Calculation of income tax for salaried employees CTC: consult the tax rules on reimbursement, transfer, variable remuneration, bonus, DA, gratuity, HRA
CTC salaried employee income tax calculation: The CTC of an employee of a private company has several components. These include Basic Salary, Housing Allowance (HRA), High Cost Allowance, Transport Allowance, Entertainment Allowance, Medical Allowance, Provident Fund, food allowance, etc. provides to its employees.
According to Dr. Suresh Surana, Founder of RSM India, taxation can be determined based on the nature of each item like allowances, perquisites, etc.
“Some of these components are fully taxable or fully exempt, while others are partially exempt under the provisions of the Income Tax Act 1961,” Dr Surana told FE Online.
Dr. Surana further stated that allowances such as per diem, uniform allowance and research allowance are exempt under Article 10. of the Income Tax Act. Perquisites, on the other hand, are usually taxed in a specific way, as provided by the law on information technology.
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“For example, Employee Stock Option Plan (ESOP) – ESOP is an employee benefit plan, allows employees to own stock in an organization. The price at which shares are offered to an employee is generally less than fair market value. Where such ESOP options are provided to employees, the difference between the two prices would be taxable under Section 17(2)(vi) of the Information Technology Act,” he said.
In an email interaction with FE Online, Dr. Surana explained how various components of CTC are taxed. Looked:
The base salary
Base salary is always fully taxable.
If a taxpayer receiving Housing Allowance (HRA) pays rent for residential accommodation, they may claim an exemption under Section 10.[13A]subject to the lower of the limits mentioned below, i.e. the minimum of the following amounts could be claimed as exempt from tax:
(i) Actual amount received
(ii) 50% of salary if you live in metropolitan cities (i.e. Mumbai, Delhi, Chennai and Kolkata) and 40% of salary otherwise.
(iii) Rent paid greater than 10% of salary
For the purposes of calculating the exempt HRA amount, salary would mean base salary plus Dearness Allowance [if it forms part of retirement benefits] and commission charged on the basis of turnover.
If the taxpayer benefiting from the HRA does not pay any rent, the entire amount of the HRA will be taxable.
Variable compensation is the portion of compensation typically determined by employee performance and is fully taxable.
Reimbursement (transportation, books and newspapers/periodicals, mobile, entertainment, etc.)
In accordance with Article 10(14) of the Computer Law, allowances given to employees for official purposes are exempt from tax, provided that such expenses are actually incurred by the employees. The employee must have the necessary invoices and supporting documents as proof to claim an exemption.
Therefore, the transport allowance is exempt to the extent of the expenses incurred. Similarly, reimbursement for books/newspapers and periodicals could be claimed as u/s 10(14) exemption while reimbursement for mobile phone charges is exempt under rule 3(7)(ix) of the rules. computers.
Representation allowance, on the other hand, is fully taxable in the case of private employees. If such entertainment allowance is provided to employees to reimburse hospitality expenses of company customers, i.e. for business purposes, the same can be claimed as u/s exemption 10 (14) of the Computer Law.
Travel Leave Allowance (LTA)
For purposes of claiming the u/s 10(5) leave/concession travel allowance waiver, the taxpayer must meet certain conditions as follows:
I. The actual trip is undertaken by the taxpayer
ii. Only domestic travel is considered for the purpose of claiming such an exemption
iii. Exemption available for the employee alone or with his family, the family includes the spouse, children, dependent parents, brothers and sisters of the employee. However, the exemption is not available for more than 2 children born after October 1, 1998. Also, in case of multiple births the second time after having a child is not affected by this restriction
iv. The LTA exemption is allowed a maximum of 2 times, i.e. for 2 trips within a block of 4 calendar years (2022-2025). The amount of the exemption would vary depending on the mode of transport. For example, in the case of air travel, an amount less than the actual expenses incurred or the economy class fare would be allowed.
The bonus is fully taxable
The gratuity, if any, received during employment is fully taxable. However, the gratuity received upon retirement would be subject to tax treatment depending on whether or not the employer is covered by the gratuity payment law.
If the employer is covered by the Bonuses Payment Act, the lesser of the following is exempt from Section 10(10) of the Information Technology Act:
I. Actual amount received
iii. 15 days salary based on last salary received for each full year of service or part thereof beyond 6 months (i.e. 15/26 * pm salary * number of years completed on duty)
For the purposes of the above calculation, salary would mean pm base salary plus dearness allowance.
If the employer is not covered by the gratuities payment law, any of the following are exempt
I. Actual amount received
iii. Half a month’s salary for each year of service completed. (ie ½ * average pm salary * number of years of service completed) When calculating years completed, any fraction of a year should be ignored.
“For the purposes of the above calculation, the average salary pm would mean the average base salary of the last 10 months plus the dearness allowance [if it forms part of retirement benefits] of the last 10 months and average commission received based on the turnover of the last 10 months,” said Dr. Surana.
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