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Salaries paid in India are usually a mix of a number of allowances and perquisites, each having a separate tax treatment. As such the computation of an individual’s tax liability from his/her gross salary is a complicated task. The following are some common components of gross salary and their tax implications:
Component Taxable Income Basic Fully taxable House Rent Allowance Fully taxable Supplementary allowance Fully taxable Conveyance Partially exempt Lunch coupons Fully Exempt Medical reimbursement Partially exempt Leave travel allowance Partially exempt Company’s contribution towards PF Partially exempt Telephone reimbursement Fully Exempt Car reimbursement Fully Exempt Annual bonus Fully taxable Mediclaim contribution Fully Exempt Gratuity Partially exempt
The detailed tax treatment of some common salary components is as under:
- Basic: The basic component of the salary is the actual compensation for the work and is fully taxable.
- House rent allowance: HRA is given to employees to help them meet the cost of rented accommodation. Tax treatment of HRA is a bit complicated; three figures need to be computed:
- Actual HRA received
- Amount by which rent paid exceeds 1/10th of salary (basic + DA)
- 50% of the salary (basic + DA) if located in Mumbai, Delhi, Kolkata or Chennai and 40% of salary if located elsewhere
- Rs 8,000
- Rs 10,000 – (10% of Rs 25,000) = Rs 7,500
- 50% of Rs 25,000 = Rs 12,500
- Supplementary allowance: This allowance is normally given as an additional benefit to employees and is fully taxable.
- Conveyance: Conveyance allowance is paid to employees to compensate them for their travel expenses. It is fully exempt if it is a reimbursement of expenses incurred for official purposes. If it is given to cover the employee’s expenses of travelling from residence to work, it is exempt up to a limit of Rs 800 p.m. and the rest is taxable.
- Lunch coupons: Many employers provide lunch or lunch coupons to their employees nowadays. These are fully exempt from tax as long as they are not given in cash. There is also no limit laid down by law on the amount that can be paid through such coupons.
- Medical reimbursement: Often medical expenses incurred by the employee or his/her dependants are reimbursed by the employer. Such reimbursements are exempt from tax, up to an amount of Rs 15,000 p.a.
- Leave travel allowance (LTA): LTA is often given to employees to reimburse them for expenses incurred on outstation personal travel. It is exempt from tax up to the amount actually spent twice in a block of 4 years.
- Provident fund: Provident fund is a means of retirement savings. An employee contributes part of his/her salary towards the fund and this contribution is matched by the employer. The tax implications of PF are given in the table below.*
- Telephone reimbursement: Many employers reimburse the telephone expenses of their key employees. Since communications is acknowledged to be an important element in business today, such reimbursements are fully exempt from tax subject to submission of actual bills.
- Car reimbursement: Any reimbursements made by the employer in case of use of a car for official purposes by an employee are fully exempt from tax.
- Annual bonus: This is a popular additional incentive given by many employers. It is fully taxable. Annual bonus also includes any amounts given in the form of incentives, commissions, etc.
- Mediclaim contribution: Any premium paid by the employer on a health insurance policy for an employee is fully exempt from tax.
The lower of the above three amounts is allowed as a deduction from the HRA received and the rest is considered taxable. Ram lived in Mumbai and paid rent of Rs 10,000 p.m. His basic salary was Rs 25,000 p.m. He received an HRA from his employer of Rs 8,000 p.m. The 3 figures to compute his HRA tax liability are as follows: The lowest among the 3 figures (Rs 7,500) will be allowed as a deduction and the rest (Rs. 500) will be taxable.
Particulars Statutory PF Recognised PF Unrecognised PF Public PF Employer’s contribution Exempt Exempt up to 12% of salary Exempt No contribution from employer Section 80C rebate Available Available Available Available Interest on PF Exempt Exempt if interest rate does not exceed notified rate of interest Exempt Exempt Lump sum payment at retirement/termination of service Exempt Exempt Exempt Exempt
In addition to the salaries, there are also a number of perquisites provided by employers. A summary of the tax treatment of some common perquisites is as under:
Perquisite Tax implication Rent-free accommodation Taxable Telephone at residence Exempt Motor car for personal use Exempt Club membership Exempt Refreshments during working hours Exempt Subsidised lunch/dinner Exempt Training expenses Exempt Holiday home facility Exempt Awards/presents/rewards Exempt Expenses on credit cards Exempt
Tax implications of salary components
11 Responses to “Tax implications of salary components”
Ravinder Kohli said on June 8th, 2010 at 4:10 pm
My employer wishes to grant me a loan of Rs. Thirty Lakh for purchasing an house. The interest on the loan will be marginal (1 percent). Please advise the tax implications on such arrangement
Sridharbhopal said on September 1st, 2010 at 7:49 pm
I am a Business Development Manager and get Cash incentives for the sales made by me, this is apart from the basic salary and other allowances. what would be the tax implication for the cash incentives. Pls. clarify.
Aradhana said on September 5th, 2011 at 11:48 am
What does a car lease means and is this component taxable.
Do I have to buy a car or does that mean that I can put my car on lease and also claim fuel and driver reembursement.Please explain.
Ravi said on February 5th, 2012 at 5:24 pm
Car reimbursement by employer : Is it fully exempt from tax? Is there any limit? What elements does this cover? ( Fuel, insurance, maintenance, etc?)
prasun tiwari said on February 8th, 2012 at 10:36 am
Pls send me the full salary deduction & components.
G Immanuvel said on March 5th, 2012 at 8:01 am
I think the lunch coupon is exempted to the extent of Rs. 50 per meal and not fully exempt. Please clarify.
Mahesh Kumar said on May 3rd, 2012 at 3:56 am
i received cash on Food Coupon allowance instead of Food coupon, i want to know what are the tax implication.
if i opt food coupon instead of Cash allowance on food coupon, the waht are the tax implication.
Which option are benefit for me can i taken cash benefit instead of Food Coupon?
Can any one help me?
Thanks & regards,
kannan said on May 10th, 2012 at 10:14 am
If the car is in the name of my wife , can I use that car for claiming Car Reimbursement exemption under the Income Tax Act
Hitika said on June 6th, 2012 at 5:09 am
what about the scholarship component in salary. How much can be given as scholarship and will it benefi employee?
MS said on July 9th, 2012 at 8:55 am
Hi, Regarding prepaid telephone connection, is there clarity on what constitues a bill. Is it the recharge coupon which is bought for doing the recharge? Thanks for any information regarding this.
shyamal banerji said on August 20th, 2012 at 2:28 pm
What is the Tax implication of Bonus ?