Salary structure in India: A comprehensive guide

Fully-taxable components in salary

Fully taxable components are parts of an employee’s salary that are subject to income tax. These components are included in the taxable income and do not qualify for any exemptions. The following are the fully taxable components of salary:

• Basic salary

It is the primary or core element of a salary, usually making up about 40 to 50% of the total CTC. A basic salary is a set amount that an employer pays to an employee for their work or professional duties, excluding bonuses, benefits, or any other compensation. It is subject to tax based on the employee's income slab.

• Dearness Allowance (DA)

DA is given to employees to offset the impact of inflation and the rising cost of living. It is usually a fixed percentage of the basic salary and is fully taxable. For central government employees, DA is calculated based on the All India Consumer Price Index (AICPI). DA for central government employees and pensioners is 17% of the basic salary. Private sector companies are not required to provide DA, but it is mandatory for all government employees.

• Gratuity

Gratuity is a lump sum paid to employees who leave the organisation after completing at least 5 years of service. According to the Payment of Gratuity Act, 1972, it is calculated as a percentage of the employee's last drawn salary and applies to organisations with more than 10 employees. Gratuity received upon retirement is taxable under ‘Income from Salary’. However, if the gratuity is paid out to the legal heir or nominee before the employee's death, it is considered taxable under ‘Income from Other Sources’.

• Medical allowance

Employers give medical allowance to cover an employee's medical expenses. It is a fixed part of the monthly salary and is fully taxable, regardless of actual medical expenses incurred.

• City Compensatory Allowance (CCA)

CCA is offered to employees working in metropolitan areas or large cities like Mumbai and Delhi to help with the higher cost of living.

• Project allowance

This temporary allowance is given to employees working on specific projects to cover additional costs associated with the project.

• Overtime allowance

Overtime allowance is paid to employees who work beyond their regular working hours. The amount is typically calculated based on the number of extra hours worked by the employee.

Partially-taxable components in salary

The following are the salary components which are partly taxable:

1. House Rent Allowance (HRA)

HRA is partially tax-exempt for employees who live in rented accommodation. The exemption is not available if the employee owns the house. Under Section 10(13A) of the Income Tax Act, employees can claim HRA exemption based on the following:

➤ The actual HRA received from the employer

➤ The rent paid minus 10% of (Basic Salary + DA)

➤ The exemption is 40% of the basic salary for employees living in non-metro cities and 50% for those in metro cities.

2. Leave Travel Allowance (LTA)

LTA provides tax exemption for travel expenses incurred during a holiday with family. The exemption covers only the actual travel costs, not accommodation, local transport, or other holiday expenses. This benefit is applicable for domestic travel only and you can claim it for up to two holidays within 4 years. There are specific rules for claiming tax exemption under LTA:

➤ Only fare expenses are eligible (accommodation and food expenses are excluded)

➤ Travel must be within India

➤ The exemption applies only to immediate family members who rely on the employee.

3. Children education allowance

This allowance helps cover educational expenses for employees' children. The tax exemption is up to ₹100 per month per child, totalling ₹1,200 per year. This exemption is available for up to two children, making the maximum claimable amount ₹2,400 per year.

4. Hostel expenditure allowance

This allowance is provided to cover the hostel fees for employees' children. Employees can claim a maximum exemption of ₹300 per month per child, totalling ₹7,200 per year, with the exemption available for up to two children. 

5. Conveyance allowance

Conveyance allowance helps cover commuting costs for office duties within the city. It includes reimbursement for fuel, public transport fares and other travel-related expenses. This amount might be a fixed sum or a percentage of the employee's basic salary. In the old tax regime, the conveyance allowance is partly tax-exempt based on actual expenses. Any amount over this exemption is taxed according to the employee's income tax slab.

6. Meal coupons

Meal coupons are a popular tax-saving benefit. They are tax-free up to ₹50 per meal. With around 22 working days and two meals a day, this amounts to ₹2,200 per month which is tax-free.

Non-taxable components in salary

There are some allowances that are completely exempt from tax, especially for government employees. Here is a simple breakdown of these tax-free benefits:

• Phone and internet bills

Reimbursements for phone and internet bills are tax-exempt. There is no fixed limit, but companies usually set reasonable limits. Employees must provide the bills to claim this benefit.

• Books, periodicals, newspapers, and journals

Subscriptions to educational materials like books and journals, which help employees improve their skills, are tax-free. Employees need to submit actual bills for this benefit.

• Gadgets

Company-provided gadgets such as tablets, laptops, and computers are tax-free. These can be used for both work and personal purposes.

• Recreational and medical facilities

Medical facilities provided by the company, like doctor check-ups and memberships to sports or health clubs, are tax-free. These are considered perks and do not incur income tax.

Other non-taxable components:

• Salary earned abroad is taxed under ‘Salary’, but allowances and perquisites may be exempt.

• Allowances granted to Supreme Court and High Court judges are not subject to tax.

• Payments given to retired Chairpersons or Members of the UPSC are tax-free.

Deductions from salary

The following are some standard deductions from the salary structure:

1. Employee Provident Fund (EPF)  

The Employee Provident Fund is a retirement benefit where both the employer and the employee contribute a portion of the employee's basic salary each month. This contribution is typically 12% of the EPF wage Employees can access these funds once they retire or if they have been unemployed for at least one month.

2. Employees State Insurance (ESI)  

ESI contributions are required for employees working in an ESIC registered company with a monthly salary of ₹21,000 or less. This applies to companies with 10 or more employees within this salary range. Employees contribute 0.75% of their gross salary, while employers contribute 3.75%.

3. Professional tax  

This state tax applies to the income of salaried employees and professionals. The highest amount you can be taxed is ₹2,500 per year. Employers calculate and deduct this tax based on the rates set by the state. In India, professional tax applies in 21 states and 1 union territory and varies from one state to another. You must check out the professional tax slabs for each state to understand how much tax applies to you.

4. Labour Welfare Fund (LWF)  

The Labour Welfare Fund is supported by contributions from employers, employees, and sometimes the government. Its goal is to offer housing, medical care, education, and recreational services to eligible workers and their families. Contributions are made twice a year, and the amount varies by state but is generally small.

5. Tax Deducted at Source (TDS)

TDS on salary is a method used by the Indian government to collect income tax from applicable employees. When an employer pays a salary to an employee, a certain percentage of the salary is deducted as TDS, which is then deposited with the government on behalf of the employee. For the financial year 2024-25, the TDS rates on salary are as follows:

New tax regime (As per the Budget announcement 2024)

Old tax regime