Income Tax Calculation: Some of the components of CTC and additional facilities provided by the company are fully taxable, some are fully exempt and some are partially exempt.
Salaried Employees CTC Income Tax Calculation: The CTC received by a person working in a private company consists of several components. This includes Basic Salary, House Rent Allowance (HRA), Dearness Allowance (DA), Convenience Allowance, Entertainment Allowance, Medical Allowance, Provident Fund (PF), Food Allowance, etc. The components of CTC differ from company to company and the tax treatment of each component or facilities provided by the company is also different. According to Suresha Surana, Founder, RSM India, their taxability can be assessed according to the nature of allowances, additional facilities etc. Some of these components are fully taxable, some are fully exempt and some are partially exempt.
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According to Surana, daily allowance, uniform allowance, research allowance are exempted under section 10(14) of income tax, while the additional facilities provided by the company are usually taxed in a specific manner. For example, Employee Stock Option Plan (ESOP) is an employee benefit plan through which the employee gets an equity stake in the company. Employees usually get this holding at less than the fair market value of the shares. On this difference of price, the employees have to pay tax in the form of additional facilities under section 17(2)(vi) of the Income Tax Act. Given below are the tax rules for various components of CTC.
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Basic Pay
Basic pay is fully taxable.
HRA
A part of CTC of a salaried employee is HRA which is subject to section 10 of the Income Tax Act.[13A] You can get tax exemption on rent of house under Rs. Taxpayers can take exemption of the actual HRA amount, 50 per cent of salary in metro cities and 40 per cent in other cities and rent paid in excess of 10 per cent of salary, whichever is the lowest. Basic salary and DA and commission received on the basis of turnover are included in the salary for the calculation of HRA. However, if the taxpayer does not have to pay the rent, then tax will have to be paid on the HRA.
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Variable Pay
The variable pay portion of CTC is fully taxable. It is given to the employee according to the performance of the employee.
Reimbursement (Convenience, Books & Newspapers/Periodicals, Mobile, Entertainment etc.)
- Under Section 10(14) of Income Tax, exemption is available on the amount received by the employees for official purposes. However, for this the personnel will have to show these expenses and present the necessary bills and vouchers.
- Exemption under section 10(14) of Income Tax Act can be availed for reimbursement of books/newspapers and periodicals. Similarly, for reimbursement of mobile phone expenses, exemption can be availed under Rule 3(7)(ix) of the Income Tax Act.
- Entertainment allowance received by private employees is fully taxable, but if it is reimbursed for expenses incurred for hospitality ie business purposes of the customers, then exemption under section 10(14) of Income Tax can be availed on it.
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Leave travel allowance (LTA)
- In order to claim exemption on Leave Travel Allowance (LTA) under section 10(5) of the Income Tax Act, certain conditions must be fulfilled-
- The taxpayer must have actually traveled.
- The benefit of exemption will be available only for domestic travel.
- The benefit of exemption will be available only on travel done with employee or family. The family includes spouse, children, dependent parents and siblings of taxpayers. More than two children born after October 1, 1998 will not get this exemption.
- One can avail LTA exemption only twice in a block of four calendar years (2022-2025).
Bonus
The bonus is fully taxable.
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Gratuity
- If gratuity is received during employment, then this entire amount is taxable. However, on receipt of gratuity at the time of retirement, its tax treatment will be based on whether the company is covered under the Payment of Gratuity Act or not.
- If the company is covered under the Employer Payment of Gratuity Act, then the actual amount under section 10(10) of Income Tax, Rs 20 lakh and (last salary) x (15/26) x (how many years worked in the company) ; Exemption is given on the lesser of these three. Salary here means Basic Salary and DA.
- If the employer is not covered under the Payment of Gratuity Act, the actual amount, Rs 20 lakh and (1/2)average monthly salaryHow many years did you work in the company? Exemption will be given on the lowest of these three. Average monthly salary means the average basic salary and DA of the last 10 months.
,Article: Rajeev Kumar)
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