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Importance of structuring your - "Salary"

What is Salary?

Salary is something paid by the employer to an employee in lieu of services provided to the organisation as per the terms of the employment agreement. Individuals receiving salary/wages are required to pay tax on any income above the exempted threshold. The salary received by an employee is also impacted by various deductions, such as statutory contributions and tax deducted at source (TDS). However, an employee may be able to increase his/her take-home salary by means of an intelligent salary structure and efficient tax planning.

Section 17 of Income Tax Act defines salary to include: - Wages - Pensions or Annuities - Gratuities - Advance of Salary - Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages. - Any encashment of leave salary. - Any amount of credit to provident fund of employee to the extent it is taxable.

Therefore "salary" includes basic salary, encashment of leave salary, advance of salary, arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent allowance, conveyance allowance and also includes perquisites by way of free housing, free car, free schooling for children of employees, etc.

Section 15 of the Income Tax Act states that salary can be taxed on due or receipt basis, whichever is earlier.

Components & Deductions:

Salary comprises various components aimed at meeting the defined requirements of employees. Deductions from the salary would include contributions to the superannuation fund, which is essential to meet post-retirement financial needs. Tax deductions are also available on contributions to statutory funds as well as some of the other components.