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  • How do I Calculate Income Tax on Salary? [With Example]

    It is a nice feeling to get paid at the end of every month for all the effort you put in your work, but aren't you disappointed when the employer deducts higher tax? So how do you avoid the high tax deduction from your salary?

    Any income received by an employee is taxed under the head Income from Salaries. It is only taxable when an employer-employee relationship exists. The first thing one needs to know is the salary slab they fall under. Then the employee needs to submit their declaration about their proposed investments so that the employer can take them under consideration before deducting the income tax from the employee's salary. By declaring the taxes in advance you do not have to go through the lengthy process of having to file for refunds from the Income Tax Department.

    Salary includes your Gross salary, Provident Fund, Insurance, Leave pay, Gratuity , Employee State insurance and Labour Welfare Fund.

    Gross Salary:

    Gross salary is the sum total of Basic pay + Dearness allowance + House Rent Allowance + transport allowance + special allowance + other allowance.

    You can invest under the Section 80C to a maximum of Rs.1,50,000. Or if you are in a higher tax bracket, you can save Rs.45,000 in tax.

    You can make the investment in Provident Fund, Life Insurance Premium, Equity Linked Savings Scheme, Home Loan monthly instalment, National Savings Certificate, Infrastructure Bond, Pension Funds, Tuition fees and Unit Linked Insurance Plan.

    Under Section 80D , you can claim Rs.25,000 as medical expenses and Rs.30,000 can be claimed by senior citizens.

    The deductions on House Rent Allowance is the least of the following:

    • Either the actual HRA amount.
    • 50% of your basic pay if the employee is living in metro and 40% if the employee is living in a non-metro area.
    • Additional rent paid above 10% of his salary.

    While you have a house of your own, you cannot claim deductions for Home loan interest payment and rent. But some people do claim both while they are living in their own homes. If they are staying with their parents, they show that they are paying rent to their parents and claim the HRA. The other case is when you have your own house, but you stay in a rented accommodation, as the workplace is far from your home. You can then claim HRA as well as deduction for the home loan interest payment.

    Deductions on Income from Salary

    The deductions on Income from Salary falls under the Section 16 of the Income Tax Act. The deductions are:

    • Entertainment Allowance under Section 16(ii): Deduction is allowed by way of entertainment allowance given by an employer. This deduction is available only for the Government employees. The deduction is either the 1/5th of salary without including the benefits or perquisites or other allowances or Rs.5,000, whichever is lesser. The non-government employees can't avail this deduction.
    • Tax on Employment under Section 16(iii): The Professional Tax is allowed as a deduction while computing income from salaries.

    Note: The Standard Deduction from gross salary income is not allowable from the Financial Year 2005-2006.

    The total taxable income is after all the deductions are being made to the all the different heads of income.

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    Example for Calculating Income Tax from Salary:

    Let's take the example of Mr. A who is a CA and his Gross Salary is Rs.80,450, which includes:

    Basic= 50000 + HRA=20000 + Travel allowance=1000 + Child's educational allowance=200 + Medical allowance=1250 + other allowance=8000

    The deductions allowed will be Travel allowance=1000 + Child's educational allowance=200 + Medical allowance=1250 provided that Mr. A submits medical bills worth Rs.1250. Mr. A has a house of his own so the HRA is not deducted. So his total exemption will be Rs.2,450.

    The taxable annual gross income will be Rs. (80,450-2,450) x 12 which is Rs.9,36,000.

    If Mr. A declares loss on House Property for the interest he is paying for the loan taken to buy his house worth Rs.1,00,000. The Gross total income will be Rs.8,36,000 (9,36,000-1,00,000).

    Mr. A declares Rs.1,00,000 as investment under Section 80C and Rs.25,000 under Section 80D, the total taxable income will be Rs.7,11,000 (8,36,000-1,25,000). This is the net taxable income. And Mr. A's income tax rate would be:

    For the first Rs,2,00,000 it is nil, for the next Rs.5,00,000 it will be 10% that is Rs.50,000. And on the balance of Rs,11,000, the tax rate is 20% amounting to Rs.2,200.

    Mr. A's total annual tax is Rs.53,766 (Rs.52,200 plus the educational cess and higher education cess that is charged at 3% which is Rs.1,566). The monthly tax that is levied on him will be Rs.4,480.50/-.

    Computation of Tax

    In the books of accounts the Computation of Tax will look like:

    Particulars Amount Amount
    Basic pay   XXXXX
    + Dearness allowance   XXX
    + Annuity   XXX
    + Bonus   XXX
    + Commission   XXX
    + Arrears of salary   XXX
    + House Rent allowance
  • Amount of HRA exempted
    + Leave travel allowance
  • Amount exempted on Leave travel allowance
    + Perquisites
    • Amount exempted
    + other allowances
    • Amount exempted
    + VRS/ Retrenchment compensation
    • Amount exempted
    + Gratuity received
  • Exempted gratuity
    + Leave encashment
    • Exempted leave encashment
    + Pension
    • Amount exempted
    + employers contribution (in excess of 12% salary of employee)   XXX
    + Interest on PF in excess of the notified amount   XXX
    Gross Salary   XXXXX
    • Deductions under the Section 16:
    Entertainment allowance   XXX
    Professional Tax paid   XXX
    Income chargeable for tax under Salaries   XXXXX

    Always remember to declare your investments at the beginning of the tax year so that the employer can make the required deductions. If you have forgotten to declare at the beginning of the year, heavy taxes will be deducted throughout the year. If you have made any investments, you can show that and claim for refund at the end of the financial year.

    Holding on to more of your money is a key to building your wealth. So, it is important to know how much tax is being deducted from your salary and you must check if there are any other deductions that needs to be included.

    News about Income Tax on Salary

    • Finance Ministry Clears Air on Income Tax Collection Targets

      Officials from the Finance Ministry have clarified that no target has been set by PM Modi to increase the income tax base to 100 million on the basis of assessment of non-farm households of the same quantum. Out of 250 million households in India, a little over 150 million were farming households.

      The direction issued by the PM was with regard to increase the number of taxpayers by taking measures against assesses who evade taxes and those who do not file. It must be noted that the number of tax assesses has grown at a rate of 10-12 percent over the last year or so. Since 2010, the number has grown from 24 million to clock 54 million in 2015.

      22nd June 2016

    • Income Tax Figures Revealed: Poor Growth For Tax Collection

      The Income Tax Department has disclosed income and tax-related figures for the last 15 years, providing important insights and information.

      Among the 10 most significant revelations is the fact that though the number of taxpayers has gone up, tax collection hasn’t registered a similar hike. In 2010-11, the growth rate of income tax collection was 18 percent, but in 2014-15 tax collection only grew by 6.7 percent compared to its previous year.

      It was also revealed that only 1 percent of the total population of the country paid tax for 2012-13, and 5,430 of those paid more than Rs. 1 crore as direct tax. There are only 3 individuals in the Rs. 100-500 crore income bracket, and they paid a total tax of Rs. 437 crore.

      3rd June 2016

    • Supreme Court says Tips are Taxable, despite not being Salary Income

      In the latest landmark ruling, the apex court cleared that tips that were received voluntarily from customers cannot be considered as salary-income and therefore the employer is not liable to withhold tax on these payments. The employees, in this case, waiters cannot claim the amount given as tips as it is not a part of the salary given by the employer. The employer plays a fiduciary role in these payments between customers and waiters. The payment directly received from customers is disbursed to the respective employer or waiter serving the customer.

      This court ruling was propelled by a matter when ITC Gurgaon was charged as assessee-in-default in a previous ruling, where tips from customers were considered as ‘profits in lieu of salary’ to waiters.

      24th May 2016

    • IT Returns for High Income Groups Set to become Complicated

      Individuals with an annual income exceeding Rs 50 lakh are likely to have a tough time filing their IT returns, for the department has made changes to the formalities associated with filing such returns. Taxpayers in this income bracket will now be expected to furnish additional details about their non-financial assets like land, jewellery, boats, bullion, etc. Additionally, income received through other means like trusts and funds are also expected to be disclosed. These details will be used to keep an eye on assets disproportionate to the income of an individual, helping the IT department regulate the structure.

      19th April 2016

    • Benefits for those Earning below Rs 5 lakh in Budget 2016

      The budget for 2016 has spelled some good news for people whose annual income is below Rs 5 lakh. The Finance Minister, Arun Jaitley, announced that tax exemption has been raised in the present Budget.

      This announcement will benefit over 2 crore tax payers. At present a salaried person having an annual income of up to or equal to Rs 5 lakh can only avail a rebate in tax equal to 100 percent of the income tax payable or Rs 2000 whichever is less. In a statement, the Finance Minister said that the ceiling of tax rebate under section 87A has been increased from Rs 2000 to Rs 5000 in order to reduce the tax burden on individuals with income upto Rs 5 lakh.

      10th March 2016


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