Income tax on Salary – How to Calculate income tax on salary & know about the allowances and Deduction applicable on Gross Salary?

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Complete Guide for Income Tax on Salary

Income tax on salary is the amount to be paid on the income of any individual. Income tax will be applicable to the person who was present in India for 182, or at least 60 days in the previous tax year or who was in India for 365 days for 4 years.

Calculation of the Income tax on Salary

It is very important to know all the details required for income tax filing before calculating the income tax on salary. Followed you have to calculate every aspect to know the exact amount of the salary that will be taxed, with the deductions and the final refundable taxes. First, you need to calculate the final tax, and then subtracts the advance taxes already paid or TCS/ TDS from the due tax amount. The income tax authorities allow the taxpayer to calculate income from 5 sources as follows:

  1. Salary
  2. Business/ property
  3. Capital gains,
  4. House property
  5. Other sources

Procedure to calculate the taxable income

  • Along with all the salary slips collect Form 16 fo the current year and add every category/ payment option such as basic salary, HRA, DA, TA, PF, ESIC and other reimbursement allowances mentioned in salary slips & Form 16 B
  • The bonus earned during the current year
  • The total gross salary is the total taxable income after deducting the house rent, transport allowance (the maximum exempted amount is Rs. 19,200 per year), Medical allowance (maximum amount is Rs. 15,000) and all other bills that are applicable for the reimbursement.

For taxpayer under 60 years of age:

Net Income Income tax rate Education Cess Secondary & higher education cess
Up to Rs. 2.5 Lakh Nil Nil Nil
Rs. 2.5 Lakh to Rs. 5 Lakh 5% 2% of income tax 1% of income tax
Rs. 5 Lakh to Rs. 10 Lakh Rs. 25,000 + 20% 2% of income tax 1% of income tax
Above Rs 10 Lakh Rs. 1,12,500 +30% 2% of income tax 1% of income tax

Taxpayer between 60-80 Years of age

Net Income Income tax rate Education Cess Secondary & higher education cess
Up to Rs. 2.5 Lakh Nil Nil Nil
Rs. 2.5 Lakh to Rs. 5 Lakh 5% 2% of income tax 1% of income tax
Rs. 5 Lakh to Rs. 10 Lakh Rs. 10 ,000 + 20% 2% of income tax 1% of income tax
Above Rs 10 Lakh Rs. 1,10,000 +30% 2% of income tax 1% of income tax

Taxpayer above 80 Years of age

Net Income Income tax rate Education Cess Secondary & higher education cess
Up to Rs. 5 Lakh Nil Nil Nil
Rs. 5 Lakh to Rs. 10 Lakh 20% 2% of income tax 1% of income tax
Above Rs 10 Lakh Rs. 1,,000 +30% 2% of income tax 1% of income tax

However, in addition to the above the Finance Minister Nirmala Sitharaman, in the budget 2020 announced a new optional Income tax slab which can be alternatively used instead of the above-mentioned slabs.

New Income Tax Slab FY 2020-21

Income Tax Slab Income Tax Rate
Up to Rs.2.5 Lakh Nil
Rs.2,50,001 to Rs.5,00,000 5% of the income above Rs. 2.5 Lakh +4% Cess
Rs.5,00,001 to Rs.7,50,000 10% of the income above Rs..5 Lakh +4% Cess
Rs.7,50,001 to Rs.10,00,000 15% of the income above Rs. 7.5 Lakh +4% Cess
Rs.10,00,001 to Rs.12,50,000 20% of the income above Rs. 10 Lakh +4% Cess
Rs.12,50,001 to Rs.15,00,000 25% of the income above Rs. 12.5 Lakh +4% Cess
Above Rs.15,00,001 30% of the income above Rs. 5 Lakh +4% Cess

Let’s understand the new tax calculation, announced on 1 February 2020, better with an example:

Components A B C D E F
Annual Salary (Rs.) 2.5 Lakh 5 Lakh 7.5 Lakh 10 Lakh 12.5 Lakh 15 Lakh
Computation of tax on the gross total income
Up to Rs.2.5 Lakh Nil Nil Nil Nil Nil Nil
From Rs.2,50,001 to Rs. 5 Lakh Nil 12,500 12,500 12,500 12,500 12,500
From Rs.5,00,001 to Rs.7.5 Lakh Nil 25,000 25,000 25,000 25,000
From Rs.7,50,001 to Rs.10 Lakh Nil 37,500 37,500 37,500
From Rs.10,00,001 to Rs.12.5 Lakh Nil 50,000 50,000
From Rs.12,50,001 to Rs.15 Lakh Nil 62,500
Above Rs.15 Lakh Nil
Total Tax Amount Nil 12,500 37,500 75,000 1,25,000 1,87,500
Additional Cess (4%) Nil 500 1,500 3,000 5,000 7,500
Total payable tax amount Nil 13,000 39,000 78,000 1,30,000 1,95,000

Income tax calculator as per the new tax regime 2020-2021

If you decide to file income tax as per the new tax regime then you must keep in mind the below points:

  • There are no exemptions
  • There are no deductions

Having said that, it is very clear that the calculation of the income tax in the new tax regime will be very transparent and will be calculated as the direct percentage of the total income received.

Salary Income2020-2021

The total salary is the amount paid at fixed intervals by the employer to the employee against the services offered by the individual.

Salary Includes

  • Basic salary as per the company policies
  • Bonus, Commission, incentives received from the employee
  • Allowances are given to the employee to meet the personal requirements

Completely Taxable Allowances

  • Dearness Allowance is given to the employees to meet the market inflation
  • City Compensatory allowances paid to an employee for moving to metro cities
  • Overtime allowances
  • Deputation Allowances
  • Servant Allowances

Partially Taxable Allowances

  • House Rent Allowance
  • Entertainment allowances (except for State & Central Government employees)
  • Uniform, Travel, Research allowance, etc.
  • Special allowance for children education, children hostel allowance

Fully Exempt Allowance

  • Foreign allowance for employees posted abroad
  • Allowances for High court & Supreme court judges
  • United Nation Organisation employee allowance

Perquisites payment received by employees. Some are listed below:

  • Club fee payments
  • Rent free accommodation
  • Concession in accommodation rent
  • Movable assets
  • Educational expenses
  • The insurance premium paid on behalf of employees
  • Interest-free loans

Some expenses are taxable only  to employees designated at a higher position like directors etc are:

  • Free Gas, electricity, etc. for domestic help
  • Educational expenses
  • Transport facility
  • Payment made to servants & domestic help

The benefits that are exempted from the income tax are

  • Medical benefits
  • Leave travel concession
  • Health Insurance Premium
  • Car, laptop, etc for personal use.
  • Staff Welfare Scheme

Retirement benefits

Retirement benefits are provided to employees during the service time or after retirement.

  • Pension is given to employees either on a monthly basis or yearly lump sum.
  • Gratuity is given to employees who work in an organization for quite a long time. The amount is exempted up to a certain limit.
  • Earned leaves depend on the category of the employee.
  • In case, of provident fund, the complete amount is given to the employee after retirement. The interest is decided as per the terms maintained by the employer.

Income tax deductions for salaried employee

The budget of 2018 announced by FM Arun Jaitley, was not focussed on the salaried category employees. It has not affected section 80C in the first, but with the later amendments, some changes were made. FM announced a proposal to re-establish the standard deduction amounting to Rs. 40,000. The government then negated the medical & transport allowances from the tax slabs. These deductions acted as an additional income exemption up to Rs. 5,800.

Let us explain with an example:

Details Up until AY 2018-19 AY 2019-20 onwards
Gross Income in Rs. Rs.5,00,000 Rs.5,00,000
Transport Allowance Deduction Rs.19,200 N/A
Medical Allowance Deduction Rs.15,000 N/A
Standard Deduction N/A Rs.40,000
Net Income Rs.4,65,800 Rs.4,60,000

What is a salaried income?

Literally saying, an amount the employer gives to an employee against the services the employee offers to the employer, which generally comes in the form of regular pay + incentives if any. As per the government guidelines and Income Tax Department, salary is defined as the worth of accommodation, free from rent, given to an employee from an employer.

Allowance is fully taxable or not?

In most of the cases, the salaried employees remain confused on which allowance is taxable and which is not. The organization provides its employees with allowances for specific needs. The first thing here is to check the nature of the allowance. Primarily, the most important thing for an employee is to know the difference between reimbursement offered (like conveyance allowance) and a basic allowance. Reimbursement is always tax-free, as a matter of fact, the employer pays the reimbursements in return of the expenses already paid by the employee. However, it can be subjected as a taxable allowance, if the company fails to declare it as tax-free.

Other allowances like leave allowance, children’s allowance, etc, are non-taxable up to a certain limit, beyond that the allowance are taxable. You must be very careful in determining which allowance is taxable & which is not.

Salary Income Deductions

There are few deductions that are incorporated under salaried employees which are varying nature in the form of profits & prerequisites. Earlier, Section 16 of the Income Tax act, 1961, allowed certain deductions to the salaried employees. But later it was discontinued from the year 2005-06.

Entertainment Allowance

Deduction of Rs. 5,000 is offered as entertainment allowance under the gross salary of an employee. Only Government employees can enjoy the benefits of this deduction.

Employee’s net pay calculation

Net pay stands for the final amount of money calculated after removing all state & federal tax deduction. In simple terms, salary after tax is considered as the net pay salary.

The procedure of the calculation

  1. Gross salary: the total salary paid to the employee for the entire year in regular periods (monthly, weekly, etc).
  2. Federal Income Tax Deduction: the tax slab the employee is liable to pay the taxes, & the status of filling taxes are the two elements that are considered in the federal income tax calculation.
  3. Local & State Deductions
  4. FICA taxes
  5. Other deductions, if any.

Total taxable income for salaried employees

The income from salary subjected to Income Tax Deductions is what taxable income stands for. Most often, all the employees have to pay taxes as per the salary income tax slab, whereas it is important to notice that some income attracts partial income tax.

Completely Taxable Allowances

  • Dearness Allowance given to the employees to meet the market inflation
  • City Compensatory Allowances paid to the employee for moving to metro cities
  • Overtime Allowances
  • Deputation Allowances
  • Servant Allowances

Partially Taxable Allowances

  • House Rent Allowance
  • Entertainment Allowances (except for State & Central Government Employees)
  • Uniform, Travel, Research Allowance, etc.
  • Special Allowance for children education, children hostel allowance

Fully Exempt Allowance

  • Foreign Allowance for employees posted abroad
  • Allowances for High court & Supreme court judges

To have a better understanding of the structure, let’s understand salary after tax with the help of an example:

Yearly Taxable Salary Salaried Income Tax exemption Total Taxable Income
Basic Pay Rs.8,00,000 N/A Rs.8,00,000
House Rent Allowance Rs.3,00,000 Rs.1,72,000 Rs.1,28,000
Conveyance Allowance Rs.96,000 Rs.19,200 Rs.76,800
Other Allowances Rs.60,000 N/A Rs.60,000
LTA (leave travel allowance) Rs.20,000 Rs.12,000 Rs.8000
Medical Expenses Rs.15,000 Rs.15,000 N/A
Total Gross Salary Rs.12,91,000 Rs.2,18,200 Rs.10,72,800

Structure of computing Net Salary of an Employee

Particulars Amount (In Rs.)
Add:
1.Basic Salary
2.Fees, Commission and Bonus
3.Allowances
4.Perquisites
5.Retirement Benefits
Gross Salary
Less: Deductions from Salary
1.Entertainment Allowance
2.Professional Tax
Net Salary

Structure of computing Net Salary of an Employee

  1. Salary
  2. Business/ property
  3. Capital gains,
  4. House property
  5. Other sources

From the above five sources, the aggregate income is calculated.  The formula for calculating:

Gross Total Income= 1+2+3+4+5

Now, the Net Taxable Income = Gross Total Income- All Deductions

To Tax Payable= Tax on the Net Income- All kind rebate & exemptions under Income Tax Act.

Below is the tax slab for the assessment year 2015-2016

  1. For individual less than 60 Years of Age
Slab Tax percentage
Up to Rs.2.5 Lakhs NA
Rs.2.5- Rs.5 Lakhs 10% of the amount above Rs.2.5 Lakhs
Rs.5 – Rs.10 Lakhs Rs.25,000 + 20% of the amount above Rs.5 Lakhs
Above Rs.10 Lakhs Rs.1,25,000 + 30% of the amount above Rs.10 Lakhs
  1. For individual between 60- 80 Years of Age
Slab Tax percentage
Up to Rs.3 Lakhs NA
Rs.3 – Rs.5 Lakhs 10% of the amount above Rs.3 Lakhs
Rs.5 – Rs.10 Lakhs Rs.20,000 + 20% of the amount above Rs.5 Lakhs
Above Rs.10 Lakhs Rs.1,20,000 + 30% of the amount above Rs.10 Lakhs
  1. For individual above 80 Years of Age 
Slab Tax percentage
Up to Rs.5 Lakhs NA
Rs.5 – Rs.10 Lakhs 20% of the amount above Rs.5 Lakhs
Above Rs.10 Lakhs Rs.1,00,000 + 30% of the amount above Rs.10 Lakhs

In addition to the above rates, earlier 2% education cess charge was also applicable on the total tax amount.

 

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