Yup. If you thought you pay tax based on what your CTC is, then you wouldn’t be the only one, but you’d be kind of wrong.
You see, the income tax department speaks a different language altogether. They couldn’t care less what your CTC is. What they do care about is something they call “Income from salary”. It’s one of the five heads of income the tax department defines as income sources i.e., ‘Income Under The Head Salaries’.
If all your money comes from the salary transfer hitting your bank account then income from salary is the only thing you should bother about from a tax angle. You must have noticed that you don’t really get the CTC credited to your bank account. It never happens that your CTC is Rs 12 lakh per annum and you get Rs 1 lakh credited to your bank account per month. Now, why isn’t that the case? Because your CTC is not your take home salary. Your employer will deduct taxes, contributions, profession tax, and so on. The residual is your take home. Similarly, the CTC and income from salary is not the same. There are many disallowed allowances, perquisites, tax deductions, unconditional exemptions etc. The Income Tax Department considers income from salaries post these values.
CTC and income from salary – What’s the difference?
Your CTC or cost to the company is what the company considers as its total money spent on you directly. For example, the company’s contribution to EPF is part of your CTC, along with your contribution. This means that there are elements which are part of your CTC but not considered from a tax perspective.
Your CTC generally includes:
- Basic Salary
- Special Allowance
- Employer’s contribution to EPF (this is up to 12% of your basic salary)
- Employer’s contribution to gratuity etc.
- Medical Allowance
- Conveyance Allowance
- Meal coupons
Of all these, your taxable income doesn’t include the following:
- Medical allowance up to Rs. 15,000 provided you submit medical bills.
- Conveyance allowance up to Rs. 19,200.
- Profession Tax.
- Food coupons up to Rs. 26,400 in a year. (if your employer pays you more than this then that amount is added to your taxable income)
- Employer’s contribution to EPF. (Your contribution is counted).
- Employers’ contribution to Gratuity
In addition, if you pay rent for the house you live in and also have HRA in your salary, then the minimum of following 3 is reduced from your salary:
- actual HRA
- 40% of your basic salary (or 50% if you live in one of the metros)
- Actual Rent paid – 10% of your basic salary
These numbers add up and your gross taxable salary may be significantly less than your CTC.
What is Total Taxable Income?
From your income chargeable under the head ‘salaries’ is the gross salary minus the allowances, exemptions, and standard deductions.
The allowances, exemptions, and standard deductions include allowances exempt under section 10, travel concession, leave entitlement, HRA, entertainment allowance, standard deduction and tax on employment i.e. profession tax.
Now, from the income chargeable under the head ‘salaries’ you can deduct all the deductions under section 80C, medical insurance, interest on education loan, charitable donation, etc.
This value is your total taxable income. This value is considerably less than your CTC. You can do better tax planning, lower this taxable income and save taxes. To conclude, these allowances, exemptions, and deductions collectively lower your taxable income from your CTC.
TIP: make sure you know your taxable income before you start planning to save taxes. It may just happen that you don’t even need to make tax saving investments.
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