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 ways the tax department identifies income sources.
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.
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.
- 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:
a. actual HRA
b. 40% of your basic salary (or 50% if you live in one of the metros)
c. Actual Rent paid – 10% of your basic salary
These numbers add up and your taxable salary may be significantly less than 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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