Your salary consists of many components. This article explains what each component means.

It
also discusses the income tax applicability of each component.

[The article has been inspired by a query from reader Dinesh Kumar]
There are many components in a salary structure that form your salary – some components
are monthly, whereas some are yearly.

(Note: This article talks about the most common components of your salary. It doesn’t talk
about the Cost To Company or CTC salary. To know more about your CTC salary and its
calculation, please read “Cost To Company or CTC salary: Understanding and
Calculation”)

Let’s understand some of the more popular components of your salary.

Basic

As the name suggests, this forms the very basis of your salary. This is the core of your salary,
and many other components may be calculated based on this amount.

Basic usually depends on your grade within the company’s salary structure.

Many deductions are also dependent on the basic – for example, your contribution (and the
matching component by your employer) to provident fund is 12% of your basic.

(To know more about provident fund and voluntary provident fund, please read “Provident
Fund (PF) and Voluntary Provident Fund (VPF)”)

Basic is paid out every month, and is a taxable component of your salary.

Dearness Allowance (DA)

The Dearness Allowance is paid out to compensate for increase in the general cost of living due
to inflation.

DA is paid out every month. It is a taxable component of your salary.

Incentive / Bonus

Incentives or bonuses are paid out depending on your performance (and, at times, depending on
the company’s / division’s performance as well). This is to reward employees for their better
performance.
Incentive is usually paid out monthly. A bonus can be paid out monthly or can be paid out once a
year.

Incentive and bonus are fully taxable.

Conveyance Allowance

Conveyance allowance is paid out to meet your expenses on commute related transportation.

Conveyance allowance is paid out every month.

Conveyance allowance upto Rs. 800 per month (Rs. 9,600 per year) is tax-free. Any amount over
it is taxable.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is paid out to meet full or part of your expenditure on renting a
house.

HRA may be expressed as a percentage of your basic.

House Rent Allowance is paid out every month.

HRA can be tax-free, subject to certain conditions. For more on taxation of HRA, please read
“Income Tax (IT) treatment of House Rent Allowance (HRA)”.

Medical Allowance (Reimbursements)

Medical allowance is paid out to help you with the amount that you spend on medical treatment
and medicines.

Medical allowance can be paid out monthly or yearly.

Medical allowance is a fully taxable component of your salary.

However, if you receive reimbursement of your medical expenses against submission of bills,
such medical reimbursement is tax-free upto Rs. 15,000 per year.

Leave Travel Allowance / Concession (LTA / LTC)

LTA is paid to encourage you to take periodic vacations and travel with your family.
Leave Travel Allowance is usually paid out once a year.

LTA / LTC can be tax-free, provided certain conditions are met. For more on taxation of LTA /
LTC, please read “Income tax treatment of leave travel allowance / concession (LTA /
LTC)”.

Vehicle Allowance

This is an allowance given to you so that you can maintain a vehicle.

It is usually paid out monthly, and is taxable.

Telephone / Mobile Allowance

This is an allowance given to you so that you can maintain a telephone (landline or a cell phone).

It is usually paid out monthly, and is taxable.

Special Allowance

Special Allowance can be given out to pay money that doesn’t fit into any other head!

Such allowances are paid out monthly, and are taxable.

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