According to the Section 14 of the Income Tax Act of 1961, there are five main income tax heads for a person. Income tax calculation is a crucial step that must be done in accordance with an individual's income. The income must be correctly classified in order to avoid any confusion throughout the calculating process. Hence, first let us understand the five income tax heads.

The five main income tax heads are as follows:

1. Income from Salary
2. Income from House Property
3. Income from Profits and Gains of Profession or Business
4. Income from Capital Gains
5. Income from Other Sources

Out of these five heads, in this article we will focus only on the first head i.e., Income from Salary.

What is Income from Salary?

The income or payment that a person receives in exchange for providing services or signing contracts is known as "income from salary". This section simply incorporates the compensation that an individual receives for the services that he provides under the employment contract.

However, it is important to note that the payment received by the person will be regarded as income for the purpose of the Income Tax Act only if – there is an "employer-employee relationship" between the parties providing the payment and the party receiving it.

What is employer and employee relationship?

If there is an employer-employee relationship between the payer and the receiver, any payment received by the employee (the receiver) will be regarded as income under the Income Tax Act. Both must be in a master-servant relationship in order for income to be considered to be earned on a salary. Where a servant is someone who is responsible for carrying out the work in the manner instructed by his master (employer), a master is someone who guides his servant (employee) as to what has to be done and how it should be done.

Meaning of Salary

The salary for the purpose of calculation of income from salary includes:

• Wages;
• Pension;
• Annuity;
• Gratuity;
• Advance Salary paid;
• Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
• Annual accretion to the balance of Recognized Provident Fund;
• Leave Encashment ;
• Transferred balance in Recognized Provident Fund;
• Contribution by Central Govt. or any other employer to Employees Pension A/c as referred in Sec. 80CCD .

What is CTC?

One of the vague words used to describe salaries is CTC. Cost To Company is referred to as CTC. It is the sum that the organization will spend on bringing on and keeping an employee.

CTC covers an employee's income as well as any other perks they receive, such as meal vouchers, office space rent, Provident Fund contributions, medical insurance, House Rent Allowances (HRA) , and any other expenses incurred by the firm.

It should be remembered that CTC contains variables more than the actual salary that a person is receiving, hence CTC differs from the actual income from salary that a person receives.

Components of Income from Salary

CTC vs Take Home Salary

Up until this point, we have learnt about the elements of your salary that make up your CTC. However, your pay is not equal to your CTC when you receive it at the end of the month. What happens, then?

Your CTC, for instance, is Rs 12,00,000. You won't get just Rs 1,00,000 per month (Rs 12,00,000 divided by 12 months). This is due to the fact that your CTC is subject to various deductions. Your employer's deductions for taxes and exemptions account for the difference between your take-home pay and CTC.

Hence, your take home salary will be:

• Gross Cost To Company CTC
• Minus- Medical Insurance, Reimbursement of food coupons, other perquisites, contribution to provident fund, Professional Tax and so on.
• Minus- Net tax payable by the employee. Net tax liability is calculated by deducting the deduction under Chapter VIA ( Section 80C , Section 80D , Section 80DDB , etc.) and applying the tax slab.

Taxability of Components of Salary

We now know what goes into salaries and what determines your take-home pay. To assist you in planning your taxes, let's now examine the taxability of each salary component.

1. Taxability of Salary Income

1. Tax on Allowances

1. Tax on Perquisites

How to Calculate Taxable Income from Salary?

Gather all the documentation relevant to salary income first. Your monthly pay-slips, Form 16 Parts A and B, and Form 26AS are required here.

Suggested Read: How to Calculate Income Tax on Salary with Example

Tax Relief and Tax Rebate

Tax Rebate – You may be eligible for a tax rebate (refund) of up to Rs12,500 if your total taxable income is up to Rs 5,00,000. After taking into account all applicable deductions, exemptions, and allowances, the total taxable income is determined. Both the old and new tax regimes allow for tax rebate. However,Union Budget 2023 has proposed that if the Assessee has opted for New Regime then he/she is eligible for a tax rebate (refund) of up to Rs 25,000 if your total taxable income is up to Rs 7,00,000. The same is applicable from Financial Year 2023-24 i.e Assessment Year 2024-25.

Tax Relief – If you received any salary delays during the fiscal year, you may be eligible for tax relief under Section 89.

Standard Deduction

The exemption from refund for travel expenses and medical expenses has been replaced by the standard deduction. The exemptions have been combined. Beginning with the 2019–20 fiscal year, you are eligible to deduct up to Rs 50,000 from your travel and medical expenses. No receipts or other written documentation supporting the costs must be provided. However, the new tax system does not allow for standard deductions.

If your only source of income for the entire fiscal year is a salary, you can use the aforementioned method. You might also make money from other sources, such as rental income, business or professional income, or income from capital gains. In this scenario, you must add the income from all of these sources before calculating the net tax due.

Important Documents to File Tax on Income From Salary

The following are the some of the important documents to file tax on income from salary:

1. Form 16At the end of the financial year, an employer gives Form 16 to its employees. For the purpose of calculating taxes that are due and taxes that are refundable, Form 16 includes information on gross salary, deductions, exemptions, and TDS . In addition, every taxpayer is required by the Income Tax Act of 1961 to submit Form 16 prior to the deadline.There are two parts of Form 16, such as follows:Your employer's information, including TAN, PAN, address, and firm name, is contained in Form 16 Part-A.The information on salary, deductions, and net tax payable is contained in Form 16 Part-B.As you are completing and submitting your income tax return, you must make use of your Form 16.
2. Form 26ASA tax credit statement called Form 26AS lists the TDS that your employer and other taxpayer have deducted from your pay. It also includes information on any advance taxes or self-assessment taxes you may have paid. To confirm that your employer is truly deducting and paying the TDS deducted to the account (credit) of the Central Government, you must refer to Form 26AS. You will not be eligible to claim the TDS refund until and unless your employer is paying the TDS deducted to the credit of the Central Government.
3. Capital Gain StatementYour investments in ULIPs, mutual funds, company shares, stocks, etc. would have generated returns for you. When you sell multiple units of mutual funds or shares, it is frequently challenging to determine the capital gain. In this situation, it is preferable to ask the asset management company for mutual funds or the broker for shares for a capital gain statement. You can simply determine the overall capital gains for tax purposes in this method.
4. Income Tax Return ITREvery taxpayer who has taxable income that is greater than the standard exemption amount is required to file an income tax return. The kind of taxpayer and the categories of income earned during the financial year determine whether the ITR is applicable.