Take-home salary is the amount received by an employee after subtracting all the deductions from his package or CTC (Cost to Company). The formula for computing the take-home salary is
Take home salary= Basic Salary + Allowances – Deductions
Allowances differ from Company to Company. Some of the most popular and widely prevalent Allowances are:-
- Dearness Allowance
- House Rent Allowance
- Conveyance Allowance
- Leave Travel Allowance
- Medical Allowance
- Any other allowance which your employer might deem fit.
Deductions
- Usually, the deductions are,
- EPF (Employee Provident Fund)
- Gratuity
- Provident Fund contribution
- Professional Tax (state-specific) and yes,
- Income Tax
Calculation of Take Home Salary
Now that you know the components of your salary. Let’s look at the calculation of it.
For calculating the take-home salary, we need to know how to calculate tax on salary.
While calculating income tax on salary, every allowance has different taxability, which affects the tax calculation. For instance, House Rent Allowance is partly exempt and partly taxable.
And same goes for other allowances.
Let’s take an example to get a better understanding of how it all works,
Say Mr A is drawing a salary of Rs. 600,000 annually, and this is the breakup of his salary,
- Basic Salary- 240000
- Dearness Allowance- 200000
- House Rent Allowance- 49950
- Conveyance Allowance- 49950
- Provident Fund- 57600
- Professional Tax- 2500
The first step is to add all the allowances after considering the taxability of each allowance. For instance, HRA and Conveyance Allowance is partly exempt and partly taxable in the employee's hands.
For the sake of simplicity, we will assume here that HRA and Conveyance Allowance is 50% taxable and 50% exempt.
So the taxable income comes out to be
Component | Amount | Taxable | Exempt | Net Taxable Amount |
Basic Salary | 240000 | 240000 | – | 240000 |
Dearness Allowance | 200000 | 200000 | – | 200000 |
House Rent Allowance | 49950 | 24975 | 24975 | 24975 |
Conveyance Allowance | 49950 | 24975 | 24975 | 24975 |
Provident Fund | 57600 | – | 57600 | – |
Employment Tax | 2500 | – | 2500 | – |
Total | 600000 | – | – | 489950 |
So, A’s taxable income is Rs. 489950.
Now, the tax is calculated according to the income tax slab rates, which varies every year. Here, we are assuming, given the current tax bracket, that he falls in the 5% tax bracket.
Total Income tax payable by Mr A will be calculated as follows,
|
Slab
|
Rate
|
Calculation
|
|
Upto 250000
|
Nil
|
–
|
|
250000-500000
|
5%
|
2,39,950*
*(489950-250000)
|
|
Income Tax Payable
|
–
|
Rs. 11997
(239950 x 5%)
|
|
Education Cess
|
–
|
Rs. 480
(11997 x 4%)
|
|
Net Income Tax Payable
|
–
|
Rs. 12,477
|
Thus, the income tax payable by Mr A shall amount to Rs. 12477.
How to increase your take-home salary?
The components of your take-home shall remain more or less the same. So how is it that you can increase your take-home salary?
No, it is not by negotiating with your HR, but with proper tax planning.
The income tax deduction is a variable component. And it can be altered with proper tax planning to minimize your tax liability.
Here’s how you can increase your take-home salary,
You can reduce your income tax liability by investing in various instruments that offer tax exemptions.
For instance, you can claim a deduction under 80C for up to Rs. 150000 by investing in instruments like Term Insurance, Equity Linked Mutual Funds, Fixed Deposit, Life Insurance, National Savings Certificate etc.
Additionally, over and above Rs. 150,000, you can also claim the medical expenses or the premium paid for mediclaim policy as a deduction under section 80D of Rs. 15000.
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