Salaried Incometax

Income From Salary – How to Calculate Income Tax On Salary-

For FY 2022-23

New Income Tax Regime From Budget 2023

Income range Income tax rate

Up to Rs.3,00,000 Nil

Rs.3,00,000 to Rs.6,00,000 5% on income which exceeds Rs.3,00,000

Rs.6,00,000 to Rs.9,00,000 Rs.15,000 + 10% on income more than Rs.6,00,000

Rs.9,00,000 to Rs.12,00,000 Rs.45,000 + 15% on income more than Rs.9,00,000

Rs.12,00,000 to Rs.15,00,000 Rs.90,000 + 20% on income more than Rs.12,00,000

Above Rs.15,00,000 Rs.1,50,000 + 30% on income more than Rs.15,00,000

Income range	Income tax rate
Up to Rs.3,00,000	Nil
Rs.3,00,000 to Rs.6,00,000	5% on income which exceeds Rs.3,00,000
Rs.6,00,000 to Rs.9,00,000	Rs.15,000 + 10% on income more than Rs.6,00,000
Rs.9,00,000 to Rs.12,00,000	Rs.45,000 + 15% on income more than Rs.9,00,000
Rs.12,00,000 to Rs.15,00,000	Rs.90,000 + 20% on income more than Rs.12,00,000
Above Rs.15,00,000	Rs.1,50,000 + 30% on income more than Rs.15,00,000

Salaried classes get into a frenzy over the taxes they must pay for the relevant financial year as soon as filing season starts. Understanding your tax bracket and the significance of each component of your wage breakdown is crucial. You may use this to learn ways to reduce your tax liability. This tutorial is for you if you wish to comprehend the components of your wage or discover how to reduce your tax burden on salary income.

Understanding Your Payslip's - Basic Salary (SECTION I)

The term comes from the fact that this is a constant part of your paycheck and serves as the foundation for other parts of your compensation. For instance, HRA is described as a portion of this base wage (determined at the company's discretion). A 12% deduction from your base pay is made for your PF. It often represents a significant chunk of your overall pay.

House Rent Assistance or allowance

Salary earners who rent their homes or apartments may apply for a house rent allowance (HRA) to reduce their tax burden. Taxes may not apply to this at all or partly. The income tax regulations have established a formula for calculating the HRA that may be exempted.

Find out more about requesting an HRA exemption.

Also keep in mind that your HRA will be completely taxed if you get it but do not rent your home.

Travel Expenses for Leave

Salaried workers are eligible for LTA exemption for domestic travel. Only the smallest portion of a journey is excluded. This allowance is only available for trips done with your spouse, kids, and parents; it is not available for trips taken with other family members. This specific exemption only applies to real expenditures, therefore you cannot make a claim unless you actually make the trip and pay the associated costs. To be eligible for this exemption, present the invoices to your employer.

Bonus

Typically, the incentive is given out once or twice a year. Whatever the label, a bonus or performance incentive is wholly taxed. According to business policy, performance bonuses are often dependent on your performance over a certain time period or your assessment ratings.

Employee Provident Fund (PF) Contributions

The Indian government's programme for social security is known as the Provident Fund (PF). Every month, the employee's pension and provident fund receive contributions from both the company and the employee equal to 12% of the employee's base pay. The current EPF interest rate of 8.10% is maintained under the Union Budget 2023. However, for non-PAN holders, the TDS rate for taxable EPF withdrawals has been lowered from 30% to 20%. According to the EPF Act of 1952, businesses with more than 20 workers are required to provide this retirement benefit.

Standard / Typical Deduction

The budget for 2018 reinstituted the standard deduction. The medical allowance and transport allowance have been replaced by this deduction. The employee may now deduct a flat Rs. 50,000 (it was Rs. 40,000 prior to Budget 2019) from the entire income, lowering the tax burden.

A standard deduction of Rs. 50,000 was recently established under the new tax system in the Union Budget 2023–24, which was previously exclusively accessible under the previous tax regime.

Professional Taxation

Like income tax, which is collected by the federal government, professional tax or tax on employment is collected by the state. A state may impose a professional tax up to a maximum of Rs 2,500. Typically, the employer withholds it and deposits it with the state government. Professional taxes may be deducted from your pay income on your income tax return.

SECTION II Take-Home Pay and CTC Differencing

In addition to your wage, your employment may entitle you to additional advantages like meal discounts or taxi service. The amount of all perks provided plus your wage is the overall cost to the business.

An illustration of your CTC's components from your offer letter may be seen here.

CTC

Components Amount

Basic salary Rs 3,00,000

Special allowance Rs 1,00,000

HRA Rs 80,000

Medical insurance Rs 5,000

PF (12% of basic) Rs 36,000

Performance bonus Rs 75,000

Total CTC Rs 5,96,000

CTC
Components	Amount
Basic salary	Rs 3,00,000
Special allowance	Rs 1,00,000
HRA	Rs 80,000
Medical insurance	Rs 5,000
PF (12% of basic)	Rs 36,000
Performance bonus	Rs 75,000
Total CTC	Rs 5,96,000

Whereas this is how your payslip will look for the CTC mentioned above.

Taxable Salary

Components Amount

Basic salary Rs 3,00,000

Special allowance Rs 1,00,000

HRA Rs 80,000

Bonus received Rs 75,000

Total salary Rs 5,55,000

Less: 12% PF Rs 36,000

Less: Tax payable* Rs 14,976

Take home salary Rs 5,04,024

Taxable Salary
Components	Amount
Basic salary	Rs 3,00,000
Special allowance	Rs 1,00,000
HRA	Rs 80,000
Bonus received	Rs 75,000
Total salary	Rs 5,55,000
Less: 12% PF	Rs 36,000
Less: Tax payable*	Rs 14,976
Take home salary	Rs 5,04,024

Broadly your CTC will include:

a. Salary received each month.

b. Retirement benefits such as PF and gratuity.

c. Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

Your take-home salary will include:

a. Gross salary received each month.

b. Minus allowable exemptions such as HRA, LTA, etc.

c. Minus income taxes payable (calculated after considering Section 80 deductions).

SECTION III - Exemption of Retirement Benefits from Leave Encashment

For information about their leave encashment policies, ask your company. Some companies allow you to roll over a certain number of leave days and use them later, while others prefer that you use them all up immediately. The sum that is received as payment for accrued vacation days is known as a leave encashment and it is taxed as salary.

Tax exemption for leave encashment:

Employees of the federal and state governments are completely excluded. The least restrictive of the following three is exempt for non-government workers.

10 months of average pay (which includes basic and DA but excludes perquisites and allowances) prior to retirement or resignation

b. Actual leave encashment (this is further limited to Rs. 3,000,000 for retirements after 02.04.1998)

c. Amount equivalent to the wage for the leave taken, with a maximum of 30 days of leave for each year of employment.

The total leave encashment received less the exemption determined above will be the amount subject to tax. This is in addition to your salary-based income.

Relief based on Section 89(1)

When you get a part of your pay in advance or in arrears or a family pension in arrears, you are eligible for tax relief under Section 89(1).

Make Your Own Tax Relief Calculation

a. Determine the amount of tax due on the whole income, including any extra wages received in the year.

b. Determine the tax due on the entire income, excluding additional compensation received in the year.

c. Determine the variation between Steps 1 and 2.

d. Determine the amount of tax due on the year's total revenue, excluding the amount owed in arrears.

e. Determine the tax due on the whole amount of income for the year that the arrears pertain, including the arrears.

f. Determine the variation between Steps 4 and 5.

g. The tax relief that will be permitted is the difference between Step 3's excess and Step 6's excess.

Keep in mind that no relief will be granted if the amount at Step 6 exceeds the amount at Step 3.

Receipts at the Time of Voluntary Retirement Are Exempt

According to Section 10(10C), any remuneration received upon voluntary retirement or separation is not subject to tax. However, the prerequisites listed below must be met.

a. The compensation is used to fund a voluntary separation or retirement.

b. The total amount of compensation received is no more than Rs 5,00,000.

c. The recipient works for a body created by a Central or State Act, a local government, an IIT, a state or federal government, a notified institute of management, a notified institute of importance across India, a PSU, a business, or a cooperative society.

d. Rule 2BA is followed by the receipts.

If relief under Section 89 has been accepted by an employee for compensation of voluntary retirement, separation, or termination of employment, no exemption may be sought under this section for the same AY or any other.

Note that only the assessment year in which the compensation is paid may be used to seek an exemption.

Pension

Pensions are subject to taxation under head salary on income tax returns. Pensions are typically distributed on a monthly basis. Instead of receiving payments on a regular basis, you may elect to receive your pension as a lump sum (also known as a commuted pension). You have the option to elect to receive a portion of your pension in advance when you retire.

A commuted pension is one that is received in advance. For instance, let's say that at the age of 60, you choose to collect 10% of your monthly pension of Rs 10,000 in advance. You will get this payment in one single amount. Your commuted pension is thus Rs.10% of 10000x12x10 = 1,20,000. Up to the age of 70, you will continue to get Rs 9,000 (your uncommuted pension), and then you will start receiving your full pension of Rs 10,000.

Any periodic pension payout or uncommuted pension is fully taxed as salary. In the aforementioned scenario, the Rs 9,000 you got are completely taxed. 10,000 rupees are totally taxed as well beginning at age 70.

Pension, Commuted and Uncommuted In certain circumstances, a commutated pension or lump payment received may be excluded. A government worker is completely free from the commuted pension tax. Any periodic pension payout or uncommuted pension is fully taxed as salary.

In the aforementioned scenario, your receipt of Rs 9,000 is entirely taxed. 10,000 rupees are totally taxed as well after you become 70. A non-government worker is only partly free from it.

If a pension is received together with a gratuity, a third of the pension that would have been paid if the pension had been converted in full is exempt from commuted pension and the remaining portion is taxed as pay. If just the pension is paid out and no gratuity is received, only half of the pension that would have been paid out had the pension been fully commuted is exempt.

However, a family member's pension is taxed in the income tax return under "Income from other sources." This pension is not taxable, whether it is converted to a lump sum payout or not. A family member who receives an uncommuted pension is partially exempt. Taxes are not due until you get Rs. 15,000 or 1/3 of your uncommuted pension, whichever is smaller. Employees of UNO and their families are not required to pay taxes on any pension benefits they receive. Family members of the armed forces who get pensions are likewise excluded.

Gratuity

Employers offer their workers gratuities as a retirement perk. When the employee has worked for the firm for five years, he is eligible to earn a gratuity. However, it is only paid upon resignation or retirement. The gratuity received by a central, state, or municipal government employee upon retirement or death is completely tax-free for the employee and his family. Whether or not your employer is covered by the Payment of Gratuity Act will affect how your gratuity is taxed. Then, continue with the calculation after consulting with your organisation about its state.

The lowest of these three is tax-exempt if your employer is protected under the Payment of Gratuity Act.

15 days of pay based on the latest wage received for each year of service that has been completed, or any portion thereof, that is longer than six months.

Genuine gratuity of Rs. 20,000 received

The least of the following three is tax-exempt if your employer is not covered by the Payment of Gratuity Act.

Half a month's pay for each year of service that has been completed. Any fraction of a year must be omitted when counting completed years.

For instance, if you have worked for a company for 14 years and 9 months, the employer will count it as 14 years of employment. The pay used in this instance is the mean wage for the ten months before the month of retirement.

Genuine gratuity of Rs. 20,000 received

SECTION IV – Basics of Income Tax

Income Chargeable to Tax

Your income is not equal to your salary. You could earn income from several other sources other than your salary income. Your total income, according to the income tax department, could be from house property, profit or loss from selling stocks or from interest on a savings account or on fixed deposits.

All these numbers get added up to become your gross income.

Income from Salary- All the money you receive while rendering your job as a result of an employment contract

Income from house property -Income from house property you own; property can be self-occupied or rented out.

Income from other sources- Income accrued from fixed deposits and savings account come under this head.

Income from capital gains- Income earned from the sale of a capital asset (mutual funds or house property).

Income from business and profession -Income/loss arising as a result of carrying on a business or profession. Freelancers income come under this head.

Tax Rates

Add up all your income from the heads listed above. This is your gross total income. From your gross total income, deductions under Section 80 are allowed to be claimed. The resulting number is the income on which you have to pay tax.

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