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Components of Salary in India: Taxable Income vs. Tax Exempt Income

One of the frequent questions that we get from our clients that employ workers in India is how to compute the taxable income and exempt components of salary.  The reason that this comes up is that an employee sent on assignment will naturally be most concerned about after tax income, which may differ if they were working in the home country.  Also, there may be unusual expenses or allowances as part of the assignment to take into account.

When we run your payroll through our GEO local partner, the Indian tax laws will be applied to at least a portion of employee income (depending upon whether you have set up some type of split payroll.) However, these amounts may be offset by tax treaties which can offer some relief, or you might have to offer some type of tax equalization to the employee to ensure fairness.

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How are Components of Income Treated Differently?

Here are the fully taxable income components:

  • Basic Salary: the monthly compensation paid as salary, bonuses or commissions
  • City Compensatory Allowance: paid to offset the high cost of living in metro areas, the CCA is fully taxable as income to the employee
  • Incentives: reimbursement of personal expenses
  • Leave Encashment: amounts paid for unused leave are taxable

At least partially tax exempt components include:

  • Conveyance Allowance: exempt up to INR 19,200 per year
  • Medical Reimbursement: exempt up to INR 15,000 per year (reimbursement receipts are required)
  • House Rent Allowance: the amount of rental allowance will be partially exempt from income tax, depending on salary level and percentage calculations.

Are there other deductions from income that will affect my employees?

  • Provident Fund: The employee contribution of 12% to the Provident fund is deductible from salary for computing income tax.
  • Tax Deducted at Source: TDS deduction rate is a way that a minimum level of income is taxed and withheld by the employer, based on taxable income.  In other words, there is no flat tax rate.  Rates range from zero for annual incomes less than Rs.250,000 up to 30% for taxable income of Rs.1,000,000.

How Does Shield GEO Assist Clients With Calculating the After Tax Income of Employees?

The complexity of Indian tax laws make a DIY payroll a challenge.  Shield GEO, through our local Indian partners, can run a fully compliant payroll for your company, as well as give you pre-assignment estimates of taxable income and exemptions.  This can be very useful for employees who may not understand the nuances of the local tax laws, and really only want to know the final amount of their monthly pay check.

Our local partner will ensure that all withholding and tax deductions are made according to Indian regulations, and will give the employee peace of mind that their income will be as predicted.

Contact us if you have questions about assigning employees to India and want to know more.

Considering employing workers in Asia? Read why you should work with us! 

 

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