All You Need to Know about the Taxable, Nontaxable, and Partially Taxable Components of Salaries and Allowancesadmin
According to the IT Act of 1961 in India, regarding payroll processing, taxable benefits are classified into two broad categories: recurring and ad hoc. Allowances and perquisites are different benefits provided by employers to their employees. While some allowances fall under the salaries head and are fully taxable, other allowances may be partially taxable or, at times, fully exempt from the liability of tax.
Understanding the nuances of payroll tax and meeting statutory compliance needs with regard to payroll tax is crucial to conducting any modern business. Calculating salaries and working out tax deductions are critical steps in payroll management. Most contemporary businesses, with their intent to develop and expand their business, may not always be in a position to afford a team to handle these things.
Allowances – the fundamentals
In the Indian context, Salary is generally provided to employees by the employers in the monetary form. In addition to this, other monetary benefits are also sometimes provided, known as allowances. These allowances are offered over and above the salary paid, and these are meant to enable employees to meet costs incurred for facilitating the discharge of the intended service.
Allowances are fixed amounts of money paid by an employer to his employee for meeting any specific expenditure. This is over and above the salary received by the employee.
Travel allowance is one example of such allowance; it covers the expense incurred by an employee for reaching the workplace. In addition, employers may periodically provide perks to employees that may again be taxable or nontaxable. A clear understanding of the different employee benefits or allowances categories is essential to handling the payroll tax management process.
The Three Major Salary Components in the Indian Business Setting
- Fully-taxable components:
- Medical allowance
- Dearness allowance
- City compensatory allowance
- Overtime allowance
- Entertainment allowance
- Project allowance
- Meal allowance
- Nontaxable (exempt) components
- Health insurance premium
- Telephone and Internet Bills
- Books, newspapers, journals, and periodicals
- Meal coupons
- Recreational and medical facilities
- Compensatory allowance
- Partially taxable components
- House rent allowance
- Leave travel allowance
- Hostel expenditure allowance
- Children’s education allowance (Special allowance)
- Fixed medical allowance
- Conveyance allowance
The Significance of statutory compliance and payroll tax in India
The two important components of payroll in India are statutory compliance regarding salaries and salary structuring. Proper tax calculation and planning are crucial for reducing the tax liability of both employers and employees. Similarly, statutory compliance is mandatory and critical to eliminating legal liabilities and penalties. Failure to manage salaries and payroll tax processes properly result in unnecessary consequences.
TalentPro India helps Indian companies manage their payroll while staying up with all essential regulations and laws. Non-compliance may lead to unwanted legal troubles and emotional stress. It has therefore become essential for all business entities operating in India to invest time and money to meet compliance needs.
TalentPro India, a leading HR Services company in India, provides comprehensive payroll management solutions and statutory compliance management services to businesses of all sizes and types in India.
(Read more: Payroll Outsourcing Leads to Better Tax Reporting)
When efficiently handled, payroll tax and statutory compliance management processes can be streamlined. If you are running a business in India and looking for a reliable HR and payroll management service provider, look no further. Approach TalentPro India today.