The moment the financial year comes to an end all the individuals start bothering about their tax returns. It is very important to know about the tax system, the income calculation and the slab rates so that the calculation of the tax amount becomes simpler. There are five heads of income –
- Income from salary
- Income from house property
- Income for capital gains
- Income for business or profession
- Income from other sources
Income from salary is the first head of income which is further subdivided into other components. You would first need to understand the components of the salary income and then you can find out the correct tax liability. To understand the salary you need to first understand the different components of the pay slip. Then you need to find out the difference between the CTC and take home salary, the retirement benefits deducted from the salary and then you can calculate tax.
So, let’s start with the pay slip components. These components include the following -
- Basic Salary : This is considered to be the fixed amount of your pay slip which is the basic pay which your employer promises you apart from the other salary benefits. The basic salary is also used to calculate the contribution to the provident fund (EPF) as the contribution is expressed as a part of the basic salary.
- Dearness Allowance : Dearness allowance (DA) is an allowance which is allowed to you for factoring in inflation which increases the cost of living.
- Housing rent allowance : If you are employed and live in a rented apartment or house you can claim HRA to lower your tax amount. There is an option to partially or completely exempt the amount of rent paid from the taxable income. You need to follow the guidelines set by the income tax department in the computation of the HRA amount.
- Leave Travel Allowance : Under LTA you can apply for exemption from taxation for the costs incurred while travelling within India. This exemption can be availed on the shortest distance during the trip. The allowance claim also includes cost for spouse, children and parents if travelling together. To avail the exemption you need to provide all the related documents associated with travel and so you need to take a trip before making the claim. LTA is allowed twice in a block of four years.
- Bonus : The bonus declared by the company differs from one company to another. Generally, performance bonus is given once or twice a year. The bonus comes under the tax slab as it is an income. 100% of the bonus amount is taxed.
- Employees’ Provident Fund contributions : The Government of India has initiated the social security scheme for salaried individuals where both the employee and the employer contribute 12% of the basic salary and dearness allowance on a monthly basis towards the Employees’ Provident Fund (EPF). The amount attracts 8.55% of the interest on the accumulated amount. All the companies employing above 20 employees need to contribute towards the PF amount under the EPF ACT 1952. The EPF contributions create a retirement corpus for you when you retire.
- Standard deduction : Medical allowances and the conveyance allowance have been replaced by standard deduction in the 2018 budget. Now you can claim INR 50000 from your total salary income as standard deduction thereby reducing the amount of taxable income.
- Professional Tax : This tax is levied by the State Government and is similar to the income tax which is levied by the Central Government. The maximum amount that can be levied is INR 2500. This is usually deducted by the employer only and deposited to the State Government.
Let us now understand the difference between the CTC (Cost to Company) and take home salary. The company may entitle you with other benefits like food coupons, pick and drop facility, rent free accommodation, gratuity, etc. These benefits add up and form the total amount of hiring you for the company which is known as cost to the company. So, the CTC would include the salary paid every month, the retirement benefits which are payable when you retire or leave the organization and non-monetary benefits like free meals, free transport, etc.
Compared to CTC, the basic take home pay would include the gross salary paid to you after deducting the tax-free allowances like HRA, LTA, etc., and the income tax payable by you.
The salary also includes the retirement benefits which are payable to you. Let’s understand these benefits -
Income Tax calculation
After you calculate the taxable income from your salary, you can calculate your tax liability. However, the following should be kept in mind while calculating tax -
- Salary income is not the only taxable income that you have. There are various sources that also contributes towards income besides salary for example it can include income from property, stocks, interest etc. all these income are added together and then on the accumulated amount tax is charged depending on the slab that the income falls in.
- You also get deductions and exemptions from the gross taxable income calculated from all the heads of income. You have to deduct such tax-free deductions and exemptions to arrive at the net taxable income.
- The net taxable income would then be taxed as per the given slab rates -
|Up to INR 2,50,000
|INR 2,50,000 – INR 5,00,000
|INR 5,00,000 – INR 10,00,000
|INR 10,00,000 and above
The above table is applicable for taxpayers up to 60 years of age. In case of taxpayers between the age group of 60 years to 80 years, the tax exemption limit is INR300000. For taxpayers above the age of 80 years tax exemption limit is INR 500000. 4% of the total amount of tax calculated is charged as the health and education cess.
- Tax deduction at source on the salary : Every employer deducts a certain amount of money from your basic salary and pays it to the tax department on your behalf. The employer calculates the tax amount on your basic salary and investments made, deducts TDS from your salary. The employer will provide you with the TDS certificate also known as form 16 containing all the details about the TDS deductions. These deductions should be factored in to know the tax liability
- FORM 16 : Form 16, typically known as TDS certificate, contains all the information regarding the tax deductions made by the employer from your salary on a monthly basis during the given financial year. The form is typically divided in two parts. Part 1 contains details about the employer like the name, address, Pan Details etc. Part 2 contains details about the salary paid, deduction, other income etc.
- Form 26AS : This form is provided by the income tax department containing details about the tax deducted on your behalf and also the amount of tax paid. The form is available on the website of the IT department.
- Deductions : Section 80 and section 10(10D) includes all the deductions that can be availed by you from your gross taxable income. By utilizing these deductions you can reduce your tax liability thus reducing the amount of the tax to be paid to the government.