Tax Calculation on CTC of Salaried Employees
There are several parts of the CTC of a salaried employee in a private company. This comprises of Basic Salary, House Rent Allowance (HRA), Dearness Allowance, Conveyance Allowance, medical allowances, Provident Fund, food allowance, Entertainment Allowance, and others. From firm to firm the CTC parts differ upon the grounds of the advantages it gives to its employees.
As per Dr Suresh Surana Founder, RSM India tax is to be revealed on the nature of every part like allowances, perquisites, and others.
“Some of these components are fully taxable or fully exempt whereas some others enjoy a partial exemption in accordance with the provisions of the Income Tax Act, 1961, Dr. Surana mentioned.”
Dr Surana also specified that allowance like Daily allowance, Uniform allowance, Research allowance is privileged beneath section 10[14] of the income tax Act. Perquisites, on the other hand, would be subjected to tax in a distinct way given by the IT Act.
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“For instance, Employee Stock Option Plan (ESOP) – ESOP is an employee benefit plan, that allows the employee to hold equity in an organisation. The price on which shares are offered to an employee is usually lower than Fair Market Value. Where such ESOP options are provided to the employees, the difference between the two prices would be taxable as perquisite u/s 17(2)(vi) of the IT Act, he added.”
Dr Surana specified how different parts of CTC are to be taxed.
Basic Pay Under Tax
The basic pay would be taxed in a full way.
House Rent Allowance (HRA)
When any assessee obtained a House rent allowance (HRA) finished the rent for the residential accommodation then he would avail the exemption beneath section 10(13A) as per the lower threshold that is the lesser of the following amounts would be availed as privileged from tax.
- (i) Actual amount received
- (ii) 50% of salary if living in metro cities (i.e. Mumbai, Delhi, Chennai, and Kolkata) and 40% of salary in other cases.
- (iii) Rent paid in excess of 10% of salary
Towards calculating the exempt HRA amount the salary rendered for the basic salary along with the Dearness allowance when it makes them part of retirement advantages and the commission obtained on the grounds of turnover.
When the assessee obtained the HRA would not furnish any rent the complete amount of the HRA undergoes taxable.
Variable Pay in Salary
The variable pay comes beneath the compensation which is being revealed by the employee performance and undergoes taxed.
Refund (Conveyance, Newspapers/Periodicals, Books & Mobile, etc.)
Under section 10(14) of the IT act allowances provided to employees towards the official purpose gets privileged from tax given that these expenses would sustain by employees. The employee must pose essential bills and vouchers as evidence to avail of the exemption.
Hence the expenditure on the conveyance allowance is to be exempted to an extent. The reimbursement for the books or newspapers and the periodicals must be availed as exemption u/s 10(14) in which the reimbursement for the mobile phone expenses is privileged as per Rule 3(7)(ix) of the IT Rules.
The entertainment allowances undergo taxable for private employees. When these entertainment allowances furnished for employees reimburse the expenses upon the subject of the hospitality of the customers of the business that is towards the purpose of business and this might be availed as exemption u/s 10(14) of the IT act.
Leave Travel Allowance (LTA) Under Income Tax
Towards the concern of availing the exemption for to leave travel allowance or concession u/s 10(5) the assessee is required to meet some specific conditions mentioned as:
- The actual journey is performed by the assessee.
- Only domestic travel is recognized for the purpose of claiming this exemption.
- The exemption is available for the employee itself or along with his family engaging spouse, children, dependent parents, brother and sisters of the employee. But this privilege would not be available exceeding than 2 children born post to 1st Oct 1998. “Further in cases of multiple births on the second occasion after having one child is not affected by this restriction.”
- LTA privilege is permitted max 2 times that is for the 2 journeys in the block of the 4 calendar years (2022-2025). “The quantum of exemption would vary as per the mode of journey.” For example, when Air towel, less of the real expenses sustain or the economy class face is permitted.
Employee Bonus
- Bonus experience taxes.
Payment of Employee Gratuity
On obtaining the Gratuity in the period of employment is subjected to tax. But when the Gratuity obtained on the retirement time will experience tax treatment relies on whether the employer undergoes beneath the payment of gratuity act or not.
When the employer comes beneath the Payment of Gratuity Act, then the least of the following is exempt u/s 10(10) of the IT Act:
- i. Actual amount received
- ii. Rs. 20,00,000
- iii. 15 days salary on the grounds of the salary for each finished year of service or the portion thereof in excess of 6 months that is 15/26 * Salary p.m. * No. of years of completion of service.
Towards the intention of the mentioned calculation, the salary will be rendered as basic salary per month along with the Dearness Allowance.
When the employer would not undergo beneath the payment Gratuity act then the least of the provided is privileged.
- i. Actual amount received
- ii. Rs. 20,00,000
- iii. Half months salary for every finished year of service that is ½* aggregate salary per month * no of years of the service competition during the computation of the completed years any fraction of a year will not come in it.
Dr. Surana mentioned “For the purpose of aforementioned computation, Average Salary p.m. would mean Average Basic Salary of last 10 months plus Dearness allowance [if it forms part of retirement benefits] of the last 10 months and Average Commission received on the basis of turnover of the last 10 months,”
