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 It can only be withdrawn in limited circumstances.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 –

    1. Transport Allowance - Transport allowance 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.

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

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

    4. 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.

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

    6. 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.

    7. 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.

    8. 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:

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

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

    3. Tiffin/Lunch Allowance - Taxable.

    4. Fully taxable - Fully taxable.

    5. Retaining Allowance - Fully taxable.

    6. Rent free accommodation - Fully taxable.

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

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