If you are an employee in any organization, and you get a monthly salary, this income is treated as ‘salary income’ for tax purposes. That means, if you are a freelancer or are hired by an organization on contract basis, your income would not be treated as salary income. (In such case your income would be treated as income from business and profession).
Your salary is broken up into several components, like basic, HRA, special allowance etc. The main reason for doing this is to make your salary tax effective; to ensure that you pay minimum tax on your salary. Here is a run down on the various common components and how they are treated according to the tax laws.
- Your basic salary is fully taxable.
- Allowance given to you to compensate for inflation or rising prices. DA is fully taxable.
- House Rent Allowance (HRA) is tax-free only if you are actually paying rent.
- Conveyance allowanceis not taxabe if bills are provided by the emplyer.
- Children Education Allowance and Hostel expenditure allowance are tax free.
- Leave Travel Allowance (LTA) tax structure of this component is slightly complicated.
- Medical re-imbursement: Your company will reimburse the expenditure that you incur on medical expenses for you and your family. This is however restricted to Rs 15,000 per annum.