It’s that time of the year when almost every salaried person can start expecting emails from their HR department asking them to submit ‘tax proofs’ for the year. We thought it would be a good time to decode the salary slip and Form 16.
The Difference Between Taxable Salary and ‘Cost to Company’
There is usually a lot of confusion between the terms 'Taxable Salary' and 'Cost To Company.' Your Salary slip represents your CTC. Your Form 16 will show you your taxable salary.
CTC is what the company owes you and Taxable Salary forms the basis on which you calculate what you owe the government by way of Income Tax. CTC includes all the benefits paid out to the employee, whereas Taxable Salary represents the amount of salary that is eligible to be taxed.
There are components of your salary that are paid out to you, but not taxed (for example, HRA (House Rent Allowance) if you pay rent). There are also components of your salary that are taxable but are not paid out to you (for example, if you’ve taken an advance from the company, the installment portion is deducted from your payout every month but is not tax deductible). It is important to discern between them for they represent different things.
The Components of CTC
Your ‘Cost To Company’ (or CTC) is the aggregate of all the direct and indirect benefits that are given to you. Cost to Company includes:
Basic Salary – Your basic salary is the largest and most significant component of your CTC. It is also the basis on which other components of your salary slip are calculated.
Dearness Allowance – A Dearness Allowance is an allowance that is given to employees to tackle inflation. It is calculated using an index that predicts the rise in cost of living. While most Public Sector companies are bound to give their employees Dearness Allowance, Private Sector companies have the option to not give Dearness Allowances to their employees.
Basic Salary and Dearness Allowances form the core of your taxable salary.
House Rent Allowance – House Rent Allowance is given to employees who are paying rent. If you live in a rented house, the least of either your HRA, the actual rent you pay or 50% of your basic salary (40% for those who don’t live in Metro cities) is tax free. It will not be considered when calculating your taxable salary. However, if you don’t live in a rented house, your entire HRA will be considered for tax.
Standard Deduction: Travel & Medical Allowances – Travel and Medical allowances were given to employees to compensate for commuting and medical expenses. Companies usually provide them on a reimbursement basis, up to a certain limit. This limit is enumerated in your CTC.
However, for the purpose of calculating taxable salary, Budget 2018 replaced both with a ‘Standard Deduction’, or a flat amount of Rs 40,000 that is reduced from your taxable salary. The interim Budget 2019 that was announced last week, increased the Standard Deduction to a flat Rs 50,000. This means that you can deduct Rs 50,000 from your taxable salary for the Financial Year 2019-2020 if the NDA government is re-elected.
Other Allowances – Any other allowances that your employee might offer you, including special allowances, performance allowances etc. This amount is fully taxable.
Deductions in your CTC are essentially amounts that are reduced from the salary that is paid out to you. Organisational deductions include loan advance installments (if any), Provident Fund paid out from your salary and Professional Tax (if applicable in your state). The final deduction in your CTC is your Income Tax Deducted At Source, which represents your tax liability as calculated by your organisation.
Your Form 16 will have a different set of deductions – those which reduce your taxable salary (and those for which you’ll have to provide proofs this month!). This includes PF Paid, Home Loan Principal, NPS payments, medical insurance and other deductions under Chapter VI A. The final tax payable in your Form 16 will be the same amount that is deducted from your CTC as Tax Deducted At Source. Your organisation is essentially paying the tax you owe the government, in advance and on your behalf.
Your Salary Slip and your Form 16 represent different sides of the same coin. Understanding the differences will help you navigate your income better and plan your taxes more efficiently. It is your money after all, and with a brand new financial year in the horizon, there’s no better time to get a grip on it!
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