Income Tax Computation for FY 2019-20

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According to the Income Tax Act, 1961, every salaried person has to pay a certain sum of their salary amount as a tax to the country.

The Income Tax Act was enacted in the year in 1961 to consolidate and amend the law relating to tax. This whole act consists of a long list of various sections which state different perspective of taxations and its various deductions.

There are different sections sections such as Section 80D, section 80DD, Section 80 C and many more between Section 80 C of section 80U which provides deductions on various investments such as life insurance policies, Provident Funds, etc.

Computation of Income Tax

The most important step while filing your income tax return is to collect all the information required to file the ITR. The next step is to compute your taxable income. 

Once you have determined your computable tax income, the tax slab under which your income falls will help you figure out the exact amount of tax owed by you. In case the amount of tax owed by you is less than the TDS paid by you, you are entitled to get a refund from Indian Revenue Services (IRS).

The final amount of tax payable/refundable is calculated by applying prevailing tax rates and then subtracting the amount of already paid taxes by you.

Five heads of Income eligible for Income Tax Computation:

According to Section 14 of the Income Tax Act, an individual can have several modes of income. You need to classify your income properly to avoid any confusion and get a hassle-free computation.

The Income Tax Act has categorized the sources of income under different headings to help the taxpayers calculate their income accordingly.

The five main headings of income according to Section 14 of the Income Tax Act for the computation are:

  1. Salary Income
  2. House Property Income

iii. Income from Profits & Gains of Business/Profession

  1. Capitals Gains’ Income
  2. Income from Other Sources

Various Tax Deductions on Income from Salary

Deductions mean that you have to pay some amount less in your tax because of certain tax benefits. The deduction scheme comes under Section 16 of the Income Tax Act.

It majorly comprises of two deductions;

  • Entertainment Allowance [SEC.16 (ii)]: this includes deductions allowances by the way an employer provides entertainment allowance. This deduction is only for government employees including central government and state governments.

No deduction is provided to non-government employees.

  • Professional Tax [SEC.16 (iii)]: professional tax or taxes on employment levied by a state are allowed as deduction only when it is actually paid by the employee during the previous year (deduction on pain basis)

If the professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction under section 16.

Income Tax Slabs in India

After calculations of net income by applying various deductions, the resultant amount is called taxable income. There is a slab available which provides applying a percentage of tax accordingly to your respective income levels. If the income is lower than the taxation limit, then the salaried person is exempted from paying any tax.

Taxpayers are broadly classified into two types;

Individual and HUF (Hindu Undivided Family): includes male, female up to 60 years, senior citizens up to 80 years and super senior citizen is more than 80 years.

Business entities: it includes domestic companies, firms, local bodies, co-operative societies, foreign companies, etc.

Individual & HUF Taxpayers For individual and HUF (senior citizen) For individual and HUF (super senior citizen) Business entities
Tax slab Tax Rate Tax slab Tax Rate Tax slab Tax Rate Tax slab Tax Rate
Up to INR 2.5 lakhs nil Up to INR 3 lakhs nil Up to 5 lakhs nil Up to INR10, 000 10% of exceeded amount
2.5-5 lakhs 10% of exceeded amount 3-5 lakhs 10% of exceeded amount 5-10 lakhs 20% of exceeded amount 10, 000- 20,000 20% of exceeded amount
5-10 lakhs 20% of exceeded amount 5-10 lakhs 20% of exceeded amount Above 10 lakhs 30% of exceeded amount Above 20, 000 30% of exceeded amount
Above 10 lakhs 30% of exceeded amount Above 10 lakhs 30% of exceeded amount        

Various Allowances which are taxable

City Compensatory Allowance:

The intention of City compensatory allowance is to compensate the employees for the higher living cost and expenses in cities. It is taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or special circumstances.

Entertainment Allowance:

This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. This act gives a nominal amount of deduction towards government employee in name entertainment allowance i.e Rs.5000, one-fifth of the basic salary or actual amount received as allowance.

Dearness allowance:

It is fully taxable and is of two types;

Dearness allowance which is performing part of the salary for computation of retirement benefits as per the terms of employees.

Dearness allowance which is not forming part of the salary for computation of retirement benefits as per the terms of employees.

  • Medical allowances
  • Lunch allowance/tiffin allowance/cash allowance/deputation allowance
  • Overtime allowance/servant allowance/warden allowance/family allowance

How to Calculate Income Tax on Salary with Example

How to calculate income tax of a salaried person is very easy. Let us consider the following example.

Example 1) Mr. Goyal (non-government employee) furnishes the following particular for his remunerations from Delta Pvt. Ltd. With the following details;

Basic Salary:  INR 25,000 per month

Dearness Allowance (forming part of salary for retirement benefits):  INR 4500 Per month    

Entertainment Allowance: INR 2,250 per month

He paid INR 3,500 towards professional tax to state government. Now we will compute his income and respective tax.

Computation of taxable salary of Delta Pvt. Ltd

Basic salary=                     25,000*12 =  3, 00,000

Dearness Allowance =        4, 5000*12 =    54,000

Entertainment Allowance = 2,250*12 =        27,000

Total gross salary = basic salary + dearness allowance + entertainment allowance = 3, 81,000

Deductions = (as per SEC. 16 (iii)) professional tax = 3, 81,000 - 3,500

Net Income = 3, 77,500

Income tax as per the income tax slab in India

Up to INR 2, 50, 000  = NILL

BETWEEN INR 2, 00, 000 – 5, 00, 000  = 10% on net income

Income tax on above net income = 10% (3, 77,500)

                                                = INR 37, 750

Example 2) MR. Bajaj receives the following emoluments during the previous year ending 31.03.16.

Basic salary:   INR 1, 00, 000 per annum

Dearness Allowance (forming part of salary for retirement benefits):    INR 15, 000 Per annum   

Entertainment Allowance =  INR 4,000 per annum

Commission=  INR 10, 000 per annum

He paid INR 3,000 towards professional tax to state government (INR 2, 000 paid by the employer). Now we will compute his income and respective tax.

He has no other income and is a state government employee.

Computation of tax payable (Income tax calculation sheet)

Basic Salary = INR 1, 00, 000

Dearness Allowance = INR 15, 000

Commission =INR 10, 000

Entertainment allowance  = INR 4, 000

Professional Tax = INR 2, 000

Gross salary = Basic Salary + Dearness Allowance + Commission + Entertainment allowance + Professional Tax  = INR 1, 31, 000

Deductions according to SEC. 16 (ii)

Entertainment allowance    = INR 4, 000

Statutory Limit                  = INR 5,000

20% of the basic pay        = INR 20, 000

Deductions according to SEC. 16 (iii)

Professional tax paid by employer  = INR 2, 000

Professional tax paid by employee   = INR 1, 000

Total                                         = INR 3, 000

Taxable salary = gross salary - (deduction under Section 16 (ii) + deduction under Section 16 (iii))

  = 1, 31, 000 – (4, 000 + 3, 000)

  = INR 1, 24, 000

He doesn’t have to pay any tax since his taxable salary is below INR 1.25 lakhs.

Final note

It is important to declare various investments at the beginning of assessment year in order to avail proper deductions. Proper investments and knowing basics of tax, its deductions, it returns, etc. are an important key to build a proper wealth foundation.

Reclaiming the wrong tax payments or excess tax payments from IT department is also important. Defaulter of tax or providing falsehood information can lead to legal actions taken and payment of heavy penalties.

Income tax fraud arises when a company or a person does some of the following;

  • Avoiding to fill income tax return intentionally
  • Willfully fail to pay the tax dues
  • Intentionally does not report total incomes per year
  • Prepares falsification of tax return
  • Claims which are false or fraud

IRS usually finds the fraudulent person or who willfully tries to invade tax laws. Payments have to be made by any mode which can be either cash or check. 

Now every person aspires to live a luxurious life. Having big homes, expensive cars, children studying in major universities and living a lavish lifestyle is a dream for everyone. But because of taxation rules we often have to pay a huge sum according to our salary income levels. We often choose different tax deduction benefits to escape paying less.

The difficulty is that everyone does not know these details and hence tend to get confused. Even though one can make use of income tax calculator to calculate the taxable income  but it is good to know things.

FAQs - on Income Tax Computation:

Q. What is income tax computation?

Income tax computation shows the tax adjustments made to the accounting profit to get the amount of income that would be chargeable to taxes. Tax adjustments primarily include non-taxable receipts, non-deductible expenses, capital allowances and further deductions.

Q. How is the taxable income calculated?

To calculate your taxable income, first of all, you need to understand how your total taxable income is computed.  Once you have an idea of your total taxable income, you can go ahead to calculate your taxable income by applying the prevailing tax rates and then deducting the taxes you’ve already paid such as TCS,  TDS or Advance tax. 9504821082 

Q. How do you calculate tax?

Your tax is calculated after applying all deductions like HRA, interest on a home loan (if any), LTA, etc. are adjusted from your total income (your gross salary + income from other sources).

After doing all this calculation, your income tax is calculated based on the slab your income falls under + 3% Cess.

For instance, if your income falls under the tax slab of Rs 5 lakhs to Rs 10 lakhs, you will get an exemption till Rs 2.5 lakhs. For an income between Rs 2.5 lakhs to Rs 5 lakhs, you will be taxed 5% and for your income between Rs 5 lakhs to Rs 10 lakhs, the tax will be levied at 20% + 3% cess.

Q. How is income calculated?

Every single penny you have earned in a financial year is your income, whether it’s from a salaried job, business or other sources such as hobby income, alimony, etc.

Q. How can I reduce my taxable income?

  1. By restructuring your salary
  2. Utilizing Section 80C to receive maximum benefits by investing in different mediums such as PPF, NSC, Life Insurance Premiums, ELSS, etc.

iii.    Options other than Section 80C such as Section 80D (exemption for Rs 15,000 for medical insurance) & Section 80G (exemption for donations)

  1. HRA (House Rent Allowance) exemptions (for salaried individuals)
  2. Home loan exemption
  3. Leave Travel allowance

vii.    Tax on Bonus received from your employer

viii.    HUF (Hindu Undivided Family)

  1. Buy House with your spouse/parents/siblings as co-owner to claim the tax exemption of Rs 1 lakh for every individual

Q. What is taxable income example?

Few of the examples of taxable income are wages, bonus, salary, annuity, discounts, dividends, alimony, employee awards, fee, and interest and hobby income.

Q. What is your taxable income?

Your taxable income is the part of your income on which you calculate your final tax liability. Your taxable income majorly includes the money you earn by working a salaried job along with other resources.

Q. How is taxable income determined?

Your taxable income is determined by taking into account every penny of income you have earned in the previous financial year. This includes gifts, employment bonus, employment compensation, inheritances, independent contracting work, large barter exchanges, and prizes.

Q. How do I calculate my income tax rate?

Your income tax rate is determined based on the tax slab your income falls under:

Income Tax Rates for taxpayers less than 60 years of age in FY 2018-2019 and FY 2017-2018:

Income Slab Income Tax Rate
Up to Rs.2,50,000 No tax
Rs.2,50,000 - Rs.5,00,000 5%
Rs.5,00,000 - Rs.10,00,000 20%
Rs.10,00,000 and beyond 30%

Q. What are the tax brackets for 2018?

Different tax brackets applicable for 2018 are:

Income Slab Income Tax Rate
Up to Rs.2,50,000 No tax
Rs.2,50,000 - Rs.5,00,000 5%
Rs.5,00,000 - Rs.10,00,000 20%
Rs.10,00,000 and beyond 30%

Q. How do you figure your yearly income?

Your yearly income is basically your gross salary that is mentioned in your job offer letter without applying statutory deductions like TDS, ESI, etc.

Q. How do you calculate overtime?

You can calculate your overtime by determining your hourly pay rate. It is the total salary paid for a fixed time period divided by the number of hours worked by you. Finally, multiply the hourly pay rate by 1.5.

Q. How can I legally not pay taxes?

It is said that one can’t have the best of both the worlds, specifically when it’s about income and taxes. The more you earn, the more you would have to pay taxes. However, this is not completely true as there are certain incomes that come with zero tax liability.

  1. Receipts from HUF (Hindu Undivided Family)
  2. Interest income on savings bank

iii.    Shares from a partnership firm

  1. Long-term capital gains
  2. Allowance for foreign services
  3. Income from gratuity

vii.    Amount received under voluntary retirement

viii.    Scholarships & awards

Q. What reduces taxable income?

You can reduce your taxable income by signing up for the below-enlisted methods:

  1. Save on HRA (House Rent Allowance)
  2. Using Tax-saving Investments

iii.    Using Tax-saving insurance

  1. Allowances
  2. Loans
  3. Donations

Q. What income is not taxable?

Section 10C of the IT Act lists the following income sources that are not considered taxable:

  1. Income from HUF (Hindu Undivided Family)
  2. Income from Agriculture

iii.    Income from partnership firm

  1. Income from leave encashment, Gratuity, voluntary retirement compensation, etc.
  2. Income to an employee if he leaves the country under certain conditions
  3. Amounts received in the form of bonuses & claims from insurance policies

vii.    Income from Provident funds

viii.    House rent allowance (HRA) from the salary

  1. Income from capital gain bonds & other such debt instruments.
  2. Income from dividends via mutual funds.

Q. What is considered taxable income?

Income falling into the following slabs is considered taxable income in India:

Income Slab Income Tax Rate
Up to Rs.2,50,000 No tax
Rs.2,50,000 - Rs.5,00,000 5%
Rs.5,00,000 - Rs.10,00,000 20%
Rs.10,00,000 and beyond 30%