How to calculate income tax for salaried Individual


Salaried Individual is an individual or the taxpayer that comes under the head of income from salary according to Income Tax act. Any Individual or businessman that comes under the purview of tax submits their Income Declarations form and submit the requisite documents. Although, it seems very easy but submitting income tax forms requires a professional guidance and expertise.

Therefore, a personal income that exceeds the maximum limit of the income prescribed by the Income-tax department as a taxable income is known as taxable income. The Income tax department brings revenue to the government.

According to the Income tax act, the amount of money you pay from your income is an income tax. Income tax is levied on a person who was in India for about 182 days during any previous year or the person who was in India for at least 60 days during the previous tax year and for at least 365 days during the preceding 4 years will be charged to tax.

Heads under the Income tax act

A person total income is divided into 5 heads of Income which are as follows-

  • Income from salary
  • Income from House Property
  • Profit or gains of business or profession
  • Income from other sources
  • Capital Gain

So, our main topic is how to calculate Income tax for salaried Individual. The term Salary includes wages, pension, gratuity, fees, commission, provident fund contribution, perquisites, and leave encashment, the central government contributed to pension and compensation received for a service.

“Salaried Income” as per Income tax act 1961

The dictionary meaning of the salaried Income ” is a form of earning or profit that is provided by an employer to his or her employee for the service rendered”. So, the amount of money which is calculated as the salary is the right of the employee which he or she received from the employer as a service rendered. And as a result of the income from salary, it comes under Income tax for Salaried Individual.

As per the Income tax department, section 17(2) of the Income-tax Act, 1961 defines the salary as the worth of an accommodation that is free of rent from an employer to an employee.

What is Salaried Income?

Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. The person who gets the salary income is the salaried Individual. It is paid in fixed intervals like monthly one-twelfth of the annual salary.  The following items are included in salary-

  • Basic Salary or the fixed component of salary as per the employment terms.
  • Fees, Commission and bonus received by an employee from employer end
  • Allowances are paid by the employer to an employee to meet the personal expenses. Allowances are taxed either partially, fully or exempt sometimes.

Following are some fully taxable allowance-

  1. Dearness allowance is paid to the employee to meet its expenses caused due to inflation
  2. City Compensatory allowance is paid to those who move to metropolitan cities like Mumbai, Delhi, Chennai where the standard of living is higher,
  3. Overtime allowance is paid to the employee who works apart from working hour
  4. Deputation allowance and servant allowance

Following are some partially taxable allowance –

  1. House Rent Allowance is given to the employee who stays in rented property and unlikely a person who stays in its own house then it is fully taxable. The allowance exemption is the least of the actual house rent allowance or additional rent above 10% of the salary or the rent is equal to 50% of the salary in metro or 40% in another area
  2. Entertainment allowances are given to the employee excluding Central or State Government
  3. Special allowances are like uniform, travel or research allowance etc.
  4. Special allowance to meet personal expenses like children education allowance, children hostel allowance etc.

Following are fully exempt allowances –

  1. Foreign allowance given to the employee posted abroad
  2. Allowance of high court and Supreme Court Judges
  3. United Nations Organization employee allowances.
  • Perquisites are the incentives that are paid to the employee over their salaries. They are not reimbursement of expenses. 

Some perquisites are taxable for all employees irrespective of salaried Individual which are as discussed-

  1. Rent free accommodation
  2. Concession in accommodation rent
  3. Interest-Free loan
  4. Movable assets
  5. Club free payments
  6. Educational Expenses
  7. Insurance premium paid on behalf of employees

Some perquisites are those who are only for directors or those who have some substantial interest in the organization –

  1. Free gas electricity for the domestic purpose
  2. Concessional educational expenses
  3. Concessional Transport Facility
  4. Payment made to gardener, sweeper and the attendant

Some are exempt from the tax like fringe benefits are exempt from tax –

  1. Medical benefits
  2. Leave travel concession
  3. Health Insurance Premium
  4. Car, laptop for personal use
  5. Staff Welfare Scheme
  • The retirement benefits are given to the employee during their period of service or retirement –
  1. A pension is given either on a monthly basis or in a lump sum and the tax is charged depending on the category of the employee.
  2. Gratuity is given as the appreciation of the going performance which is received at the time of retirement and is exempt to a certain limit.
  3. Leave salaries tax depends on the category of the employee. The employee has the discretion to make use of the leave or encash it.
  4. Provident fund is contributed by both employee and employer on a monthly basis. At the time of retirement, the employee gets the amount along with interest.

Calculate Taxable Income on Salary

To calculate the taxable income for a salaried individual,  you need to gather all the details that are required to file your income tax returns before computing the total taxable income on salary.

After that, you will calculate the total taxable income along with the tax deduction or tax refundable in case.

Procedure for calculating taxable income on salary is as follows-

  1. Firstly, collect your salary slips along with the Form 16 of the current fiscal year and ass every emolument like basic salary, House Rent Allowance, Travel allowance, Dearness Allowance and other reimbursement and allowances that are mentioned in Form 16 (Part B) and salary slips.
  2. Secondly, add the bonus or benefit received during the year
  3. The total gross salary you have to deduct from the exempted part of house rent allowance, transport allowance or medical reimbursement and all other reimbursement provided the actual bills are in respect of the expenses incurred.
  4. As a result, the net income from salary is calculated.

Deduction on Income from salary

Following deductions are available on the income from salary-

Computation of Net Salary of Salaried Individual

 Particular Amount
Add-
Basic Salary
Fees, Commission and Bonus
Allowance
Perquisites
Retirement Benefit —————————-
Gross Salary —————————-
Less- Deduction from salary
Entertainment Allowance
Professional Tax
———————–
Net Salary ——————–

 

Conclusion:-

Calculating tax for a salaried individual is not a tough call but it needs professional guidance. Lastly, it is advisable to the taxpayer to take the help of the professional having root in taxation. We at Corpbiz are standing to hold your back. Kindly contact us for further information at www.corpbiz.io.contant.us