What is other allowance in Salary and are tax free allowances?

The nine crucial components of your Salary Break-up

  • Cost-to-Company or CTC

The Cost-to-Company or CTC is the total amount that a company spends on you, directly or indirectly. It includes basic pay, allowances, provident fund, and others. In simpler terms, this is the amount that the company offers you as a salary package when employing you for the job. However, it is not that same as the amount that you take home at the end of each month.

CTC= Gross Salary + PF + Gratuity

  • Basic salary

Basic salary acts as your base income and is the fixed part of your compensation package with the exclusion of benefits and bonuses. The amount of basic salary varies depending on your designation and industry, but commonly it is set at 40 – 60% of CTC.

  • Allowances

A monetary benefit provided by the employer to meet the expenditures incurred by you to meet the service requirements is called an allowance. These are usually provided in addition to the basic salary. The most common form of allowances is dearness allowance (DA), house rent allowance (HRA), leave travel allowance (LTA), and conveyance or transport allowance. Again, the amount of these allowances might differ from company to company depending on its policies.

  • Bonus

A bonus is usually awarded in recognition of your good performance. It is compensation over and above the basic salary. The amount of bonus can either be fixed or variable and the time period in which it is due varies from different for different companies.

  • Provident fund (PF)

A scheme that benefits you after your retirement, the provident fund is an investment which is made by you and the employer every month. This amount is commonly calculated at 12% of your basic salary when it is up to Rs. 15000 and is directly transferred to your PF account. In case it exceeds the given threshold amount, the company may still choose to retain its share at 12% of Rs. 15000.

  • Insurance

The benefit of insurance is provided by many companies but not all. A small amount is deducted from your salary each month which then goes towards your life and health insurance. The premium is deducted from your salary each month. This amount is included in the CTC but is deducted from your net salary.

  • Taxes

The final contribution made out of your salary is towards the section of income tax and professional tax. The tax amount due on your salary (according to the slab and rate of tax applicable) is directly deducted by the employer before handing over the salary to you. This tax is also called the tax deducted at source or TDS. Other than income tax, the professional tax is another form of deduction made from your salary.

  • Net Salary or Take-Home Salary

Finally, the salary that you take home with you is the net salary. To simplify, this amount is calculated by adding your basic salary and allowances and then deducting the various forms of taxes (income tax, EPF, professional tax) therefrom. Giving out the most realistic image of your income, this is the actual amount that is credited to your bank account at the end of every month.

In a nutshell, Net Salary = Basic Salary + Allowances – Income Tax/ TDS – Employer’s Provident Fund – Professional Tax.

  • Gross Salary

Add the allowances to the basic salary and you arrive at the gross salary. This amount is calculated before the application of taxes and other deductions.

Gross Salary= Basic Salary + Other Allowance

What is tax free allowances?

These allowances are part of the salary, however, are fully exempt from tax, which means while computing tax these are deducted from the salary. Here are few commonly known fully exempted allowances –

  • Uniform Allowance: This allowance is paid to the employees to meet the expenses incurred on the purchase of uniform to wear during duty hours. This is exempted to the limit of the actual amount spent on the expenses.
  • Entertainment Allowance: As explained earlier this allowance is paid to employees for the expenses incurred on the meal, hotel, etc. for the business clients or on the hospitality of the customers. This is fully exempt only for the government employees.

The other allowances which are tax free in nature are Daily Allowance, Academic / Research Allowance, Entertainment Allowance (Govt. Employees), Allowances paid to UNO Employees, Allowances paid to Judges of High Court and Supreme Court, Allowances paid to government employee posted outside India, Compensatory Allowances paid to Judges, Helper Allowance and Travelling Allowance.

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