Learning to Calculate Income Tax Levied on Salary Income

People present their Income Declarations forms along with other required documents to pay Income tax..But, people have no idea about how to actually calculate income tax. Income Tax department is the regulating authority that decides the income tax charges that are to be paid by a person whose income surpasses the maximum amount. This further depends on the taxpayer’s residential status.

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Indian Government gets revenue from the Income Tax Department.  Further, in India tax is levied on Indian income. Wherein, tax is not levied on foreign income for those who are not the residents of India. But tax is levied on the foreign income earned by Indian residents. Income tax can be defined as the tax paid on one’s income. Income Tax is applied on someone who lived in India for about 182 days in the preceding tax year.

Along with this, tax will be levied on those who were in India for about 60 days at the time of preceding tax year and this was for about 365 days at the time of earlier 4 years. A resident’s complete income is separated into 5 parts which are known as the heads of income and thet are as follows:

  • Income from house property
  • Income from salaries
  • Capital gains
  • Profit and gains of a business
  • Income from any other means. 

Salary comprises of pension, wages, fees, gratuity, commission, provident fund contribution, perquisites, leave encashment, the contribution of the Central Government towards the pension and any compensation in exchange for a service.

What Does the Term Salary Income Means?

The term Salary implies the remuneration or the monetary benefit received by the employee from its employer for the services he or she renders for a definite period of time.

This monetary benefit is paid at fixed intervals which are primarily on monthly basis. Salary comprises of:

  •  Basic Salary is also known as the set component of salary which is based on the terms and conditions of the employment.
  •  Fees, Bonus and Commission are what the employee receives from the employer as an additional benefit.
  •  Allowances are the additional sum paid to the employee in order to help them meet their personal expenses. These allowances are exempted completely or partially. 

 Allowances those are fully taxable:

  • Dearness allowance is the sum paid to the staff in order to meet the expenses in case of inflation.
  • City Compensatory allowance is the relocation allowance which is paid to employees who relocate to metro cities such as Delhi, Mumbai, Chennai. This allowance is paid to help the employees to cope up with the higher living standards of the metro cities.
  • Overtime allowance is paid to the staff member who stretches his or her working capacity and render services for more than the regular working hours.
  • Servant allowance and Deputation allowance.

Allowances those are Partly taxable: 

  • House Rent Allowance: This allowance is completely taxable if the employee resides in his or her own house. The exemption of the allowance is the smallest amount of: 
    • The house rent allowance
    • If the employee pays an additional rent that exceeds 10% of his salaried income
    • If the employee pays a huge part of his salary as the rent i.e. 50% of the salary if residing in a metro city or 40% if in other areas.
  • Entertainment allowance (excluding the employees of Central and State Government).
  • Special allowances for instance travel, uniform, research allowance and others.
  • The special allowance that helps employees to get over with their expenses such as allowance for their children’s education, hostel allowance and several others. 
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Allowances those are completely exempted:

    • Foreign allowance paid to staff posted abroad.
    • Allowances of High Court and Supreme Court Judges.
    • United Nations Organisation employees’ allowances.

Perquisites are payments that the employees received apart from their salaries.

Moreover, no reimbursement is made for their expenses. There are few perquisites that are taxable for employees, and they are the following:

      • Rent free accommodation
      • Interest-free loans
      • Concession in housing rent
      • Movable assets
      • Club fee payments
      • Insurance premiums that are paid on employee’s behalf
      • Educational expenses

Some of the Perquisites are taxable, but are taxable only some specific employees such as directors or those who have extensive interest in the company, they get taxed for:

        • Electricity. Free gas and others that are used for household purpose
        • Concessional educational expenditure
        • Wages given to sweeper, gardener, and attendant.
        • Concessional transport facility

Other than this there are perquisites that are exempted from tax deductions. The fringe advantages on which no tax is levied are:

      • Medical benefits
      • Health Insurance Premium
      • Leave travel concession
      • Staff Welfare Scheme
      • Car, laptop etc. for personal use.
      • Retirement benefits are paid to the employees during their service phase or after the retirement.
      • The pension is paid to the user on in a lump sum amount at the time of retirement or on a monthly basis. The tax also depends on the category in which the employee falls.
      • Gratuity is paid to the employee as an admiration of the performance through the entire services which are paid to the user at the retirement time and tax is exempt up to a certain limit.
      • Leave salaries tax depends on the category in which the employee falls.  This depends on the employees- how they wish to use their leaves. They also have the option to encash it.
      • Provident fund is a contribution made by the employee as well as the organization employer every month. At the time of retirement, the employee receives the amount including the interest. Tax treatment further depends on the category of the provident fund that the employer maintains.

Deductions on Salary Income:

When it comes to deductions from salary following are the deductions available:

  • For the employees of State and Central Government, Entertainment tax is allowed. The least of the following will be the amount received:
      • Rs.5,000,
      • entertainment allowance given to the employee
      • 20% of the basic salary
        • Professional tax is the tax levied on employment which gets deducted from the salary of the employee every month. This tax is forced on every individual at state level that earns a salary.

From the Assessment Year 2006-2007, the standard deduction was not on salary income.

Calculating an employee’s Net Salary:

Using this table you can calculate the Net salary of an employee:

For calculating Total income from diverse sources, the incomes can be separated into the following categories:

    • Salaries
    • Money earned after selling a property
    • Profit earned from business
    • Money earned from capital gains
    • Money earned from other sources

All these income when put together gives you a combined income of a person.

The entitled deductions, reliefs and allowance are computed on each head.

Gross Total Income= A+B+C+D+E

Total Taxable Income= Gross Total Income- Deductions allowed from income

Total Tax Payable= Tax on Total Income- Rebates and relief allowed under Income Tax Act

The tax levied on the person is totally depended on upon the remuneration of that particular person.

The complete taxable income is accordingly segregated into 4 parts. Tax rates keep on changing every year and here we will discuss the tax calculated for the year 2015- 2016:

1.    For a person falling under the age slab of fewer than 60 years; the total taxable income will be:

      • For income till Rs.2.5 Lakhs: Tax is not levied.
      • For income falling under the slab of Rs.2.5- Rs.5 Lakhs: 10% of the sum Rs.2.5 Lakhs is charged.
      • For income falling under the slab Rs.5 – Rs.10 Lakhs: Rs.25,000 + 20% of the amount more than Rs.5 Lakhs is levied as tax benefits.
      • For income more than Rs.10 Lakhs: Rs.1,25,000 + 30% of the sum above Rs.10 Lakhs is levied. 

2.    For a person is more than 60 years of age but less than 80 years; the total taxable income will be:

      • For income till Rs.3 Lakhs: No Tax is levied.
      • For income falling under Rs.3 – Rs.5 Lakhs: 10% of the sum above Rs.3 Lakhs is levied as tax.
      • For income till Rs.5 – Rs.10 Lakhs: Rs.20,000 + 20% of the amount above Rs.5 Lakhs is levied as tax. 
      • Income that surpasses Rs.10 Lakhs: Rs.1,20,000 + 30% of the amount above  Rs.10 Lakhs is levied as tax.

3.    For a person of 80 years and above; following is the taxable income:

      •  No tax is levied till Rs.5 Lakhs (taxable income).
      •  For taxable income ranging from Rs.5 – Rs.10 Lakhs: 20% of the sum that exceeds Rs.5 Lakhs is levied.
      •  If the taxable income exceeds Rs.10 Lakhs: Rs.1,00,000 + 30% of the sum exceeding Rs.10 Lakhs is levied as a tax.

Along with these tax rates, a surcharge is also charged with people. Plus, an education cess of 2% is levied on the entire tax as well as the surcharge sum.

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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