Deduction or salary deduction is the amount deducted by employer from employee’s gross salary before disbursing the final salary (CTC) every month in the form of government mandated taxes and voluntary deductions like retirement plans, medical insurance and more.
In this blog, we will cover in detail about salary deduction-
Deduction Meaning
Deduction is meant to fulfil legal requirements and offer benefits to employees. They are reflected in the salary slip/ CTC break up of employees.
But why are deductions given in the first place?
- Fulfil legal needs like income tax, EPF, ESI, etc. depending on organization
- Empower employees by offering them retirement benefits
- Support well-being of employees with health insurance, and other medical benefits
- Facilitate loan repayments and complete financial regulations
Types Deduction for Salaried Employees
In India, depending on certain factors like legal requirements, employee benefits and more, several deductions can be part of the salaried employees.
Let’s understand them one by one:
- Income Tax: Employers deduct income tax at source (TDS) from employees’ salaries and deposit to government, depending upon employee’s income and applicable tax slabs
- Employee Provident Fund: EPF deduction is a retirement saving scheme for employees. Each month, both employees and employers contribute an equal amount (% of employee’s basic salary and dearness allowance) to the EPF account of employees. The amount contributed by employees is deducted from their salary every month
- Medical Insurance: Employers deduct premium for health insurance plan if they offer the same to employees. This deduction actually secures employees from emergent expenses related to medical emergency
- Loan repayments: In cases, when employers offer loans to employees either for their education needs, buying home, or more, then deductions are made from salary for loan repayment.
What are Standard Deductions on Salary?
Standard deductions in salary refer to fixed, standardized deductions applicable to employee’s gross salary before calculating their taxable income.
These deductions are uniform for all salaried people across every part of India.
Standard deductions of Rs. 40,000/- was re-introduced in budget 2018 by then Finance Minister, Arun Jaitley, winning the heart of middle-class salaried people. It replaced transport allowance and medical reimbursement.
Example: Suppose employee’s gross salary is Rs. 6,00,000.
After standard deduction of Rs. 50,000, their taxable income would be Rs. 5,50,000.
Deduction under new tax regime:
For FY 2022-23, the limit of the standard deduction is Rs.50,000 in the old regime.
As per Budget 2023, salaried taxpayers are now eligible for a standard deduction of Rs.50,000 under the new tax regime also from the financial year 2023-24.
How to Manage Deductions for Error-Free Payouts?
Deductions must be taken carefully to offer maximum benefits to your employees. You can go with following methods:
- Integrated Payroll Software: Implement HR & payroll software for complicated calculations, tax compliance, and various deductions. The software will reduce the chances of manual errors and ensure error-free payouts by automating deductions like IT, EPF, medical premium, more
- Detailed Document Deduction Policies: Upload well-documented deduction policies on employee self-service portal that outline the types of deductions, their calculation methods, and the legal regulations.
- Update Employee Records: Revise and maintain up-to-date employee records. Every latest change like promotions, PF contributions, health insurance premiums must be updated in the system
- Sync Payroll software with Latest Tax Laws: Tax laws update time to time specially after the release of financial budget, so make sure your payroll system will be updated with new laws and regulations
- Schedule Regular Audits: Conduct periodic audits to cross-check the accuracy of payroll and deduction processes. This can help identify any errors or discrepancies in deductions and payouts.
- Employee Self-Service Portals: Empower employees with self-service portals where to access their payroll information, including deductions so that they can review their deductions and remain updated with latest deduction policies
- Statutory Compliances: Ensure every deduction comply with statutory compliances, especially income tax, PFs and other regulations
- Error Resolution Procedure: Design a clear workflow for rectifying errors, if any. Mention people responsible, procedure, compliance requirements and other necessary details required for error-free deductions
- Training and Upskilling: To ensure that finance teams and HR teams won’t miss the intricacies and complexities of laws, upskill and schedule training programs for them
Summing Up
In conclusion, deductions in salary transform the financial landscape of your employees. Their deductions are not merely for government compliances, but to actually secure them financially when they need it!
However, it is your responsibility to ensure deductions, aware your employees about its benefits and official policies, remind them to comply with regulations and offer financial stability to them.
To make your payroll deductions load-free, timely and with utmost accuracy, you can implement end-to-end payroll software which can help your employees as well as you too to experience the true benefits of deductions.