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Basic Salary and tax planning
Your total salary is the sum of various components, such as your basic salary, allowances, deductions like provident fund contributions, tax, and more. Understanding the details of calculating your basic salary can help you with your tax planning. It will also help you know each component of your salary better.
Let us understand this in detail.
What is basic salary?
Basic salary refers to the base pay that your employer pays you. This is the primary component of the salary and is exclusive of allowances like Dearness Allowance (DA), House Rent Allowance (HRA), bonus or overtime, medical insurance, as well as deductions like the Employee Contribution to Provident Fund (EPF), gratuity, and more.
The basic salary is a part of the cumulative Cost to the Company (CTC) towards you.Explanation of basic salary is given in respective sections for deduction/exemption calculation for tax purpose under The Income Tax Act.
How to calculate basic salary?
It is important to understand the details of the calculation of your basic salary. Various components of your total salary, such as EPF, gratuity, and more are calculated as per your basic salary. Therefore, knowing how to calculate your basic salary can also help you understand the other components of your total salary.
There is no fixed formula to calculate your basic salary. Your basic salary would depend on various factors such as the HR policies of your organisation, the size of your organisation, your designation, the country, the industry, and more.
Typically, your basic salary would be 50% of your CTC or 40% of your yearly gross income. However, most companies follow a simple formula as given below:
Annual basic salary = Monthly basic salary x 12 months
In case of other variables, companies may use the following formula too:
Basic salary = Gross Pay - (Total of all allowances, including DA, HRA, medical insurance, conveyance allowance, bonus, and others)
What are the different components of a salary structure?
Basic Salary
As mentioned above, the basic salary is the base pay offered to you by your employer. This normally equals 50% of your CTC or 40% of your gross salary.
Dearness Allowance (DA)
DA is the allowance provided to cover your cost of living. It is paid as a percentage of your basic salary. It is given to government employees to reduce the impact of inflation.
House Rent Allowance (HRA)
HRA is a part of the salary that covers your cost of accommodation. It also qualifies for a deduction under Section 10(13A) of The Income Tax Act, 1961.
Special Allowances
Companies may offer allowances for internet, entertainment, phone reimbursements, and more. These are called special allowances.
Professional Tax
State governments charge professional tax from working individuals in the state. This tax is deducted from your total salary.
Leave Travel Allowance
You can claim leave travel allowance to cover the costs of travel for yourself and your family. This can be used as a deduction under Section 10(5) of the Income Tax Act, 1961.
Provident Fund
The provident fund is a pension account to which you and your employer jointly contribute. The contributions can be claimed as deductions under Section 80C of the Income Tax Act, 1961. This amount is deducted from your total salary and is added to your provident fund account, which you can withdraw as per the prevailing rules.
Bonus
It is an incentive given over and above the basic salary for your performance. It may also be paid at the end of the year or on a particular day, as chosen by your organisation.
How to calculate basic salary from gross salary?
The gross salary includes the basic pay and allowances. However, it does not comprise the deductions.
Below is how you can calculate your basic salary from your gross salary:
Basic salary = Gross salary – (DA + HRA + conveyance + medical insurance + other allowances)
For example, if the employment contract states the following:
- Gross salary = ₹ 60,000
- HRA = ₹ 2,000
- DA = ₹ 2,000
- Medical insurance = ₹ 1,000
- Conveyance = ₹ 2,000
- Other allowances = ₹ 2,000
Basic pay = ₹ 60,000 – (2,000 + 2,000 + 1,000 + 2,000 + 2,000) = ₹ 51,000
If your employment contract has specified your gross salary as a percentage of your basic salary, you can also use the following formula:
Basic salary = Percentage mentioned on the contract x gross salary
What are the different ways to save tax?
Investing in the right plan can help you save tax1 in India. Below are some options:
1. ICICI Pru iProtect Return of Premium
This term insurance plan with return of premium benefit** can provide you with a life cover^ and help you claim a deduction1 of up to ₹ 1.5 lakh per annum under Section 80C1 of the Income Tax Act, 1961. The plan also provides a deduction1 under Section 80D1 of The Income Tax Act, 1961 if you opt for the Critical Illness benefit while purchasing the plan. Moreover, the payout received from the plan is also tax-free1 subject to conditions under Section 10(10D)*.
2. ICICI Pru Signature
This unit-linked insurance plan can offer life cover^ and help you grow your money by investing in equity, debt, or balanced funds, as per your risk appetite. You can claim a deduction1 for the premiums paid towards the plan of up to ₹ 1.5 lakh per annum under Section 80C1 of the Income Tax Act, 1961. The payout received from the plan is also tax-free1 subject to conditions under Section 10(10D).
3. ICICI Pru Guaranteed Income For Tomorrow (Long-term)
This is a long term guaranteed* income plan that provides you with a life cover^ that protects your loved ones financially in case of an unfortunate event. The plan also provides guaranteed* returns that can help achieve your financial goals, such as buying a house, your child’s higher education or wedding, starting a new venture, and more. You can claim a deduction1 for the premiums paid towards the plan of up to ₹ 1.5 lakh per annum under Section 80C1 of the Income Tax Act, 1961. The payout received from the plan is also tax-free1 subject to conditions under Section 10(10D)*.
*T&Cs apply
