Deduction: Meaning of Deduction and Its Importance | HRMantra HR Software

Deduction: Meaning of Deduction and Its Importance | HRMantra HR Software

5-7 minutes

Definition of Deduction

Deduction refers to the amount that an employer deducts from an employee''s gross salary before finally paying or disbursing the salary. These deductions include government-mandated taxes and voluntary contributions such as retirement plans, medical insurance, and more.

Deduction serves multiple purposes:

• Fulfil legal needs such as income tax, EPF, ESI, etc., depending on the organization
• Empower employees by providing retirement benefits
• Support employee well-being through health insurance and other medical benefits
• Facilitate loan repayments and complete financial regulations

Types Of Deductions for Salaried Employees

In India, various deductions may apply to salaried employees based on legal requirements, employee benefits, and other factors. Here are some common types:

• Income Tax: Employers deduct income tax at source (TDS) from employees'' salaries and deposit it with the government based on income and applicable tax slabs.
• Employee Provident Fund (EPF): A retirement saving scheme where both the employee and employer contribute a percentage of the basic salary plus dearness allowance to the EPF account. The employee''s contribution is deducted from their salary every month.
• Medical Insurance: Employers may deduct premiums for health insurance plans offered to employees. This deduction covers employees for medical emergencies.
• Loan Repayments: If employers provide loans for education, home buying, etc., deductions are made from salaries to repay these loans.

What is Meant by Standard Deduction on Salary?

Standard deductions are fixed, uniform deductions from an employee''s gross salary before computing taxable income, designed to simplify tax calculations. The standard deduction amount is the same for all salaried individuals across India.

The standard deduction of Rs. 40,000 was reintroduced by Finance Minister Arun Jaitley in the 2018 budget, replacing transport allowance and medical reimbursement. For example, if an employee''s gross salary is Rs. 6,00,000, with a standard deduction of Rs. 50,000, income tax is calculated on Rs. 5,50,000.

For the FY 2022-23, the standard deduction under the old regime is Rs. 50,000. The Budget 2023 allows a standard deduction of Rs. 50,000 under the new tax regime, applicable from the financial year 2023-24.

How to Manage Deductions for Error-Free Payouts?

Managing deductions carefully ensures maximum benefits for employees. Here are some methods to achieve error-free payouts:

• Integrated Payroll Software: Implement HR and payroll software to handle complex calculations, tax compliance, and various deductions. This reduces manual errors and ensures accurate payouts by automating deductions related to income tax, EPF, medical premiums, etc.
• Detailed Document on Deduction Policies: Upload well-documented deduction policies onto the employee self-service portal, specifying types of deductions, calculation methods, and legal provisions.
• Update Employee Records: Ensure all employee records are current, including promotions, PF contributions, and health insurance premiums.
• Synchronize Payroll Software with Latest Tax Laws: Keep the payroll system updated with new tax laws and regulations following budget announcements.
• Plan Regular Audits: Conduct regular audits of payroll and deduction processes to identify and rectify any flaws.
• Employee Self-Service Portals: Provide employees access to self-service portals to view their payroll information and deductions, ensuring they stay informed about deduction policies.
• Statutory Compliances: Verify that all deductions comply with statutory regulations, such as income tax and PF contributions.
• Error Resolution Procedure: Establish a clear workflow for correcting errors, including responsible individuals, procedures, compliance requirements, and other necessary details.
• Training and Upskilling: Upskill finance and HR teams through training programs to ensure they understand the complexities of deduction laws and regulations.

Summing Up

In summary, salary deductions significantly impact employees'' financial scenarios. They are essential not only for government compliance but also for providing financial security. Ensure proper deductions, educate employees about their benefits and official policies, and maintain compliance with regulations to offer financial stability.

Use end-to-end payroll software to manage deductions efficiently and ensure accuracy down to the last penny.

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