Salary refers to the remuneration paid by the employer to the employee for the services rendered for a certain period of time as a result of an express or implied contract. It includes:
- Basic Salary: It is the base income of an individual, the fixed amount paid to employees by their employers in return for the work performed or performance of professional duties by them, without any reductions. It is a fixed part of the compensation structure of an employee and generally depends on her or her designation. If the appointment of an employee is made on a pay scale, the basic salary may increase every year. Else, it remains fixed.
- Fees, Commission and Bonus: Bonus is the amount received by the employee over and above his basic salary for his good work towards the organisation. Commission is generally the amount received by the employee as a percentage of total sales made by him. Fee is usually paid to professionals for their services rendered.
- Allowances: An allowance is the financial benefit given to the employee by the employer over and above the regular salary. These benefits are provided to cover expenses which may be incurred to facilitate the discharge of service. Allowances are taxed either fully, partially or are exempt.
- Fully taxable allowances are:
- Dearness allowance paid to the employees to meet expenses due to inflation.
- City Compensatory allowance paid to those who move to big metros like Mumbai, Delhi, Chennai, where the standard of living is higher.
- Overtime allowance paid to the employee who works over the prescribed hours.
- Deputation allowance and servant allowance.
- Partly taxable allowances are:
- House Rent Allowance: If the employee stays in his own house then the allowance is fully taxable. The allowance exemption is the least of
- The actual house rent allowance
- Rent paid in excess of 10% of his salary
- If the rent is equal to 50% of his salary (metros) or 40% (other areas).
- Entertainment allowance (except for Central and State Government employees).
- Special allowances like uniform, travel, research allowance etc.
- Special allowance to meet personal expenses like children education allowance, children hostel allowance etc.
- Fully exempt allowances are:
- Foreign allowance given to employees posted abroad.
- Allowances of High Court and Supreme Court Judges.
- United Nations Organisation employees’ allowances.
- Perquisites: Perquisites are benefits received by a person as a result of his/her official position and are over and above the salary or wages. They are not reimbursement of expenses. Perquisites can be taxable or non-taxable depending upon their nature. Perquisites taxable for all employees include:
- Rent free accommodation
- Interest-free loans
- Movable assets
- Club fee payments
- Educational expenses
- Insurance premium paid on behalf of employees
Perquisites taxable only to specific employees like directors or those who have substantial interest in the organisation include:
- Free gas, electricity etc. for domestic purpose
- Concessional educational expenses
- Motorcar facility
- Payment made to gardener, sweeper, and attendant.
Perquisites fully exempt from tax include:
- Medical benefits
- Leave travel concession
- Health Insurance Premium
- Car, laptop etc. for personal use.
- Staff Welfare Scheme
- Retirement benefits: These benefits are provided to employees either during their period of service or on retirement for meeting their future expenses. These are also known as ‘profits in lieu of salaries’.
- Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the category of the employee.
- Gratuity is given as an appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
- Leave salaries tax depends on the category of the employee. The employee may make use of the leave or encash it.
- Provident fund is contributed by both employee and employer on a monthly basis. At retirement, the employee gets the amount along with interest. Tax treatment is based on the type of provident fund maintained by the employer.
- Deductions allowed from Salary: The following deductions are made from the salary income to reach the net salary income:
- Entertainment Allowance: This is first included in the salary and then allowed as a deduction to the State and Central Government employees. The deduction amount is the least of
- Entertainment allowance actually received
- 20% of basic salary
- Professional Tax: Professional tax also known as tax on employment is first paid by the employer and then allowed as a deduction from salary. It is allowed only in the year in which it is actually paid up to a maximum limit of ₹2,500. This source allows you to check your company’s compliance with federal and state labor and employment laws.
Computation of Net Salary of an Employee
|Fees Commission and Bonus||XXX|
|Less: Deductions from Salary|