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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.).

How to Calculate the Taxable Income on Salary

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.

 

Components

Amount (Rs)

Basic Salary

--------

Add:

--------

1. Fees, Commission and Bonus

--------

2. Allowances

--------

3. Perquisites

--------

4. Retirement Benefits

--------

5. Fees, Commission and Bonus

--------

Gross Salary

--------

Less: Deductions from Salary

--------

1. Standard Deduction (Rs. 50,000)

--------

2. Entertainment Allowance u/s 16

--------

3. Professional Tax u/s 16

--------

Net Salary

--------

Less : Deduction under Chapter VIA

 

a) Investment in LIC, PPF, Mutual funds, children education fees, Repayment of house loan(max restricted to 1,50,000/-)

--------

b) Medical insurance premium - (max restricted to 25,000 & 30000 in case senior citizen)

--------

c) Other deductions like Interest on loan for higher education of children, Donations made,

--------

Taxable Salary

--------

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.

AGE

Income Tax Slab Rates - OLD REGIME

NIL

5%

20%

30%

Below 60 Years

Up to Rs. 2.5 Lacs

Rs. 2.5 - Rs. 5.0 Lacs

Rs. 5.0 - Rs. 10.0 Lacs

Above Rs. 10.0 Lacs

60 - 80 years

Up to Rs. 3.0 Lacs

Rs. 3.0 - Rs. 5.0 Lacs

Rs. 5.0 - Rs. 10.0 Lacs

Above Rs. 10.0 Lacs

Above 80 Years

Up to Rs. 5.0 Lacs

NA

Rs. 5.0 - Rs. 10.0 Lacs

Above Rs. 10.0 Lacs

NEW SLAB RATES

(Applicable from F.Y 2020-21)

TAX RATES

Up to Rs. 2.5 Lacs

NIL

Rs. 2.5 - Rs. 5.0 Lacs

5%

Rs. 5.0 - Rs. 7.5 Lacs

10%

Rs. 7.5 - Rs. 10.0 Lacs

15%

Rs. 10.0 - Rs. 12.5 Lacs

20%

Rs. 12.5 - Rs. 15.0 Lacs

25%

Above Rs. 15.0 Lacs

30%

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

Deductions & Exemptions NA in New Tax Regime

Deductions & Exemptions Available in New Tax Regime

• The standard deduction, professional tax and entertainment allowance on salaries

• Leave Travel Allowance (LTA)

• House Rent Allowance (HRA)

• Minor child income allowance

• Helper allowance

• Children education allowance

• Other special allowances [Section 10(14)]

• Interest on housing loan on the self-occupied property or vacant property (Section 24)

• Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJAA)

• Without exemption or deduction for any other perquisites or allowances

• Deduction from family pension income

• Transport allowances in case of a specially-abled person.

• Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.

• Any compensation received to meet the cost of travel on tour or transfer.

• Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.

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.

 

Old regime (Rs. )

New regime (Rs. )

Salary

9,75,000

9,75,000

Less: Standard Deduction

50,000

Nil

Professional Tax

2,400

Nil

Taxable Salary

9,22,600

9,75,000

Less; Deductions

• u/s 80C

• u/s 80D

1,25,000

25,000

NIL

Taxable Income

7,72,600

9,75,000

Tax on above income

67,020

71,750

Add : Education Cess @4% on tax

2681

2,850

Tax payable (rounded off to nearest tens)

69,700

74,600

 
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