How to Calculate the Taxable Income on Salary?

Basis of Charge of Salary (Section 15)

• Salary is Chargeable to tax either on a due basis or on receipt basis, whichever is earlier.

• Existence of an Employer and Employee relationship is a must.

• Income from salary taxable during the year shall consist of the following:

• Salary due from employer (including former employer) to the taxpayer during the previous year, whether paid or not;
• Salary paid by an employer (including former employer) to the taxpayer during the previous year before it became due;
• Arrear of salary paid by the employer (including former employer) to the taxpayer during the previous year, if not charged to tax in previous years.

The meaning of the term 'salary' for purposes of income tax is much wider than what is normally understood. The term 'salary' for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, etc.).

What does "Salary" Include?

Salary u/s 17(1) of Income Tax Act comprises of the following:

• Compensation,
• Pension or annuity
• Gratuity
• Commission, fees, benefits or profits in addition to salary,
• Advance salary
• Leave salary,
• Taxable portion of transfer to recognised provident fund, and
• The contribution made in pension scheme u/s 80CCD by the Central Government or the employer to the account of the employee in the previous year

Computation of Salary

Basic salary as given in the play slips shall be summed up and other allowances shall be added to the basic salary. However, allowances given by the employee are either fully taxable or fully exempt or partially taxable. These allowances shall be computed in accordance with the provisions of the Income Tax Act.

Taxable salary shall arrive when Net salary is adjusted against the deductions under chapter VI A based on eligibility criteria of savings, investments and donations made. Such Taxable salary shall be taxed according to the slab rates as notified by the Government from time to time. For the F.Y 2020-21, the below slab rates are applicable.

The slab rates are optional; Taxpayers can choose the Tax rates either old or new which are most beneficial to the taxpayer. Tax slab rates in the new regime are common and not varied on an age basis. In order to avail the new slab rates taxpayer has to forgo few deductions & exemptions. A salaried taxpayer can opt-in and opt-out every year, means a taxpayer can choose the new tax regime in one year and choose the regular tax regime in another year

Let us calculate the taxable income & income tax of Mr X, an employee who is earning a 9,75,000/- per annum he has made investments in the PPF to the tune of 1,25,000 & Paid a premium & professional tax of 25,000/- & 2,400 respectively.