Salary is an agreed payment received by an employee from the employer at regular intervals in exchange for work. Under the Income Tax Act, Salary is the first head of income. It is important to understand the different components in salary for smarter tax planning. There are many components in salary and not all components may be applicable to every taxpayer. However, it is advisable to have a basic understanding of all components. In this article, we provide an overview of the various components of the ‘salary’ head of income under the Income Tax Act.
Basic Salary is a fixed amount of salary that an employee is paid in return for the work done. It does not include benefits, bonuses or any other potential form of compensation from the employer.
Allowance is a monetary benefit offered by the employer to its employees for meeting expenditures, over and above the basic salary are known as Salary Allowances. Most common allowances are Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Allowance (LTA), Medical Allowance and Transport Allowance.
Bonus pay is compensation offered over and above the basic salary to employees, at the discretion of the employers. Most common types of Bonuses are Performance Bonus, Sales Commission Bonus, Referral Bonus and Retention Bonus.
Perquisites, also known as Fringe Benefits are benefits that one enjoys or is entitled to enjoy on account of one’s job or position. These are usually non-cash benefits given by an employer to employees in addition to cash salary or wages. However, they may include cases where the employer reimburses expenses or pays for obligations incurred by the employee.
Profits in Lieu of Salary
Profits in lieu of salary are any additional payment in addition to one’s salary. Compensation in connection with the termination of employment or modifications of Terms and Conditions, any sum received under Keyman Insurance Policy etc would fall under this category. For further information about this topic, please refer to the article on profits in lieu of salary.