CA V.K.Mahipal,
[email protected],924633 4840 Basic Concepts Salary Tax Planning Formula for Zero Tax Cost To Company (CTC) CA V.K.Mahipal,
[email protected],924633 4840 ASSESSEE PREVIOUS YEAR ASSESSMENT YEAR GROSS TOTAL INCOME TOTAL INCOME OR TAXABLE INCOME INCOME TAX SLAB RATES FOR INDIVIDUALS ( A.Y. 2011 – 12 ) CA V.K.Mahipal,
[email protected],924633 4840 K. vkmahipal@in. It is therefore. For example.As per section 2 (7) of the Income Tax Act.Mahipal.the legal heirs are responsible for payment of tax. 1961 assessee means a person responsible for payment of income tax or any other dues ( as interest or penalties ). not necessary that the person should have his own income to become an assessee. in case of death of a person.924633 4840 . in case of a minor – the parents are responsible. CA V.com. com. CA V. The financial year ending on 31st March is called Previous Year.Mahipal.924633 4840 . 1961 previous year is the year in which the income is earned. vkmahipal@in. for a person who is employed on 4/6/2009. previous year would be from 4/6/2009 to 31/3/2010. previous year would mean the period starting from the date of employment till the next 31st March.As per Section 3 of the Income Tax Act. In case of a person becoming assessee for the first time.K. For Example. For example. the assessment year would be 2009 – 10. Income earned in the previous year is assessed in the next year i.924633 4840 .Mahipal.com. CA V. for financial year 2008 – 09.As per Section2 (9) of the Income Tax Act.e. assessment year. vkmahipal@in. 1961 Assessment year is the period of 12 months commencing from 1st April immediately after the previous year.K. Income from Other Sources CA V. Income from Business or Profession IV. Income from House Property III. I. The sum total of taxable income of all five heads (sources) is called Gross Total Income. Income from Capital gain V.K.924633 4840 .Mahipal.Income under the Income Tax Act. Income from Salaries II.com. vkmahipal@in. 1961 is calculated under five heads. The five heads of income are. Mahipal.924633 4840 . 1961. the Total Income the amount of income which is chargeable to tax.
[email protected] per Section 2 (45) of the Income Tax Act. computed after deducting permissible deductions under Chapter VI – A of the Income Tax Act. 1961 CA V. 00.
[email protected] 1.00.000 8.K.001 and above 0 – 2.001 – 5.000 5.000 1.60.001 – 8.000 5.000 8.40.90.00.001 – 8.00.001 – 5.00.90.000 2.000 8.001 and above Tax Rate Nil 10 % 20% 30% Nil 10 % 20% 30% Nil 10 % 20% 30% For Men Below 65 yrs of Age For Women Below 65 yrs of Age For Senior Citizens (Above 65yrs) CA V.00.001 – 8.60.001 and above 0 – 1.001 – 5.00.Assessee Category Total Income in Rs.Mahipal.40.924633 4840 . 0 – 1.00.00.com.000 5.00.00.00. com.Mahipal.In addition to the basic Income Tax the individual assessee is also required to pay Education Cess @ 3% on the Income Tax including surcharge if any is levied CA V.
[email protected] 4840 . Mahipal.com. (iii) Arrears of salary.which were not due/ received earlier are taxable when due or received.924633 4840 . CA V.Income under the head Salaries is charged on (i) Due basis – when it is earned even if it is not received in the previous Year (ii) Receipt basis – when it is received even if it is not earned in the previous year.
[email protected]. which ever is earlier. com.924633 4840 . which are either fully exempt or exempt up to a certain limit. there are certain incomes in each of these categories. Fees.Mahipal. vkmahipal@in. Taxable value of cash allowances 4. Taxable value of perquisites 5. Basic salary 2. CA V. Commission and Bonus 3. all the components of salary income are included in salary. Broadly.Section 17 of the Act gives an inclusive definition of salary. it includes: 1.K. Retirement Benefits Although. 924633 4840 . annual increments to be given to the employee are pre fixed in the grade. vkmahipal@in. 1st May.com. apart from the basic salary at which the employee will start. 2004.K.All employees are entitled to a basic salary which is fixed as per their respective terms of employment either as a fixed amount or at a graded system of salary. this means that he will start at a basic salary of Rs. 2005 and onwards every year on the same date till his basic salary reaches Rs.f. No further increment is given thereafter till he is promoted and placed in other grade. He will get an annual increment of Rs. 2004 in the grade of 12000 –300 – 15000.Mahipal. Under this graded system.e.15. CA V.12000 from 1st May. if a person is employed on 1st May. 000. For example.300 w. 2002.K. CA V. Compute his basic salary for the previous year 2008-09.com.
[email protected] – 300 – 13800 – 400 – 16800 on 1st June. X joins service in the grade of Rs.Mr.Mahipal.924633 4840 . 924633 4840 . 12900 p. 1st June 2008 – 31st May 2009 = Rs.13500 x 2)= 27.13800 x 10) = 1.com.m.m. 1st June 2003 – 31st May 2004 = Rs. 13800 p.K.1. vkmahipal@in. 13500 p.000 CA V. 13200 p. Basic Salary for April and May 2008 (Rs.For the previous year 2008-09.m. 1st June 2004 – 31st May 2005 = Rs.65.12000 p. 1st June 2006 – 31st May 2007 = Rs.Mahipal.m. 1st June 2005 – 31st May 2006 = Rs. basic salary of X will be calculated as follows: 1st June 2002 – 31st May 2003 = Rs.m.m.m. 12600 p. 12300 p. 1st June 2007 – 31st May 2008 = Rs.000 Basic Salary for June 2008 – March 2009 (Rs.000 Basic Salary for previous year 2008-09 =Rs.38. vkmahipal@in. CA V.K. In both the cases.924633 4840 .Mahipal. Any fees or commission paid or payable to an employee is fully taxable and is included in salary.com. Commission payable may be at a fixed amount or a fixed percentage of turnovers. it is taxable as salary only when it is paid or payable by the employer to the employee. For the purpose of tax treatment. we divide these allowances into 3 categories: I. Partially exempt allowances III.Mahipal. whether personal or for the performance of his duties.924633 4840 .com.K. vkmahipal@in. These allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. Fully taxable allowances II. Fully exempt allowances CA V.Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses. (iv) Non practicing Allowance – this allowance is normally given to those professionals (like medical doctors.The main allowances under this category are enumerated below: (i) Dearness Allowance . chartered accountants etc.com. The purpose is to compensate the high cost of living in cities like Delhi.this allowance is paid to compensate the employee against the rise in price level in the economy. (iii) Tiffin / Lunch Allowance –this allowance is given for lunch to the employees. CA V. (i) City Compensatory Allowance .924633 4840 .this allowance is paid to employees who are posted in big cities. Mumbai etc.Mahipal.K. vkmahipal@in. (v) Warden Allowance – this allowance is given in educational institutions for working as a Warden of the hostel. It is to compensate them for this ban.) who are in government service and are banned from doing private practice. Mahipal. maintain (x) Other allowances .When an employee works for extra hours over and above his normal hours of duty. he is given this allowance. project allowance.K.(vi) Deputation Allowance . he is given overtime allowance as extra wages. (viii) Fixed Medical Allowance – this allowance is given to meet the medical expenses of the employee and his family. vkmahipal@in. and holiday allowance etc. which are not covered under specifically exempt category. education allowance.com. (ix) Servant Allowance – this allowance is given to servants at home by the employees. so are fully taxable.When an employee is sent from his permanent place of service to some place or institute on deputation for a temporary period. marriage allowance. CA V. (vii) Overtime Allowance .There may be several other allowances like family allowance.924633 4840 . Helper Allowance.924633 4840 .Tour Allowance. For certain allowances. there is a fixed limit of exemption.K.com. exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances.This category includes allowances which are exempt upto certain limit. Transport Allowance Tribal Area Allowance Children Education Allowance Hostel Expenditure Allowance CA V.
[email protected]. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) The main allowances under this category are enumerated below: House Rent Allowance (HRA) Leave Travel Concession Reimbursement of Medical Expenses Special Allowances including Uniform Allowance . An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts: a) House Rent Allowance actually received by the assessee b) Excess of rent paid over 10% of salary c) An amount equal to 50% of salary due to assessee (If accommodation is situated in metro cities) ‘Or’ an amount equal to 40% of salary (if accommodation is situated in any other place).com. Commission based on fixed percentage of turnover achieved by the employee.924633 4840 . If an employee is living in his own house and receiving HRA. it will be fully taxable. Salary for this purpose includes Basic Salary. CA V. vkmahipal@in. Dearness Allowance (if it forms part of salary for the purpose of retirement benefits).K.Mahipal. 000 per month and Dearness allowance of Rs.20lakhs.20. vkmahipal@in. The employer has paid bonus @Rs.500 p.com. and HRA of Rs.924633 4840 . 000 per month (half of the dearness allowance forms part of salary for the purpose of retirement benefits). Commission @1% on the sales turnover of Rs.. X is employed in A Ltd. getting the following Basic pay of Rs.Mr.Mahipal.7. 000 per month. Compute his gross salary for the assessment year 2006-07 CA V.000 per month and was posted at Agra. X has paid rent of Rs.m.7.6.K. 200 Amount of HRA exempt is least of 3 amounts: 1.40.6.6.800 Amount of HRA exempt is = Rs.K.20.500 x 12) = 6. Rent paid (Rs.42.Mahipal.000 Bonus (Rs. 000 x 12 – 10% of salary Rs.000 Dearness Allowance (Rs.924633 4840 .000 x 12) = 2. 200) = Rs.3.7.53.20.00.000 3.000 + Rs.800) = 18.200 Income From Salary = 3.68.000) = Rs.000 House Rent Allowance (Rs.20.com.02. 53.30.40.800 CA V.000 2.Solution: Basic Salary (Rs. 72.2.000 x 12) = 84.000 Commission (1% of Rs.7.000) = 20. Actual HRA received (Rs. 53.000 x 12 – Amount exempt Rs. 000 x 12) = Rs.000 + Rs. 40% of Salary (Rs. vkmahipal@in. Mahipal. Rs. CA V. 15.K.
[email protected] 4840 . Medical expenses bills/ receipts are required to be presented to the employer for claiming this exemption.000 per annum for reimbursement of expenses on medical treatment (expense incurred during the current financial year April to March). CA V.K.The Actual amount spent in connection with proceeding on leave to any place in India is covered under leave travel concession.
[email protected]. The exemption is available only for 2 journeys in a block of 4 years from 1-1-2006 to 31-12-2010. Names of persons traveled & Travel ticket is required to be presented to the employer for claiming this exemption. (Section 10(5) of the Income Tax Act).924633 4840 .Mahipal. CA V.Mahipal. (ii) Tour allowance.K. These include (i) Traveling allowance.924633 4840 .com. and (iv) Uniform allowance. (iii) Helper allowance.Special Allowances for meeting official expenditure Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. vkmahipal@in. An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt upto 70% of such allowance or Rs.Special Allowances to meet personal expenses .Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs. not dependent on actual expenditure incurred in this regard.e.1600 p.K. it is exempt up to Rs.com. in case of blind and orthopaedically handicapped persons.This allowance is exempt to the extent of Rs. However. whichever is less. CA V.300 per month per child for maximum of 2 children. Transport Allowance -This allowance is generally given to government employees to compensate the cost incurred in commuting between place of residence and place of work.800 per month paid is exempt.Mahipal.certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.
[email protected] per month per child for maximum of 2 children (grand children are not considered).924633 4840 b) c) d) . Children Hostel Allowance .6000 per month. An amount upto Rs. Out of station allowance . These allowances include: a) Children Education Allowance .m. CA V.The main allowances under this category are enumerated below: (i) Foreign allowance .K.Mahipal. (ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax. vkmahipal@in. (iii) Allowances from UNO organization to its employees are fully exempt from tax.this allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad.924633 4840 .com. It is fully exempt from tax. d) Subscription towards National Saving Certificate. vkmahipal@in. m) Investment in Equity Shares Debentures of approved Public Finance Instn. h) Repayment of Housing Loan Principal towards Self-occupied Residential Property.Under Section 80C – Aggregate of amount paid/incurred/invested towards any of the following:a) Premium paid towards Life Insurance Policy not exceeding 20% of the total Sum Assured. for not less than 5 years. e) Contribution to UTIs Retirement Benefit Plan.Mahipal.K. k) Investment in Pension Fund / Deposit Scheme of National Housing Bank Under Home Loan Account Scheme.com. i) Payment of Tuition fees towards any two children of the assessee. j) Investment in Equity Linked Savings Scheme / approved Infrastructure Bonds. b) Any annuity or Deferred Annuity Plan. CA V. c) Contribution towards approved Provident Fund including PPF. g) Approved Mutual Fund Investment. l) Fixed Deposit of any Scheduled Bank /Housing Finance Co. or Company.924633 4840 . f) Investment in UTIs Unit Linked Insurance Plan. Mahipal.com. 20. Under Section 80D Medical Insurance Premium paid by any mode other than cash. Up to10% of Salary. 00.1. 00.Under Section 80 CCCPremium paid towards IRDA approved Pension Fund. 1. For Senior Citizens Up to Rs.000. CA V. 80CCC & 80CCD shall not exceed Rs.K. Under Section 80 CCD Amount paid/deposited in an approved Pension Scheme of Central Government & matching contribution made by the Employer to the Pension A/c of individual. Under Section 80 CCE Aggregate of deduction u/s 80C.000). Up to Rs.924633 4840 . 15.000.Up to Rs.1 lakh.000 (sum of claim under 80 C and 80 CCC shall not exceed Rs.b. vkmahipal@in. b. UTI’s Scheme & other IRDA approved Insurers for the benefit of Physically Handicapped dependent.Mahipal. Renal failure etc.50. Cerebral Palsy and Multiple disabilities.com.Up to Rs. CA V. For Senior Citizens. 000 if disability is over 80%.Up to Rs.K. 000.75. Nursing & Rehabilitation incurred on dependent relative suffering from permanent Physical Disability. Under Section 80E Interest on repayment of Loan taken from charitable / financial institution for Self.b. Spouse. Children Higher Education for a maximum of 8 years. Under Section 80DDB. Deposits under LIC.
[email protected] amount of interest.924633 4840 .Up to Rs.60.Under Section 80DD. Autism. AIDS. Any expenditure for Medical. 000. 000 if disability is over 40% & Rs. Actual expenditure incurred on medical treatment of self.40. or dependent relative suffering from terminal diseases like Cancer. Funds of Universities or Educational Institution of National Fame.M.75. Corporation established for promoting interest of the members of a minor community. Cerebral Palsy. vkmahipal@in. Under Section 80U Persons suffering from permanent physical Disability and includes Autism.100% of donation/50% of Donation. National Trust for welfare of persons with Autism. Jawaharlal Lal Nehru memorial fund.Ms Drought Relief Fund.924633 4840 . Any Charitable / Religious Institutions.com.000 p. Mental retardation and multiple disabilities.a whichever is less.K. Cerebral Palsy. Donations to National Children fund. Relief fund. spouse or minor child in the place of work and is residing in any of the specified cities.Rs.25% of income or rent paid in excess of 10% of income or maximum of 24. 000 if disability is over 80%.(b).50. Donation paid to P. Under Section 80GG Deduction in respect of rents paid provided no house is owned by self. In some cases.Mahipal.Under Section 80G. donation is restricted to 10% of total income. P. National Defence Fund. Person with Disability and Severe Disability. 000 if disability is over 40% and Rs. Multiple Disability. CA V. 00.90.000 15.60.50.com.000 1.00.000 1.50.924633 4840 .000 NIL Female 4.000 NIL Senior Citizen 5.
[email protected] 1.000 1.No Description 1 2 3 4 5 6 Gross Total Income Deduction – Interest on Housing Loan Mediclaim Premium U/s 80D Investment U/s 80C Taxable Income Tax Payable Male 4.000 2.000 15.05.000 15.000 1.000 NIL CA V.K.S.000 1.25.00.000 1.40.000 1.50.Mahipal. Mahipal.com.924633 4840 . For the Company. For the Finance Manager it is the total cost incurred to hire.K. maintain. vkmahipal@in. Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee. retain the employees and may also include a part of overhead cost allocation. And for most others it is plain confusion! CA V.The phrase "Cost to Company" or CTC. Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash. as it is commonly known. means different figures to different people. For employees. Medical Insurance.Mahipal. HRA. Allowances Perquisites and Reimbursements given to employees (i. reimbursement of conveyance/ medical / telephone/. Gratuity. Stock Option Plans and Non cash concessions Fringe Benefit Tax on Stock Option plans only.
[email protected].) . etc.CTC would generally include the following cash. DA. incentives. And would not include Gifts and Promotional items Overhead costs of the company CA V. Contributions that the company makes for the employees like PF.bonus. benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc. non cash and perquisite-based components: Components of the salary like Basic.K.924633 4840 .e. Reasonable estimates of Leave Encashment. Here are some tips to Structure the CTC of your employees:- The breakup of the CTC needs to be clearly mentioned in the appointment letter to the employee. Variability and calculation logic is to be explained in the appointment letter and/or the policies of the company. Annual. Frequency of payment (Monthly. vkmahipal@in. Quarterly. CA V.Mahipal. Non-cash components and perquisites have to clearly identified If the employer is offering a Flexible benefit plan the rules for availing the Plan have to be clearly mentioned. Base pay needs to be differentiated from performance and variable pay Cash.com.924633 4840 .).K. Compare the tax benefits of House Rent Allowance vis-à-vis Company leased accommodation.924633 4840 .Mahipal. Finally it helps to keep the CTC Structure simple De-mystifying the concept of CTC and allowing employees to plan their own structures through Flexible Benefit Plans that minimize the tax impact should be the one of the foremost points that an HR manager should be aware of to both attract and retain talent. Recreation and Entertainment facilities. Check for the wage rates as per The Minimum Wages Rules of the State. Gratuity and benefits. CA V.K.com.Include reasonable and actual cost to the company for Non cash benefits like Canteen Facility. vkmahipal@in.