Understanding Salaried Income and Its Tax Computation

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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.

The various deductions 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.

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.

The deductions include either amount actually received or INR 5,000 or 20% of basic salary.

  • 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 INR

10, 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

 

 

 

 

 

Current News about Income Tax Rates and Slab Rates

Although the income tax slab rates have not changed in current union budget, there have been plenty of suggestions made to finance minister from public to restructure income tax slabs which provide higher IT slabs or exemptions on earned interests.

There have also been requests to increase medical reimbursement.

The announcement of providing no subsidized LPG for consumers with annual income of INR 1, 00, 000 was always on high rate last year.

There have been no tax targets set by Prime Minister yet for future tax collections; the main aim is to increase the number of taxpayers and catch the non-payers.

There has been some exemption for salaried people whose income less than INR 5, 00, 000. This will benefit around 2 crore taxpayers.

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.

  • 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 proper deductions. Proper investments and knowing basics of tax, its deductions, it returns, etc. are an important key to building 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
  • Tax dues to willfully fail
  • 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 various tax deduction benefits to escape paying less.

The difficulty is that everyone does not know these details and hence tend to get confused. Although Income Tax calculator is also available but it is good to know things. Do not worry we provide the article consisting of everything you need to know about income tax, its salary deductions and calculation.

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