Breaking Down Salary Deductions: Insights for Indian Professionals

When you receive your paycheck each month, you may notice that the amount credited to your account is less than your gross salary. This difference arises due to deductions in salary, which can be a mix of taxes, contributions, and other expenses. For employees in India, understanding these deductions is crucial to better manage personal finances and optimize tax savings.

In this blog, we’ll explore everything you need to know about deductions in salary, the old and new tax regimes, and how to navigate these calculations.

What Are Deductions in Salary?

Deductions in salary refer to the amounts subtracted from an employee’s gross income before the final net salary is paid. These deductions are typically categorized into two types: mandatory deductions like income tax, provident fund (PF), and professional tax, and voluntary deductions like loan repayments or employee welfare contributions.

By understanding these deductions, you can plan your finances better and identify opportunities to save more under available tax schemes.

Types of Deductions in Salary

Mandatory Deductions

Income Tax

Income tax is a major component of deductions in salary and is calculated based on the employee’s taxable income. The tax liability depends on the tax regime you choose (old or new), which we’ll discuss later.

Employee Provident Fund (EPF)

This is a retirement savings scheme where both the employer and employee contribute 12% of the employee’s basic salary and dearness allowance. The employee’s contribution is considered a deduction in salary and offers tax benefits under Section 80C of the Income Tax Act.

Professional Tax (PT)

Levied by certain state governments, professional tax is a small, fixed deduction based on your salary slab. While it’s minor, it’s important to be aware of it as part of your overall salary deductions.

Voluntary Deductions

Loan EMIs

If you’ve taken a loan like a personal loan, car loan, or home loan, the EMI amount may be directly deducted from your salary each month.

Health Insurance Premiums

Some employers offer health insurance plans where the employee’s share of the premium is deducted from the salary.

Other Contributions

Additional voluntary contributions to EPF, Employee Welfare Funds, or charitable donations are also considered deductions in salary.

Understanding Tax Deductions Under Old and New Tax Regimes

India’s tax system allows employees to choose between the old tax regime, which offers multiple exemptions and deductions, and the new tax regime, which has lower tax rates but fewer deductions. Here’s how deductions in salary vary under these two regimes:

The Old Tax Regime

Under the old tax regime, employees can claim a host of exemptions and deductions to reduce taxable income. Key deductions include:

• Standard Deduction: 50,000 is automatically deducted from the salary to cover basic expenses.
• Section 80C: Offers deductions of up to 1.5 lakh for investments in EPF, PPF, ELSS, life insurance premiums, and more.
• Section 80D: Deduction for health insurance premiums up to 25,000 (50,000 for senior citizens).
• House Rent Allowance (HRA): Exemption for employees who live in rented accommodation, based on actual rent paid.
• Leave Travel Allowance (LTA): Tax-free reimbursement for travel within India.

The New Tax Regime

The new tax regime, introduced in Budget 2020, offers lower tax rates but eliminates most exemptions and deductions. However, the standard deduction of 50,000 has been retained with an option of 75,000 too.

Key Features:

• Simplified structure with reduced tax rates.
• No need to maintain investment proofs, as exemptions like Section 80C are not applicable.
• Ideal for individuals who do not claim many deductions.

An Example of How Deductions in Salary Work

Let’s break down an example to illustrate how deductions in salary affect take-home pay under the old and new tax regimes.

Example:

• Gross Salary: 10,00,000/year
• EPF Contribution: 60,000/year
• Professional Tax: 2,400/year

Old Tax Regime:

• Standard Deduction: 50,000
• Section 80C Investments: 1,50,000
• Taxable Income: 7,37,600 (after all deductions)
• Tax Payable: 54,080 (approx.)

New Tax Regime:

• Standard Deduction: 75,000
• Taxable Income: 9,25,000
• Tax Payable: 60,000 (approx.)

While the old regime provides more tax savings for those with eligible deductions, the new regime may be simpler for those without significant investments or expenses.

Tips to Optimize Your Salary and Reduce Deductions in Salary

• Understand Your Pay Structure: Review your salary slip carefully to understand all components, including basic pay, allowances, and deductions.
• Maximize Tax Benefits: If you choose the old tax regime, ensure you invest in schemes like PPF, ELSS, or NPS to claim deductions under Section 80C and 80CCD.
• Leverage HRA and LTA: If applicable, claim HRA and LTA exemptions to reduce taxable income.
• Use Employer Benefit: Opt for employer-provided benefits like health insurance to enjoy group premium rates and tax savings.
  Track Voluntary Deductions: Keep track of voluntary deductions, such as EMI payments or additional contributions to EPF, to better manage your take-home pay.

Conclusion

Understanding deductions in salary is essential for managing your finances and maximizing your take-home pay. From mandatory deductions like income tax and EPF to voluntary contributions and loan repayments, every deduction plays a role in shaping your net income.Whether you choose the old tax regime to claim multiple exemptions or the new regime for simplicity, staying informed about deductions in salary will help you make smarter financial decisions. Empowering yourself with financial knowledge is a way to help you achieve your goals effortlessly.

FAQs on Deductions in Salary: