Complete Tutorial on Payroll Accounting in Tally Prime

Component of salary 

Basic salary

Basic salary is a fixed amount paid to employees by their employers in return for the work performed or performance of professional duties by the former. Base salary, therefore, does not include bonuses, benefits or any other compensation from employers. As the name suggests, basic salary is the core of the salary of an employee.

Allowances 

Dearness Allowance

Dearness Allowance is cost-of-living change allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary applies to both employees in India and Bangladesh.

House Rent Allowance

HRA or House Rent Allowance is a salary component paid by employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person’s salary. HRA is applicable to both salaried as well as self-employed individuals.

They account HRA for salaried people for under section 10 (13A) of the Income Tax Act under rule 2A of Income Tax rules. Similarly, self-employed individuals are not considered for HRA exemption under this section but can claim tax benefits under section 80GG of the Income Tax Act.

Conveyance Allowance – 

Conveyance allowance, also known as transport allowance, is a kind of allowance offered by employers to their employees to compensate for their travel expense to and from their residence and workplace. Note – In Union Budget 2018, a standard deduction of Rs. 40,000 has been introduced instead of transport (Rs 19,200) and medical (Rs 15,000) allowances.

Leave Travel Allowance –

Leave travel allowance is eligible for tax exemption. It is offered by employers to their employees to cover the latter’s travel expense when he or she is on leave from work. The amount paid as leave travel allowance is exempt from tax under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the mode of travel needs to be air, railway or public transport.

Medical Allowance –

Medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditure. Note – In Union Budget 2018, a standard deduction of Rs. 40,000 has been introduced in lieu of transport (Rs 19,200) and medical (Rs 15,000) allowances.

Books and Periodicals Allowance –

Books and periodicals allowance is a type of allowance provided to employees for helping them meet the expenses associated with purchase of books, periodicals and newspapers. It is tax exempt to the extent of actual expenditure incurred towards purchase of books and periodicals.

Professional Tax

Professional tax is a tax levied on the income earned by salaried employees and professionals, including chartered accountants, doctors and lawyers, etc. by to the state government. Different states have varying methods of calculating professional tax. The maximum amount that is payable in a year is Rs. 2,500.

Gratuity

Gratuity is a lump sum benefit paid by employers to those employees who are retiring from the organization. This is only payable to those who have completed 5 or more years with the company. The gratuity amount is paid in gratitude for the services rendered by the individual during the period of employment. According to the Payment of Gratuity Act, 1972, gratuity is calculated as 4.81% of the basic pay. Most firms with a workforce of 10 or more employees come under the Act.