Procedure for the calculation of taxable income on salary
Income from Salary
Every payment made by an employer to his employee for the services rendered, will be chargeable under the head income from salary
In other words ,Income can be charged as salaries only if there is an employer-employee relationship between the payer and payee
Income treated as salaries includes full time employment as well as part time employment
What is Salary
Salary includes basic salary or wages, any annuity, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits.
The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary.
What is Wages
Wages means fixed regular payment earned by the employee for rendering his services
Wages ,salary, bonus are fully taxable payments
What is Allowances
An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work.
This monetary benefits are partially taxable in certain cases such as House rent allowance ,conveyance allowance ,etc.
Allowances that are fully taxable
Let us discuss taxability part of allowances in brief
City compensatory allowance :
This are normally provided with the intention to compensate the employees for the higher cost of living in cities.
Entertainment allowance :
This are provided to employee to meet the hospitality expenses .For government organisations employees only this allowance is exempt
Transport allowance :
This allowance Is provided to compensate the employees commutation expenses , it is fully taxable
However in case of blind or deaf exemption upto Rs.3200/-PER Month is provided for this allowance
Other allowances which are fully taxable are below
- Dearness allowance
- Overtime allowance
- Fixed medical allowance
- Interim allowance
- servant allowance
- Project allowance
- Lunch allowance
- Any other cash allowance
- Warden allowance
- Non practicing allowance
Allowances that are partially exempt
House Rent Allowance
This allowance is specifically allowed to employee to meeting the rent or residence expenses .This allowance is partially exempt as per section 10(13A)
This allowance are not in the nature of perquisite , but specifically provided to meet the expenses incurred wholly for the performance of his official duties , this allowance are exempted partially based on the amount spent for performance of his official duties
Allowances that are fully exempt
- Allowances to High court judges
- Allowances paid by the United Nations Organization
- Compensatory allowance received by a judge
- Sumptary allowance granted to High court or Supreme Court judges
- Allowances granted to Government Employees Outside India
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
Deductions eligible against salary income
- Standard Deduction
- Entertainment allowance( for government employees only)
- Professional tax paid
A standard deduction of up to Rs 50,000 in lieu of the earlier conveyance allowance and medical re-imbursement of Rs 19,200 and Rs 15,000, respectively.
Procedure for the calculation of taxable income on salary:
- Gross income is gathered from salary slips along with Form 16 for the current financial year (i.e. summing up of every emolument such as basic salary, other reimbursements and allowances that are mentioned in Form 16 (Part B) and salary slips.
- The bonus received during the financial year is added to the income that is being calculated.
- The total is gross salary, from which deduction relating to the exempted portion of House Rent Allowance, and standard deduction are made. This will be the net salary income chargeable to tax.
- Rate of tax is as per the slab rates announced for the financial year in respective year budget announced by the government
However, in addition to the tax slabs mentioned above, the Finance Minister of India, Nirmala Sitharaman has announced a new optional tax slab for individuals. The new income tax slab is an alternative and can be used instead of the existing system.
If an individual decides to file his or her taxes according to the new income tax regime, the following things are to be kept in mind:
- There are no exemptions under the new income tax regime
- There are no deductions under the new income tax regime
That said, the calculation of the taxable income as per the new income tax regime will be calculated as a direct percentage of the income earned by an individual.
Other points worth noting
- Foregoing of salary
Once salary accrues the subsequent waiver by employee does not let him/her free from liability of taxation
- Surrender of salary
If employee surrenders his/her salary to Central government voluntarily then such salary would be exempt
- Salary paid tax free
If employer pays tax on behalf of the employee on salary income ,then the employee income from salary will consist of his /her salary income plus tax paid by the employer
However tax paid on non monetary perquisites on behalf of employee by employer then,this would be exempt in the hands of employee as per section 10(10CC)
- Advance salary
This is taxable as and when received irrespective of the fact that it is due or not
- Arrears salary
Normally ,this salary is charged to tax on due basis , in certain cases it is charged to tax on payment basis also