Sunday, July 13, 2014

Union Budget 2014: Salary income — Your slip is showing

Whether it's your first job or you are a top executive in an MNC, a higher take-home pay is always welcome. 'Salary' is not just the basic pay and cash allowances that prominently figure on your monthly salary slip. It includes taxable perquisites (benefits in kind such as car and housing provided by your employer). This kitty of all allowances and benefits is referred to as Cost to Company (CTC) — the cost which your employer incurs for having you on the company rolls. Some of these CTC components are eligible for tax breaks — prior to the beginning of any financial year be sure to talk to your HR department and devise a tax-efficient CTC for yourself. Some typical CTC components are outlined below and apply to a non-government employee...

Along with your promotion, your employer gave you a car. While you use it for commuting to work, you also drop junior to school. As the car is used (or could be used) partly for personal use as well, it is a taxable perquisite. The perquisite value will depend on the cubic capacity of the car engine and whether you or the employer pays for its maintenance and running cost (including fuel). The maximum perquisite value that can be added to your salary income is Rs 2,400 per month. If your employer has also provided a driver, another Rs 900 per month will be added.

In case you prefer using a 'personal' car for office work and your employer reimburses the maintenance and running cost, you can enjoy a maximum concession of Rs 2,400 per month against reimbursement made by the employer. For example, if the employer reimburses you Rs 10,000 in a month, the taxable perquisite value will be Rs 7,600 (Rs10,000 less Rs 2,400).

Hot tip: If you think that you would rather use your own car, think again - with just an increase of Rs 2,400 per month in your taxable income, you not only enjoy a company provided car but also get fully reimbursed for its maintenance and running cost.

Flat provided by employer

An employer-provided accommodation takes away the hassle of finding a place, especially in a new town, but it does add up to your taxable perks. Its perquisite value varies depending on whether the flat is owned by the employer, has been taken on rent for you, or hotel accommodation has been made available. It will not exceed 24% of your salary when accommodation is provided in a hotel, and 15% of salary in other cases. This will be reduced by the amount recovered from you, if any. Where the employer provides furnished accommodation, another 10% of the cost of furnishing (if owned by employer) or actual hire charges payable (if leased by employer) is added to the perk value each year. HOT TIP | Hotel accommodation provided by the employer for the first 15 days when you move to a new town is not a taxable perquisite

Your CTC components and various tax breaks

House Rent Allowance

HRA is a typical CTC component for those not staying in employer-provided accommodation. HRA exemption is limited to lower of:

(a) Rent paid less 10% of basic salary or

(b) 50% of basic salary where the house is situated in any of the four cities of Delhi, Mumbai, Kolkata or Chennai, and 40% of basic salary in others or

(c) Actual HRA received

If your employer does not give you HRA, deduction for rent paid by you is available from gross taxable income, subject to various limits (maximum deduction of Rs 2,000 per month).

Caution point

For claiming HRA exemption, if your annual rent exceeds Rs 1 lakh, you should obtain not just the rental receipts but a copy of your landlord's PAN card for submission to your HR department.

Leave encashment

In case you haven't availed of your entitled leave, you may have the option to get it encashed. With an increasing realization that employees who avail of annual leave are more productive, most employers permit such encashment only on retirement or resignation. While there are detailed rules to calculate tax exemption on such encashment, the maximum exemption available is Rs 3 lakh. This is a lifetime exemption limit for leave encashed from all your employers. The 3-lakh limit will be reduced by the exemption claimed from any previous employment.

Caution point 

Any leave encashed while on employment is taxable.

Leave Travel Concession (LTC)

Your annual holiday within India can get you a tax break. The tax exemption on any reimbursement of your travel expense while on leave is limited to the economy class air fare for the shortest route available to your vacation destination. The point to note is that no exemption is available for expenses such as hotel, local conveyance etc. Keep the travel bill handy to submit to your HR department.

Hot tip

LTC is allowed to you as a salaried employee in respect of two journeys performed in a block of four calendar years. The current block of four years has commenced from January 1, 2014. So keep tabs and be sure to claim your LTC.

Employee Stock Option Plans (ESOPs)

To retain and reward employees, employers grant stock options to enable them to purchase shares of the company at a discounted price. ESOPs involve two-stage taxation. First, at the time of allotment of shares, the difference between fair market value less price paid by the employee will be taxable as 'Salaries'. Second, at the time of sale of shares, capital gains tax will trigger in the hands of the employee.

Other allowances and tax benefits 

Medical reimbursement

Reimbursement of medical expenses by your employer up to Rs 15,000 per year is exempt from tax (also refer to the section on medical insurance).

Meal vouchers

Meal vouchers provided by employers are exempt from tax to the extent of Rs 50 per meal.

Transport allowance

Any such allowance paid by your employer to meet your conveyance needs for commuting to office is tax exempt up to Rs 800 per month.

Children's education allowance

This component in your CTC gets you a limited tax break of Rs 100 per month per child and Rs 300 per month per child for hostel expenses (both allowances are restricted to two children). (Also refer to tuition fee payments explained in the section on savings).

Telephone expense reimbursement

This is fully exempt from tax, though your employer may impose an internal cap on how much can be claimed by you.

Provident Fund

Employer's share of PF contribution is not taxable. Employee's share of PF contribution is eligible for deduction from gross total income under the overall cap of Rs 1.5 lakh. PF balance can be withdrawn by the employee in specific circumstances like retirement, building a house, daughter's marriage etc. Such withdrawal is not taxable if the employee has rendered continuous service for a period of 5 years or more. If an employee has not rendered 5 years of service, he may transfer the balance under the new employer's account; such transfer of balance is not taxable.


If you job hop after a continuous tenure of 5 years or retire after a continuous service of 5 years, you are entitled to a gratuity payment. While there are detailed rules to calculate tax exemption, the maximum amount that is tax exempt is Rs 10 lakh.

Caution point

This Rs 10-lakh ceiling is a lifetime exemption limit, it will be reduced by the tax-free exemption claimed from any previous employment.