- Working for someone else or Employee ,
- Working for themselves or Self Employed ,
- and running a business .
When a person works for someone else or company, (s)he is then said to hold a job and is called Employee . The person or the company he or she works for is called Employer . Money that is paid is called as Salary or Income or Wage .
As explained earlier Money that is received under Employer-Employee relationship is called as Salary. If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such case your income would be treated as income from business and profession).
Did you know that word salary has come from Latin salrium based on salrius which means pertaining to salt . The word appeared in 1350-1400. In those days, salt. regular ordinary table salt, was a prized and valuable commodity. It was money given to Roman soldiers to buy salt. The phrases the salt of the earth or worth your salt refer to the high value of salt.
The salary consists of following parts.
Basic Salary. As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure.It is
a fixed part of one’s compensation structure.
Allowance. It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA). Lunch Allowance, Conveyance Allowance. Children’s Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or non taxable. One can read Understanding the components of your salary and their taxation for more details.
Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan. Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option. and so on.
How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.
Deductions: Two type of deduction are made from salary
- Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) .
- Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc
Provident Fund Contribution