Salary – Meaning & Components
Your CTC is ₹12 lakh but take-home is ₹8.5 lakh. Where did ₹3.5 lakh go? Understanding salary components is the first step to income tax planning!
What is Salary?
Legal Definition (Section 17):
"Salary includes wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of salary and annual accretion"
Simple meaning: All payments received by employee from employer
Who Pays Salary Income?
Taxable under "Salaries" if:
- Employer-employee relationship exists
- Paid during employment or after retirement
- Legally due (not voluntary gift)
Not salary:
- Freelancer fees (Business/Profession income)
- Director's sitting fees (Other Sources)
- Pension to family after death (Family pension - Other Sources)
Components of Salary (Section 17(1))
1. Basic Salary
Foundation of salary structure
Characteristics:
- Fixed amount
- Not linked to performance/attendance
- Forms base for DA, HRA calculations
- Fully taxable
Example:
- CTC: ₹12 lakh
- Basic: ₹6 lakh (50%)
2. Dearness Allowance (DA)
Compensation for inflation
Two types:
A. DA forming part of retirement benefits:
- Used to calculate pension, gratuity
- Example: Government employees
- Forms part of salary for HRA calculation
B. DA NOT forming part of retirement benefits:
- Additional payment, not for retirement calculation
- Fully taxable but not used for HRA calc
Taxation: Fully taxable (both types)
3. Bonus
Performance-based payment
Types:
- Annual bonus
- Festival bonus (Diwali bonus)
- Performance bonus
- Ex-gratia
Taxation: Fully taxable
Example:
- Annual bonus: ₹1,00,000
- Added to salary income
4. Commission
Paid to employees for achieving sales/targets
Types:
- Fixed commission
- % of turnover (used in salary for HRA calc!)
- Sales commission
Taxation: Fully taxable
Example:
- Commission: 2% of ₹50 lakh sales = ₹1,00,000
- Fully taxable
5. Allowances
Additional payments for specific purposes
Three categories (detailed in separate chapter):
- Fully taxable: CCA, lunch allowance, overtime
- Fully exempt: Transport (disabled ₹3,200/month), foreign allowance
- Partially exempt: HRA, LTA, children education
6. Perquisites (Section 17(2))
Benefits in kind (not cash)
Examples:
- Rent-free accommodation
- Company car
- Interest-free loan
- Free meals
- Club membership
Valuation: Special rules (detailed in separate chapter)
Taxation: Added to salary after valuation
7. Profits in Lieu of Salary (Section 17(3))
Payments on retirement/termination
Includes:
- Gratuity: Payment on retirement/resignation
- Leave encashment: Unutilized leave payment
- Compensation on termination
- Payment from unrecognized provident fund
- Retrenchment compensation
Partial exemptions available (detailed in separate chapter)
8. Annual Accretion
Increase in value of retirement benefits
Example:
- Recognized Provident Fund contribution by employer
- Superannuation fund contribution
Salary Structure Breakdown
Typical CTC ₹12 lakh breakdown:
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Take-home will be less due to:
- Employee PF deduction (₹72,000)
- Professional tax (₹2,400)
- TDS (tax deducted at source)
- Insurance deductions
Actual take-home: ~₹8-8.5 lakh
What is NOT Salary?
X Freelancer income → Business/Profession X Rent from property → House Property X Dividend from shares → Other Sources X Director's fees (if not employee) → Other Sources X Professional consultancy fees → Business/Profession
Salary for HRA Exemption Calculation
Special definition for HRA:
Salary = Basic + DA (forming part of retirement) + Commission (% of turnover)
NOT included in HRA salary:
- Other allowances (CCA, Special, etc.)
- Bonus
- Fixed commission
Example:
CTC: ₹10 lakh breakdown:
- Basic: ₹5L
- DA (retirement): ₹1L
- Commission (2% of turnover): ₹50k
- HRA: ₹2L
- Other allowances: ₹1.5L
Salary for HRA = ₹5L + ₹1L + ₹50k = ₹6.5L (not full ₹10L!)
Salary Payment Modes
How salary paid:
- Cash (rare, limited)
- Bank transfer (most common)
- Cheque
- In-kind (perquisites)
Timing:
- Due basis: Salary due in previous year → Taxable (even if received next year!)
- Arrears: Taxed in year received (with relief under Section 89)
Advance Salary vs Arrears
Advance Salary:
- Received before it's due
- Taxable in year received
- Example: March 2024 salary received in Feb 2024 → Taxable in FY 2023-24
Arrears:
- Salary for previous year received late
- Taxable in year received
- Relief under Section 89 available (to avoid higher tax due to spike)
Statutory Deductions from Salary
Deducted by employer:
1. TDS (Tax Deducted at Source):
- Based on estimated annual income
- Deducted monthly
- Adjustable in return filing
2. Employee PF (Provident Fund):
- 12% of basic + DA
- Goes to retirement fund
3. Professional Tax:
- State-wise (max ₹2,500/year)
- Example: Maharashtra ₹2,500, Karnataka ₹2,400
4. Employee's contribution to Pension:
- National Pension System (NPS)
- Deductible under 80CCD
Summary
- Salary (Section 17): All payments from employer to employee - basic, DA, bonus, allowances, perquisites
- Components: Basic (fixed), DA (inflation), Bonus (performance), Commission (sales), Allowances, Perquisites (in-kind)
- CTC vs Take-home: CTC includes PF, bonuses; Take-home after PF, PT, TDS deductions
- For HRA calc: Basic + DA (retirement) + Commission (% of turnover only)
- Fully taxable: Basic, DA, Bonus, Commission
- Partially exempt: HRA, LTA, Children allowances
- Perquisites: Benefits in kind (car, house, loans) - valued and taxed
- TDS: Employer deducts tax monthly based on projected annual salary
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