It is very important for a person to know how much salary he is actually going to get and how does a company calculate his actual salary. There are tax considerations, deductions, allowances, incentives, benefits and many other components related to your salary package. We are going to discuss how your net salary is calculated considering these components.
For this, first of all we need to know our gross salary, which comprises of taxable allowances, retirement benefits, taxable perquisites, commissions earned and the basic salary. We should subtract deductions from it, such as a conveyance allowance.
Total Taxable Income
All of your basic salary including allowances, commissions and bonuses are fully taxable.
House Rent Allowance
– If you are actually paying the rent, this allowance can be tax exempt. Whichever is lowest in the following three benefits can determine, how much tax exemption you are eligible for:
- If you pay your rent and it is 10% of your basic salary
- HRA received which is 50% of your basic salary
- Actual house rent allowance received
if you are residing in any of the five metropolitan cities of India including Delhi, Mumbai, Bangalore, Kolkata and Chennai, rent paid in access of 40% of your basic salary is tax exempt.
It is tax exempt, if it is less than Rs. 800 per month.
Leave travel allowance
Modern companies encourage taking break from work and travel exotic places to unwind yourself, so, leave travel allowance is tax free for two trips in a period of four years. Both the trips described above that are tax exempt can occur in either one specific year or can spread over the period of four years.
If it is less then Rs. 15000 per year, it is tax exempt. It is provided subject to submission of documents and bills. Medical allowance includes the expenditure borne by the employee for the treatment of his dependents as well.
Any benefit that you get apart from your regular salary from your employer is included in perquisites. Perquisites such as Insurance especially the premium paid by the employer along with benefits such as company accommodation, company car and discounted loan are subject to tax exemption, but it is calculated based on certain slabs. It is not very difficult to calculate this. All you have to do is to procure Form 12 BB from your employer, which will explain the true value of perks as components of your salary.
You may also procure a Form 16 which explains the chargeable income under various salary components including TDS (Tax deduction at Source). The tables in Form 16 neatly classify deductions and allowances. If there is no TDS, you are entitled to get a certificate of salary earned from your employer for that specific financial year.
Most of the prominent companies have tax consultants on their rolls, who advise employees about these deductions and how to legally avoid them. You can discuss your deductions and seek their expert advice that will help you maximize your take home salary.