Answer By law4u team
In India, salary income is one of the most common sources of income for individuals, and it is taxed under the Income Tax Act. Salary income includes wages, bonuses, allowances, and other benefits provided by the employer. It is essential for individuals to understand how salary income is taxed, the exemptions available, and the deductions that can reduce the tax liability.
Taxation of Salary Income in India:
Components of Salary Income:
Salary income includes:
- Basic Salary: The fixed amount paid to an employee.
- Allowances: These could include House Rent Allowance (HRA), Special Allowances, Dearness Allowance (DA), etc.
- Bonuses: Any performance or festival bonuses received.
- Perquisites: These are non-monetary benefits provided by the employer, such as a company car, accommodation, or stock options.
- Gratuity and Pension: Amount received by an employee after retirement.
Calculation of Taxable Salary:
The taxable salary is calculated by summing up all the components of salary and then applying deductions and exemptions as per the Income Tax Act.
- Step 1: Add all components of salary.
Basic salary + allowances + bonuses + perquisites = Gross Salary. - Step 2: Subtract exemptions and deductions.
Exemptions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and deductions like Section 80C (for PPF, EPF, life insurance premiums, etc.) are subtracted to arrive at the final taxable income.
Exemptions and Deductions on Salary Income:
House Rent Allowance (HRA):
HRA is provided by employers to employees to help with rent payments. However, it is partially exempt from tax.
The exemption is calculated as the minimum of the following three:
- Actual HRA received.
- Rent paid minus 10% of basic salary.
- 50% of basic salary (if living in a metro city) or 40% (for non-metro cities).
The remaining portion of HRA is taxable.
Leave Travel Allowance (LTA):
LTA is provided to employees for travel expenses incurred while on leave. LTA is exempt from tax for domestic travel expenses, subject to certain conditions.
Standard Deduction:
A standard deduction of ₹50,000 is available for salaried employees, which directly reduces taxable salary.
Deductions Under Section 80C:
Employees can claim deductions up to ₹1,50,000 for investments in eligible instruments like Provident Fund (PF), National Savings Certificates (NSC), Life Insurance Premiums, and Tax-saving Fixed Deposits.
Deductions for Interest on Home Loan (Section 24(b)):
If the employee is paying interest on a home loan, they can claim a deduction of up to ₹2,00,000 on the interest paid under Section 24(b) for a self-occupied property.
Pension and Gratuity:
Gratuity received on retirement or death is exempt up to a certain limit, and pension is taxable as salary.
How to Calculate Salary Taxable Income:
- Gross Salary: Add all components of salary (basic salary, allowances, bonuses, etc.).
- Exemptions and Deductions: Subtract applicable exemptions like HRA, LTA, and deductions under Section 80C.
- Taxable Salary: The remaining amount is the taxable salary, which will be taxed as per the applicable income tax slabs.
Income Tax Slabs for Salary Income:
The salary income is taxed as per the income tax slabs prescribed by the government, which vary based on the taxpayer’s income range. For example, for the financial year 2024-25:
- Income up to ₹2,50,000: No tax
- Income from ₹2,50,001 to ₹5,00,000: 5% tax
- Income from ₹5,00,001 to ₹10,00,000: 20% tax
- Income above ₹10,00,000: 30% tax
Additionally, a health and education cess of 4% is levied on the total tax payable.
Example of Salary Income Tax Calculation:
Let’s assume Mr. Sharma is a salaried individual with the following details:
- Basic Salary: ₹6,00,000
- HRA: ₹1,50,000
- Special Allowance: ₹50,000
- Bonus: ₹50,000
- Deductions under Section 80C: ₹1,50,000 (for PPF, insurance, etc.)
Step 1: Calculate Gross Salary
Gross Salary = Basic Salary + HRA + Special Allowance + Bonus
Gross Salary = ₹6,00,000 + ₹1,50,000 + ₹50,000 + ₹50,000 = ₹8,50,000
Step 2: Calculate Taxable Salary
HRA Exemption (assuming living in a metro city) = ₹1,50,000 (subject to actual rent and other conditions)
Deductions under Section 80C = ₹1,50,000
Taxable Salary = ₹8,50,000 - ₹1,50,000 (HRA Exemption) - ₹1,50,000 (80C Deduction)
Taxable Salary = ₹5,50,000
Step 3: Apply Income Tax Slabs
- Income from ₹2,50,001 to ₹5,00,000 = 5% of ₹2,50,000 = ₹12,500
- Income from ₹5,00,001 to ₹5,50,000 = 20% of ₹50,000 = ₹10,000
Total Tax = ₹12,500 + ₹10,000 = ₹22,500
Add 4% cess: ₹22,500 × 4% = ₹900
Total Tax Payable = ₹23,400
Conclusion:
Salary income is subject to tax in India, and the tax payable depends on the gross salary, exemptions like HRA, deductions like 80C, and the applicable income tax slabs. Understanding these components helps taxpayers minimize their tax liability and comply with the Income Tax Act.
