ADVANCED AND DEFERRED COMPONENTS OF SALARY

BYARCHANARITUTRISHASUBHRA

SALARY DEFERRAL

• Salary deferral means taking some of employees income and putting it aside for later. Literally he/she is deferring his/her salary for later use, usually for use at age 59 ½ or thereafter.

• It is an easy and convenient way to save.• Also sometimes employer offers a matching

contribution to the employee’s retirement plan. This means if he/she defers some of his/her salary, the employers contributes some of their own money to match.

• The higher the tax bracket, the more it makes sense to make pre-tax salary deferral contributions. 

COMPONENTS OF SALARY DEFERRAL

• Gratuity• Provident Fund• Group Insurance

GRATUITY

DEFINITION: Gratuity is a part of salary that is

received by an employee from his/her employer in gratitude for the services offered by the employee in the company.

Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his/her job.

ELIGIBILTY & TAX TREATMENT

ELIGIBILITY : As per Sec 10 (10) of Income Tax Act, gratuity is paid

when an employee completes 5 or more years of full time service with the employer (minimum 240 days a year).

TAX TREATMENT OF GRATUITY The gratuity received by the employee is taxable

under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’.

 

TAX TREATMENT Contd..

• In case of government employees – they are fully exempt from receipt of gratuity.

• In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

1. Actual gratuity received;2. Rs 10,00,000;3. 15 days’ salary for each completed year

of service or part thereof

TAX TREATMENT Contd..

‘In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:

• Actual gratuity received;• Rs 10,00,000;• Half-month’s average salary for each

completed year of service (no part thereof

FORMULA FOR CALCULATING GRATUITY

Gratuity= (last drawn salary/26)* 15 days* No. Of years of service

where,last drawn salary= Basic+DACompleted year of service or part thereof’ means: • Full time service of more than 6 months is considered

as 1 completed year of service & less than 6 months is ignored in case of non-government employees covered under the payment of gratuity act.

• Less than 1 year is ignored in case of non-government employees not covered under the payment of gratuity act.

PROVIDENT FUND

• The term Provident Fund is a fund providing a compulsory contribution for the future of an employee after his retirement or for his dependents in the event of his early death.

• In such fund employee and employer contribute equally.

• The PF contribution is 12% of Basic salary from both employee and employer.

• It is compulsory for any organization in which more than 20 employee working is to contribute in Provident fund

Contd...

• Provident Fund comes under EPF - Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and organaized by EPFO - Employees' Provident Fund Organisation which is a statutory body of the Government of India under Ministry of Labour and Employment.

•  In terms of Taxation, the employer contribution towards employees’s PF will not be taxed from the employee. According to the Indian Income Tax Act under section 80 C, an employee can get the tax exemption for Provident Fund contribution up to 1 lakh. 

COMPONENTS TO CALCULATE PF

Currenct Age _____________ YearsRetirement age _________ YearsCurrent EPF balance _________ INRMonthly basic pay ________ INRMonthly dearness allowance  ________ INRContribution to EPF ___ %Expected salary hike _____ %

TYPES OF PROVIDENT FUND

• CONTRIBUTORY PF: All work charge Government employees who

were not getting the benefits of pension are subscribed to this Fund.

A subscriber, at the time of joining the Fund is required to make a nomination, in the prescribed form, conferring on one or more persons the right to receive the amount that may stand to his credit in the Fund in the event of his death, before that amount has become payable or having become payable has not been paid.

A subscriber shall subscribe monthly to the Fund. Rates of subscription shall not be less than 8% of subscriber’s emoluments and not more than his total emoluments. An equal amount is deposited in the account holders account by the state government.

GENERAL PF

EMPLOYEE PF

GROUP INSURANCE

• Group Insurance is an amount paid to government employees after 60 years of employment along with the interest.

• Monthly Rs. 30 to 60 is deducted from the salary of the employee.

• In case of death of employee before 60 years this/her family member is given the amount.

ADVANCE SALARY

SIGN-ON BONUS

• A signing bonus or sign-on bonus is a sum of money paid to a prospective employee by a company as an incentive to join that company.

• Also known as joining bonus• It is a one-time payment• It has to be returned if the employee quits before a

specified period given in the contract.• Signing bonuses are often used in professional

sports, and to recruit graduates into their first jobs.• The pay varies based on the talent of the

employee.