Salary Structure in India for income tax
Salaries are paid by organizations,corporate, business entities etc to their employees in exchange for the services Provided by them. The salary paid by the employers to the employees contains different components, such as basic salary, allowance, perquisites, etc.
Components of Salary Structure:-
Basic salary is the base income of an employee, containing 35-50 % of the total salary. It is a fixed amount which is paid to employees prior to any reductions or increases due to bonus, overtime or allowances.
Allowance is an amount payable to employees during their regular job. It can be partially taxable ,fully taxable,or exempted depending on what type it is.
· Dearness Allowance-
Dearness allowance is a certain percentage of the basic salary paid to employees during the time of inflation. It is paid by the government to employees of the public sector and pensioners etc.
· House Rent Allowance–
A house rent allowance is a component of the salary which is paid by the employers to employees for meeting the cost of rent of home. The individuals who residing in rented homes can be claimed as exemption and reduce their tax liability.
· Conveyance Allowance-
The Conveyance allowance also known as transport allowance which is offered by employers to their employees to compensate for their travel expense from their residence to workshop and workshop to residence.
· Leave Travel Allowance-
It is offered to employees to cover the latter’s travel expense when he or she is on leave from work. The amount paid as leave travel allowance is exempt u/s 10(5) of Income Tax Act, 1961. Leave travel allowance only covers domestic travel by air, railway or public transport etc.
· Medical Allowance-
Medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditure on regular basic or occasionally.
· Books and Periodicals Allowance-
Books and periodicals allowance is a type of allowance provided to employees to meet the expenses of purchase of books, periodicals and newspapers etc. It is tax exempt to the extent of actual expenditure incurred towards purchase of books and periodicals etc.
Gratuity is a lump sum benefit paid by employers to those employees who are retiring from the organization and this is payable to those employees who have completed 5 or more years with the company. The gratuity amount is paid in gratitude for the services provided by the employer during the period of employment. According to the Payment of Gratuity Act, 1972 gratuity is calculated as 4.81% of the basic pay but the firms with a workforce of 10 or more employees must come under the Act.
Employee Provident Fund
Employee Provident Fund is an employee benefit scheme where investments are made by both the employer and the employee in each month regular basic. It is a savings platform that employees to save a fixed portion of their salary each month, from which withdrawals can be made following a month from the date of cessation of service or upon retirement. In this scheme at least 12% of an employee’s basic salary of fixed amount automatically deducted and goes to the Employee Provident Fund every month. The contributions are maintained by the Employees Provident Fund Organization (EPFO).
Professional tax is imposed over the income earned by salaried employees and professionals, including chartered accountants, doctors and lawyers, etc. by to the state government. The methods of calculating professional tax is varying from state to state. The maximum amount that is payable by an employee in a year is Rs. 2,500. Employers deduct automatically profession tax at prescribed rates from the salary paid to employees and pay it to State Government. The revenue generated from that is used towards the Employment Guarantee Scheme and the Employment Guarantee Fund.
Perquisites are those benefits that some employees enjoy as a result of their official position. It also referred as fringe benefits. These are generally non-cash benefits given in addition to the cash salary of employee. For examples : car for personal use, rent-free accommodation, personal accident policy, insurance policy etc.
ESIC (Employees’ State Insurance corporation)
If a company has 10 or more employees whose gross salary is below Rs. 21,000 per month then the employer is eligible to avail ESIC scheme for employees. But the eligibility of this scheme in case of Maharashtra and Chandigarh is 20 or more employee .The employer’s contribution will be 4.75% of gross salary and employee’s contribution will be 1.75% of gross salary making a total of 6.5 per cent.