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 -
In calculation of taxation on your salary income a lot of tax benefit is given on the amount of money spent on planning for retirement. These benefits are known as retirement benefits. Let’s discuss all retirement benefits in details:
- Leave Encashment Exemption : As an employee you should always check with the employer regarding their leave encashment policy. The policy varies from company to company, some allow you to carry forward the leave days and some give you the option of encashment of leave days. The amount that you receive comes under the taxable slab. There are certain exemptions where no tax is charged on the amount you receive by encashing the leaves that are not taken. These instances include the following:
- Central and State Government employees are not charged tax on the leave encashment amount.
- In case of non-Government employees exemption is allowed for the lowest of the following amounts:
- Average salary of the last 10 months before retirement
- Leave encashment amount received provided it is limited to INR 3 lakhs
- Amount equalling the salary for the earned leaves
Taxable amount would be the leave encashment received after deducting the tax exemption using the above-mentioned rules.
- Advance Salary : Under Section 89(1) tax exemption is given in case if you have received a certain portion of your total salary in advance, or got a family pension in advance.
- VRS (Voluntary Retirement Scheme) : Under section 10 (10C), exemption is given on the amount received at the time of voluntary retirement if certain criteria is followed. These criteria state that the compensation amount should be received on voluntary retirement, it should not exceed INR 500000, the receipt should follow the rule 2BA, and you should be an employee of an authority which is formed in compliance with certain rules. The employees who have already taken benefit under section 89 are not eligible for this exemption.
- Pension : Any amount received under pension comes under the tax slab in the year that the pension is received. Pension is usually paid in the form of annuities. You can also commute 1/3rd of the accumulated pension and receive the amount in lump sum. This lump sum amount would be tax-free under Section 10(10A) but the annuity payments would be taxed in your hand at your tax slab when it is paid.
- Gratuity : Gratuity is a benefit given by the employer to its employee at the time of retirement. When you complete 5 years in the company then you would be entitled to receive gratuity from the employer. But the amount is received only at the time of resignation or retirement. The tax calculation is different and it depends on whether you are covered under the Gratuity Act or not. The amount received by a family member in case of your death is exempted from the tax slab.
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 -
Income Tax Rate Up to INR 2,50,000 No Tax INR 2,50,000 – INR 5,00,000 5% INR 5,00,000 – INR 10,00,000 20% INR 10,00,000 and above 30%
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.
Frequently Asked Questions
Q- Q- Is pension a part of the salary?
Ans: If the sale price exceeds INR 50 lakh , then TDS @ 1% should be deducted under section 194IA.
Ans: Pension is included in your salary. Under the contract of employment pension is covered up and is taxed under the heading of salary. But if the pension is paid out of any insurance product then it is placed under the heading of income from other sources.
Q- What does the term perquisites mean and what is the process of taxation?
Ans: Perquisites are the benefits given to you because of your position. This amount is given beside the salary amount for example vehicle for your commute, accommodation which is rent free etc. Depending on the nature of the perquisites it is decided whether to tax it or not. Rule 3 of the Income tax defines the valuation of perquisites. No tax is deducted by the employer from your salary in case of calculation of the tax amount on the perquisites.
Q- Are the advance salary taxed?
Ans: Yes the advance payment of the salary is taxed.
Q- What sort of loss can be set off from the salary income?
Ans: Loss from house property can be set off from the income from the salary. But loss from the business cannot be set off.
Q- How can I make rental benefit if I live with my parents?
Ans: You can get into a housing rental agreement with your parents where every month from your salary you pay them rent. This way you will be able to take the benefit of the rent in calculation of the taxable income. However, your parents will have to show the rent amount in their income tax return file under the heading ‘income from other sources’. This amount is then taxed in your parents’ returns.
Q- What should I do if my company does not charge me any TDS amount?
Ans: If your company does not deduct tax at the source then depending on the amount of the income and the taxation slab you should compute the tax amount and pay it to the government.