Tuesday, 15 July 2014

Understand your salary structure

Your salary consists of the following parts:

Basic Salary – The basic salary is fully taxable. A higher Basic Salary leads to a higher taxable income but a higher basic salary also helps one get higher gratuity.

Dearness Allowance - The dearness allowance is also fully taxable. Like Basic Salary, a higher dearness allowance helps one get higher gratuity.

House Rent Allowance – House Rent Allowance is tax deductible if the assesse actually pays rent for the house he occupies & he is not the owner of the particular property. The amount of deduction is the least of 3:
  • Actual HRA received
  • Rent paid in excess of 10% of *salary
  • 50% of salary if assesse lives in Mumbai/Delhi/Calcutta/Chennai, & 40% of salary if the assesse lives in any other city

Salary here is defined as basic pay + dearness allowance + commission based on fixed percentage of turnover achieved by employee.

PF – PF is deducted as 12% of basic salary & dearness allowance of the employee. It can only be withdrawn in limited circumstances. The employer has to match the employee contribution up to the amount of `780 per month. Above this amount it is on the discretion of the employer.

Major Non Taxable Allowances –

Transport Allowance - It is given for the expense incurred to travel between office and residence. Transport Allowance upto the amount of ₹ 800 per month is exempt. For a handicapped individual, the exemption limit is 1,600 per month.

Conveyance Allowance: It is given for expenses incurred on travelling for official purposes. Conveyance allowance is exempt upto the extent of actual expenses incurred.

Medical Reimbursement - Exempt only upto the extent of actual expenses incurred in medical treatment & the limit is 15,000 per year.

Leave Travel Allowance - Can be claimed only upto the extent of actual expenses incurred on bus/air/rail tickets for holiday trip of assesse & dependant family.

Children Education Allowance - Exempt upto the extent of 100 per month per child for a maximum of 2 children.

Children Hostel Allowance - Exempt upto the extent of ₹ 300 per month per child for a maximum of 2 children & should be used to meet hostel expenditure of children.

Food Coupons – Exempt upto ₹ 50 per meal. Total exemption limit depends on number of working days in a month & number of meals in a day.

Club Membership - Amount paid for club membership of employee is exempt from tax.

Taxable Allowances, perquisites, bonuses & Variable Pay -

Most of the other allowances &perquisites are taxable. Bonus & Variable pay is also taxable. Some of the examples of taxable allowances & perquisites are:

Medical Allowance - It is different from Medial Reimbursement & is fully taxable.

City compensatory Allowance - This is allowance given to employees living in big cities to help them bear the high costs of living in cities.

Tiffin/Lunch Allowance - Taxable.

Overtime Allowance - Fully taxable.

Retaining Allowance - Fully taxable.

Rent free accommodation - Fully taxable.

Interest free loans - The market rate of interest is calculated & tax is to be paid on that amount.

Expenditure on foreign travel & stay during medical treatment - Tax is to be paid on those expenses incurred.

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