In the United States, an Annual Salary comprises part of your gross annual income that should be fully taxed through payroll per pay cycle. From a tax perspective, your salary pay per pay period is taxed at one rate per applicable tax. This is not the case in India. Typically, in India, employees’ “annual salary” is broken into different allowances/components to give maximum tax benefit applicable to it. Below is some information on different salary components that make up an employee’s total salary and their tax implications. Our standard view of
Salary does not apply in India due to the below components.
1. Basic Salary (Base Salary) – This is most important component of the salary because it is used as basis for calculation of retirement benefit and calculation of tax exemption for certain allowances. Generally, basic salary is fixed between 30% to 50% of total salary. It is done so that employee can get an appropriate tax exemption as well as retirement benefit.
2. House Rent Allowance (HRA) – HRA is basically an allowance, which forms a part of one’s taxable salary. It is in the range of the 40% or 50% of basic salary. It is not mandatory for the employer to give HRA. But, if an employer chooses to offer the allowance as part of salary then employee may get some part of it as tax-free if the employee satisfies certain conditions.
3. Medical Reimbursement – If an employee receives some money for his medical treatment or the treatment of any member of his family or any of his dependent relatives, then a sum up to INR15,000 p.a. is not treated as a taxable. This exemption is enjoyed by the employee only if the expenditure is actually incurred on his medical treatment or for treatment of any member of the family or a dependent relative.
4. Conveyance Allowance – This allowance is granted to meet employee’s expenditure for the purpose of commuting between the place of his residence and the place of duty is tax free to the extent of INR 800 per month.
5. Leave Travel Allowance – Leave Travel Allowance (LTA) is granted by the employers, to the employees, as part of the remuneration to provide for travel expenses incurred during the year. Leave Travel Allowance also covers such expenses of the spouse, children as well as dependent parents and siblings.
6. Special Allowance – This is a balancing figure (what remains after all of the above components are taken into consideration) and is fully taxable in the hands of employee.
Lastly, some employers do provide other allowances i.e. Children Education Allowance and reimbursement components (Telephone, Fuel etc.), food coupons in salary structure. Per the above, it is important to note that what we interpret to be an annual salary figure is not how annual salary is treated and processed in India. Thus, it is critical to understand the salary calculator behind what makes up someone’s salary in India.