided they own the place they currently live in. All she has to do is enter into a rental agreement with her parents and transfer money to them every month. This way Malvika can make a nice gesture and give back to her parents, and two, save some taxes. But remember, Malvika’s parents will have to show the rent she paid in their income tax returns.
3. Leave Travel Allowance
Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.
The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.
5. Employee Contribution to Provident Fund (PF)
Provident Fund or PF is a social security initiative by the Government of India. Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward employee’s pension and provident fund. An interest of about 8.65% from FY 2018-19 (earlier it was 8.55% for FY 2017-18) gets accrued on it. This is a retirement benefit that companies with over 20 employees must provide as per the EPF Act, 1952.
6. Standard Deduction
Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. The employee can now claim a flat Rs. 50,000 (Prior to Budget 2019, it was Rs. 40,000) deduction from the total income, thereby reducing the tax outgo.
7. Professional Tax
Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.