Income from salary is one of the primary sources of income for many individuals and is governed by the Income Tax Act, 1961 in India. This type of income includes all earnings received by an employee from their employer, which is taxable under Section 15 of the Act.
What does Salary include?
Salary encompasses various components:
- Basic Salary: The fixed amount paid to you, which forms the base of your salary structure.
- House Rent Allowance (HRA): An allowance given to employees living in rented houses. It is partially exempt from tax, depending on where you live and how much rent you pay.
- Special Allowances: These can include bonuses, overtime pay, or other allowances like travel allowance.
- Employer’s Contribution to Provident Fund (PF): This is a retirement savings plan where both you and your employer contribute a certain percentage of your salary.
The total salary you receive is added up to determine your taxable income. For instance, if you receive a basic salary of ₹50,000 per month, an HRA of ₹20,000, and other allowances amounting to ₹10,000, your gross monthly salary would be ₹80,000. Annually, this totals ₹9,60,000.
Deductions and Exemptions:
You can reduce your taxable income by claiming deductions and exemptions:
- HRA Exemption: To claim HRA exemption, you need to provide proof of rent payments. The exemption is the minimum of the following:
- Actual HRA received,
- Rent paid minus 10% of basic salary, or
- 50% of salary (for metro cities) or 40% (for non-metros).
- Provident Fund (PF) Contribution: The amount contributed to PF is deductible under Section 80C, up to ₹1.5 lakh per year.
Example
Suppose your basic salary is ₹50,000, HRA is ₹20,000, and you pay ₹12,000 per month as rent. Your annual HRA is ₹2,40,000. For a metro city, the exemption calculation is:
- Actual HRA received: ₹2,40,000
- Rent paid minus 10% of basic salary: ₹1,44,000 (₹12,000 x 12 months – ₹6,000)
- 50% of salary: ₹3,00,000
The HRA exemption would be ₹1,44,000, as it is the least amount among the three.
Taxable Salary
Using these figures, if you claim ₹1,44,000 as HRA exemption and deduct ₹1.5 lakh PF contribution, your taxable income is reduced from ₹9,60,000 to ₹6,96,000.
Conclusion:
Understanding your salary components and knowing how to apply exemptions and deductions can significantly impact your tax liability. By leveraging available exemptions and deductions, such as those for HRA and PF, you can optimize your tax liabilities and keep more of your earnings.
– Ketaki Dandekar (Team Arthology)
Read more about Income from Salary here – https://cleartax.in/s/salary