Defining Salary Structure - Part 2

Well here i would like to continue the earlier started post regarding the Salary Structure, i am trying to define here what different parts of your salary mean and how it is structured and taxed. I have already written Part 1 of the series and now want to continue with Part 2.

1. PF Contribution - Its something like a Social Security fund that you collect for your old age or maybe some emergency. It has a statuary requirement that a minimum of 12% of the basic is deducted and deposited in the Employee's Provident Fund. The employer also makes a matching contribution to the PF account. Here too a balance needs to be maintained, with the basic salary higher the PF contribution also increases which in turn can cause a reduction in take home salary.

2. Medical Reimbursement - This is the part of the salary where you get paid for the medical expenditure that you incur. It is tax free only upto Rs 15,000 a year. If you dont produce the bills for the amount, the sum gets added into the income for that year.

3. Leave Travel Allowance - The amount paid by the employer to you and your family for leave travel to any place in India or for travelling to any place in India after retirement. This amount is exempt from tax. If the journey is by rail, the amount of air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less, is not taxable. If the travel is by air, then the economy class fare is not taxable.

I will continue this series, but i really hope it is useful. Do give me your comments

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Some Posts i wrote in this month last year, Not many i think i should start writing more often

1. What do you do with surplus money.
Got a windfall like bonus or a relative giving you money and dont know what to do with the cash then read this.

2. Tax alert impacting individual and employer
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3. Highlights of budget that effect you and me
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4. Compare new and old income tax slabs
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Defining Salary Structure - Part 1

Would you like to know what different parts of your salary mean? Are you just about to change your job and don't know what different parts of your salary slip mean and how to negotiate better? Well let me try to define some terms for you, this is the first part of the series i will be writing on the issue....

Basic Salary - This is the base income. The basic salary is used to calculate several other constituents of the salary. Basic salary is always taxable and hence ideally should not be kept more than 40% of the Cost to Company (CTC) but then keeping it to low may also cause the reduction in other constituents of the salary. Hence a balanced Basic income should be calculated.

House Rent Allowance (HRA) - House Rent allowance is a very crucial part of the salary structure. It is usually 40 - 50% of the basic salary. Out of the HRA received during any financial year, the least of the following is exempt from the income -
1. The actual HRA Received
2. 50% of the basic salary in metros(Mumbai, Chennai, Delhi or Kolkatta) and 40% in other areas.

3. Actual rent paid minus 10% of the basic salary.

Of course also note that the HRA becomes taxable if you do not pay any rent. Also don't forget if the HRA is lower than 40% of the basic, you will lose out on the chance to reduce your tax.

Special allowance (Other allowance etc) - This is the part which makes up for the remainder part of the salary. It is usually not bigger than the basic salary. This is the part which actually cannot be treated as any other constituent of the salary. This part of the salary is usually completely taxable.

I will continue this as a series, so absorb this information for today and the remaining is coming tomorrow. Going for a commercial break.

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With the recession talk going on i wanted to see if i could explain it to everyone much better, but then instead of explaining i came across this great presentation on one of the websites. The link to the website is here.

Its a presentation and you learn a lot , even thing you didn't know.