ITR 2 Salary Break-up for AY 2024-25

1. ensures that the taxable income calculation is accurate.

1. helps identify deductions under Section 10 of the Income Tax Act.

1. allows reporting of parquisites and profits in lieu of salary according to Section 17.

1. reduces the likelihood of discrepancies or notices from the Income Tax Department.

For instance, if your salary structure shows HRA as Rs.15,000 per month and you are paying Rs.20,000 rent in a metro city, you can claim exemption on a portion of HRA. Without a proper break-up, this benefit may be lost.

Effect on Exemptions and Deductions

The detailed salary break-up has a major impact on how you can claim exemptions and deductions in your ITR. If you do not submit all of the salary components correctly, you could lose the right to claim them.

 Important factor to consider:

1. House Rent Allowance (HRA): You can claim the exemption under Section 10(13A) for HRA, depending on your rent paid, basic salary, and HRA received. If it is not reported correctly on your ITR, you will lose the right to claim exemption on HRA. 

Example

Suppose your basic salary is Rs.40,000, rent paid is Rs.18,000, and HRA received is Rs.15,000. The exempt amount is the least of (a) actual HRA received Rs.15,000, (b) 50% of basic Rs.20,000 (metro), (c) rent minus 10% of basic = Rs.14,000. So, exemption = Rs.14,000, and Rs.1,000 remains taxable.

1. Leave Travel Allowance: You can claim LTA in the case of travel expenses incurred inside India (subject to certain provisions). LTA must be shown separately in the salary structure.

Example

If your employer gives Rs.30,000 as LTA, and you submit bills for a family trip costing Rs.25,000, only that Rs.25,000 is exempt; Rs.5,000 is taxable.

1. Section 80C deductions: You can claim deductions for your investments in PF, ELSS, life insurance premium payments or home loan principal repayment, only after you have accurately reported your salary income.

Example

If you invest Rs. 1.5 lakh in ELSS and PF, you can reduce your taxable income by this amount.

1. Section 80D deductions: Premiums paid for Health Insurance for self, spouse, children and parents, will only be claimable above your salary income.

Example

Paying Rs. 25,000 towards health insurance premium for self and spouse allows you to claim deduction under Section 80D.

1. Miscellaneous deductions: i.e., interest on education loan claim under Section 80E, contribution towards NPS under Section 80CCD and donations under Section 80G can all only be accurately claimed, once the gross salary and allowances are broken down.

What are the components of a Salary?

A salary breakdown is a compilation of several components and if you understand these components, you will report them properly in ITR 2. 

1. Base Salary

The part of your salary that is fixed and core is typically the basis of most other components. This category is fully taxable and is often used to determine allowances, benefits and contributions such as a provident fund.

1. Allowances

An allowance is an extra payment made by an employer to an employee to cover a particular expense. Allowances can be broadly divided into: Exempt Allowances: Some allowances that an employee receives are exempt (in whole or in part) from tax under Section 10. Typical exempt allowances are House Rent Allowance (HRA), Leave Travel Allowance (LTA), conveyance allowance, children's education allowance. Taxable Allowances: Any allowance that an employee receives such as bonus, special allowances, commissions, incentives, or overtime, is fully taxable and should be included in the gross salary. 

1. Perquisites

Perquisites are benefits in kind provided by the employer, which may be included as part of salary in accordance with Section 17(2) of the Act. This would cover employer-provided housing, company car, stock options, or any other type of benefit which is expressed in monetary terms.

1. Profit in lieu of Salary

Any payment is also received and/or accepted in lieu of salary, will also be taxed. This includes gratuity, encashment of leave, retrenchment pay and any payments made to you at the time of termination of employment or resignation. These are covered under Section 17(3) of the Act.

1. Deductions

Deductions are values that are subtracted from gross salary to arrive at taxable salary. The most common deductions will be:

1. Professional Tax

It is a tax at the state level on salary income that is going to be deducted from the gross salary usually on a monthly basis by the employer.

1. Standard Deduction

A player is entitled to a fixed deduction as determined by the income tax department for a salaried individual to reduce the taxable income by this value.

Note: Some organisations also include components like employer contribution to provident fund, superannuation, or other retirement benefits. While these may not be part of the immediate taxable salary, they are often reported in Form 16 and must be considered when filing ITR 2.

Illustrative Example of Salary Break-up

Let’s assume Mr. Arjun has the following salary package for FY 2024-25:

1. Basic Salary: Rs.4,00,000

1. House Rent Allowance (HRA): Rs.1,80,000

1. Leave Travel Allowance (LTA): Rs.30,000

1. Special Allowance: Rs.90,000

1. Employer Contribution to NPS: Rs.1,00,000

1. Perquisites (Company Accommodation + Car Facility): Rs.2,64,000

1. Gratuity on Resignation: Rs 4,00,000

Now, let’s apply exemptions:

1. HRA exemption available: Rs.1,20,000 (based on rent paid and Section 10 rules)

1. LTA exemption available: Rs.18,000 (based on eligible travel bills)

1. Gratuity exemption: Rs.3,50,000 under Section 10(10)

1. NPS contribution: fully exempt (within 10% of salary limit)

Taxable Salary Calculation

If Arjun had simply reported his gross salary, he would have paid tax on Rs. 14,64,000. By breaking down the salary into components and applying exemptions properly, his taxable salary reduces to Rs. 8,76,000. This shows why giving a detailed salary break-up in ITR-2 is not only mandatory but also saves a significant amount of tax.

How to Generate a Salary Break-up for ITR 2

 To file ITR 2 accurately, you should be certain of how every single component of salary is represented. Creating a salary break-up in detail can help you meet the requirements of the Income-tax Act and claim exemptions/deductions to which you are entitled. The following steps will help you with your break-up:

 Step 1. Gather Required Documentation

1. First, you should have all supporting documents ready for the salary break-up:

1. Form 16 from the employer.

1. Salary slips provided during financial year.

1. Bank statements showing the credit of salary.

1. Exemption proof relating to allowances (rental receipts to claim HRA).

Step 2. Determine Salary components

Please break down your salary by its components stated above as much as possible:

1. basic salary

1. allowances

1. perquisites

1. profit in lieu of salary

1. and deductions

Step 3. Compute Exempt Allowances

To do this you must:

1. Identify allowances eligible for exemption under Section 10 of the Income-tax Act for example, HRA, LTA, conveyance allowance, etc.

1. Calculate the exempt part using relevant formula within limits of the Income-tax Act.

Step 4. Taxable allowances (and perquisites)

1. Itemise all taxable allowances, whether regular salary or not, like bonus, special allowances, or overtime.

1. Also include the monetary value of the perquisites made available by your employer  this would be in Form 16 or Form 12BA also basically as stated in clause (11) of Paragraph C of Section II of Part B of Form 16.

Step 5. Profit in lieu of salary

1. Include amounts granted to you like gratuity, leave encashment, and/or compensation when termination, etc. according to Section 17(3). This is fully taxable and we will add this to gross salary too.

Step 6. Deduct allowable deductions

1. Deduct the professional tax as well as the standard deduction available to salaried employees.

1. You will also need to keep evidence of these deductions in case of discrepancies while filing.

Step 7. Cross-check against Form 16

1. Check your computed salary break-up against the Form 16 your employer provided you.

1. You want to ensure that the taxable salary will be the same as the income declared on ITR 2, as well as TDS deducted.

Step 8. Complete ITR 2 sections properly

1. Break up your salary in Schedule S - Income from Salary of ITR 2.

1. Ensure to record gross salary, exempt allowances, taxable allowances, perquisites, profit in lieu of salary, and deductions in the relevant words/fields provided.

Step 9. Verification and filing:

1. When all components of the salary break-up have been recorded and classified correctly, you will need to review the return before submission.

1. Accurate reporting reduces scrutiny and provides a right of claiming exemptions of deductions.

Documents Required for Filing ITR 1 and ITR 2

When filing your income tax return (ITR-1 or ITR-2), it's essential to gather the necessary documents to ensure a smooth and hassle-free process. Here are the documents required for salaried employees:

1. PAN Card: Your permanent account number. 
2. Form 16: This document is issued by your employer and provides details of your salary, tax deducted, and other allowances. 
3. Bank TDS Certificate: It serves as proof of tax deducted at source (TDS) by banks. 
4. Form 26AS: This form is provided by the Income Tax Department and can be downloaded from their official website. It summarizes the income tax paid by you during the financial year, including details of taxes deducted at source from your income. 
5. Documents for claiming deductions: Keep handy the relevant documents for claiming deductions under Section 80. These may include receipts or proof of contributions to the Provident Fund, tuition fees paid for your children's education, payments towards life insurance premiums, registration and stamp-duty charges, and home loan payments. 
6. Interest Income Documents: You need to provide your bank statement or passbook that shows the interest earned in your savings account. Additionally, you should have statements for the interest received on fixed deposits.  
7. Documents related to investments made under Section 80: You should have documents that prove your investments are eligible for deductions under Section 80. These may include documents related to investments in Public Provident Fund (PPF), Equity-Linked Saving Scheme (ELSS), and LIC premium certificates, among others.
8. Other Documents: If applicable, you will need documents pertaining to interest paid on a home loan, interest paid on education loans, and records of stock trades for calculating capital gains.

Filing income tax returns is a crucial responsibility for individuals, as it is both mandatory by law and a duty to contribute to the country's progress. However, many people lack awareness about the process. This article aims to help those who struggle with filing salary details in ITR 1 and ITR 2. To file your returns accurately, it is important to determine the appropriate form based on your income type, annual income, and eligible exemptions. Understanding the correct form will save time and effort while ensuring compliance.

Understanding  of ITR 2