Calculation of Taxable income
Income tax is the tax you pay on your income. Income Tax is levied on a person who was in India for 182 days during the previous tax year or the person who was in India for at least 60 days during the previous tax year and for at least 365 days during the preceding 4 years will be taxed.
A persons total income is divided into 5 heads of income. They are:
- Income from salaries
- Income from house property
- Profit and gains of business or profession
- Capital gains
- Income from other sources
Salary includes wages, pension, gratuity, fees, commission, perquisites, provident fund contribution, leave encashment, Central Governments contribution to pension and compensation received for a service.
Calculate Taxable Income on Salary
It is essential to gather all the details required to file your income tax returns before computing your taxable income on salary. You will then have to calculate your total taxable income, followed by the calculation of final tax refundable or payable. To calculate the final tax, you will have to use the applicable tax rates before subtracting taxes already paid through advance tax or TCS/TDS from the tax amount due.
The income tax regulations allow individuals to derive income from five sources, viz. Income from Salary, Income from Business or Property, Income from Capital Gains, Income from House Property, and Income from Other Sources. Each income derived by an individual must fall under one of the aforementioned categories.
Following is the procedure for the calculation of taxable income on salary:
- Gather your salary slips along with Form 16 for the current fiscal year and add every emolument such as basic salary, HRA, TA, DA, DA on TA, and other reimbursements and allowances that are mentioned in your Form 16 (Part B) and salary slips.
- The bonus received during the financial year must be added for the income that is being calculated.
- The total is your gross salary, from which you will have to deduct the exempted portion of House Rent Allowance, Transport Allowance (for which the maximum exemption is Rs.19,200 per year), Medical reimbursement (for which the maximum exemption is Rs.15,000), and all other reimbursements provided the actual bills in respect of the expenses incurred.
- The result is your net income from salary.
Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual salary. Salary includes:
- Basic Salary or the fixed component of salary as per the terms of employment.
- Fees, Commission and Bonus that the employee gets from the employer
- Allowances that the employer pays the employee to meet his personal expenses. Allowances are taxed either fully, partially or are exempt.
Fully taxable allowances are:
Dearness allowance paid to the employees to meet expenses due to inflation.
City Compensatory allowance paid to those who move to big metros like Mumbai, Delhi, Chennai, where the standard of living is higher.
- Overtime allowance paid to the employee who works over the prescribed hours.
- Deputation allowance and servant allowance.
Partly taxable allowances are:
- House Rent Allowance:If the employee stays in his own house then the allowance is fully taxable. The allowance exemption is the least of
- The actual house rent allowance
- If he pays additional rent above 10% of his salary
- If the rent is equal to 50% of his salary (metros) or 40% (other areas).
- Entertainment allowance(except for Central and State Government employees).
- Special allowances like uniform, travel, research allowance etc.
- Special allowance to meet personal expenses like childrens education allowance, children hostel allowance etc.
Fully exempt allowances are:
- Foreign allowance given to employees posted abroad.
- Allowances of High Court and Supreme Court Judges.
- United Nations Organisation employees allowances.
Perquisites are payments received by employees over their salaries. They are not reimbursement of expenses. Some perquisites are taxable for all employees, they are:
- Rent free accommodation
- Concession in accommodation rent
- Interest free loans
- Movable assets
- Club fee payments
- Educational expenses
- Insurance premium paid on behalf of employees
Some are taxable only to specific employees like directors or those who have substantial interest in the organisation, they are taxed for:
- Free gas, electricity etc. for domestic purpose
- Concessional educational expenses
- Concessional transport facility
- Payment made to gardener, sweeper and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax are:
- Medical benefits
- Leave travel concession
- Health Insurance Premium
- Car, laptop etc. for personal use.
- Staff Welfare Scheme
Retirement benefits are given to employees during their period of service or during retirement.
- Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the category of the employee.
- Gratuity is given as appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
- Leave salaries tax depends on the category of the employee. The employee may make use of the leave or encash it.
- Provident fund is contributed by both employee and employer on a monthly basis. At the retirement, employee gets the amount along with interest. Tax treatment is based on the type of provident fund maintained by the employer.