Kumari Palany & Co

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How your income from salaries is taxed?

Posted on: 18/Jan/2017 12:16:05 PM
Any income received by an employee is taxed under the head Income from Salaries.  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 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.

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. 
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.
 
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 s 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/-.

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.