Taxability of salaried individuals

SALARY AND TAXABILITY

What is previous year?

Previous year means financial year starting from 01 April and ending on 31st March. Eg. The current previous year is 2015-2016.

What is Assessment Year?

Every previous year shall have an assessment year.  Assessment year for a previous year is the following year starting on 01 April. In other words, assessment year is the next year after a previous year.

Eg. For previous year 2005-06, the assessment year is 2006-07. For previous year 2012-13, the assessment year is 2013-14. For the current previous year ie 2016-17, the assessment year is 2017-18.

Salary

As per Income Tax Act, 1961 salary includes

• Basic salary
• Bonus
• Allowances
• Perquisites, commission in addition to salary
• Pension or annuity
• Gratuity (fully exempt in case of govt. employee)
• Advance salary
• Taxable portion of recognized provident fund
• Payment received with respect to any period of leave not availed by him

The employer shall calculate the total salary of each employee.

Salary is computed as follows:

1. The taxable portions of the above-listed constituents of salary are summed up. Eg. Basic salary, dearness allowance, city compensatory allowance, taxable portion of house rent allowance, etc are summed up.
2. From this entertainment allowance and professional taxes paid, if any are reduced.
3. Now we arrive at ‘SALARY INCOME.’

How to calculate taxable House Rent Allowance

House rent allowance is taxable in the hands of the employee. But the Income Tax Act provides for an exemption to the least of the following:

• Actual amountof HRA received
• 40% of salary
• Excess of rent paid over 10% of salary

Here, salary means basic salary + dearness allowance.

House Property

If taxpayer receives rent from building let out, the rental income is taxed under the head ‘INCOME FROM HOUSE PROPERTY’. Municipal taxes paid can be reduced. From this reduced amount, 30% deduction is allowed for repairs and maintenance.  Interest on housing loan taken can be reduced up to a maximum of Rs. 2,00,000 in assessment Year 2016-17, in case of self - occupied properties. For let out properties full amount of interest is deductible.

Income from Other Sources
It includes income not taxed in other heads of Income. Eg. Interest from fixed deposits, interest from savings bank account, winnings from lottery etc.

Gross Total Income
In simple words, the sum total of all incomes chargeable to tax is known as gross total income.  So salary + house property income + Interest income = Gross Total Income.

Deductions
From gross total income, specified deductions can be made as per the provisions of Income Tax Act to arrive at TOTAL INCOME or TAXABLE INCOME. These deductions are as follows:

Section 80C

It includes the following:

• Life insurance premium paid on own life, life of spouse or any child. Premium paid to private insurers is also deductible. Premium paid on life of parents is not allowed as deduction.
• Contribution to Public Provident Fund upto Rs. 1,50,000 in a financial year
• Employee’s contribution to Recognized/ Statutory Provident Fund.
• Subscription to National Savings Certificates including accrued interest
• Tuition fees paid (does not include donation) to school/ nursery/ college/university in India for full time education of any two children of taxpayer.
• Amount deposited under Senior Citizens savings Scheme
• Amount deposited in 5 year time deposit in post office.
• Principal repayment of loan taken for construction/acquisition of residential house. Stamp duty, registration fees paid at the time of acquisition are also included.
• Contribution made to participate in Unit-Linked Insurance Plan (ULIP) of LIC or UTI
• Contribution to notified annuity plan of Life Insurance Corporation of India.

The total amount of deduction permissible under Section 80C is Rs. 1,50,000.

2. Section 80CCD – Deduction for contribution to National Pension scheme

• Contribution by employee upto 10% of his salary is allowed as deduction u/s 80CCD(1)
• Further contribution by employee upto Rs. 50,000 is allowed as deduction u/s 80CCD(1B), whether or not deduction u/s 80CCD(1) was allowed.
• Contribution by employer upto 10% of salary is allowed as deduction u/s 80CCD(2)
• Deduction u/s 80CCD(2) is not included to calculate limit of Rs. 1,50,000 u/s 80CCE.

3. Section 80D – Deduction for health insurance premium

Health insurance premium paid other than by cash by individual for benefit of:

• Individual, spouse and dependent children or
• Parents of individual (whether dependent or not)

Deduction is as follows:

• For Individual, spouse and dependent children- Rs. 25,000
• For Parents of individual – Rs. 25,000.

If any person included above is aged 60 years or more and is resident in India, the limit is Rs.30,000.

If person included above is a very senior citizen resident in India, aged above 80 years who is unable to get insurance cover, deduction of the actual medical expenditure incurred is allowed upto Rs. 30,000.

Section 80D also covers payment for preventive health check up. Such payment can be made in cash or otherwise. It shall not exceed Rs.5,000. It is included in overall limit of Rs.25,000 / Rs. 30,000.

4. Section 80DD- Medical treatment expense of person with disability

If individual incurs any expenditure for the medical treatment of a dependant, being a person with disability he shall be allowed deduction of Rs.75,000. If such dependant is a person with severe disability (80% or more), deduction shall be Rs.1,25,000.

Disability includes autism, cerebral palsy and multiple disabilities as defined in National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

Dependant in case of an individual means spouse, children, parents, brothers and sisters of such individual and who is wholly or mainly dependant on such individual for support and maintenance and who claims no deduction under Section 80U.

5. Section 80E – Interest on loan for higher studies

Interest on loan taken by assessee from any financial institution or any approved charitable institution for the purpose of pursuing his or his relative’s higher education is deductible. Relative means spouse and children of individual or student for whom the individual is the legal guardian. Deduction is for interest PAID during the assessment year and 7 succeeding assessment years or such shorter period within which individual repays interest in full.

Higher education means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central / State Government or local authority.

6. Section 80TTA – Interest on savings account

Interest received from deposit in savings account with a bank or a post office up to a maximum of Rs. 10,000 is deductible. But such interest income should first be included in Gross Total Income.

Income Tax

Slab rates for individuals for Assessment Year 2016-17

Resident individuals whose total income is less than Rs. 5,00,000, are eligible for a  rebate as per  Section 87A of Income Tax Act. Rebate is 100% of tax or Rs. 2000, whichever is lower.

Eg. Total income of Mr. X is Rs. 4,20,000. Tax liability as per the slab rates given above is Rs. 17,000. From this, lower of Rs. 17,000 (ie 100% of tax) or Rs. 2,000 can be reduced. Hence Rs. 2,000 is reduced. So tax payable is Rs. 15,000. On this amount of Rs. 15,000 education cess of 3% is calculated.

Tax deduction at source

• The employer responsible for paying salary shall deduct tax at source on the amount payable.

• Where employee who receives salary has any income chargeable under any other head of income (not being a loss under any such head other than the loss under the head "Income from house property") for the same financial year, he may send to the employer the particulars of—
  • such other income and of any tax deducted thereon ;
  • the loss, if any, under the head "Income from house property",

and thereupon the employer shall take into account those details.

• The employer shall, for the purposes of estimating income of the assessee or computing tax deductible, obtain from the assessee the proof or particulars of prescribed claims (including claim for set-off of loss) under the provisions of the Act in such form and manner as may be prescribed.

• Where the employee is entitled to the relief under section 89 due to receipt of arrears of salary, he may furnish to the employer, such particulars, as may be prescribed, and the employer shall then compute the relief on the basis of such particulars and take it into account in making the deduction of tax. The employee shall submit in Form No. 10E the details of relief claimed to the Income Tax Department.

• The employer may, at the time of making any tax deduction, increase or reduce the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

• It is essential to review total income and TDS of each employee especially when there is any increase in their salary by way of arrears of salary, dearness allowance, increments etc.

• TDS certificate shall be given to the employee in Form No. 16 annually on or before 31st May of the next year.

How monthly TDS is worked out:

At the beginning of the financial year, employer can calculate monthly TDS of an employee by following the steps given below.

1. Estimate salary income for the year
2. Add other income, if any, declared by employee. (In case of loss, only house property loss is considered).
3. Find total of 1 and 2 above to arrive at Gross Total Income (GTI).
4. Less: Deductions u/s 80C to 80U.
5. Find 3 minus 4 to arrive at Total Income (TI).
6. Find tax on TI using slab rates applicable
7. Less: Rebate u/s 87A
8. Find 6 minus 7.
9. Add: Education cess at 3% of 8
10. Less: Tax deducted by others as per information given by employee
11. Find out tax liability [ie 8+9-10]

The tax deductible at source from salary is determined in Step 11. This amount is deducted in 12 monthly instalments.

Note: If Total Income arrived at in Step 5 is below basic exemption limit, no taxability shall arise and consequently provisions of tax deduction at source shall not apply.

Filing of TDS Returns

Quarterly statement of tax deduction shall be submitted in Form NO. 24Q by employer within the time limit given below:

If quarterly returns are not made within due dates, late fees of Rs.200 per day shall be attracted under section 234E of the Income Tax Act, 1961 for every day of default subject to a maximum of  the tax required to be deducted.

EXAMPLE

Mr. Z, aged 39 is an employee of PQR Limited, earning monthly salary as follows:
Basic salary – Rs. 40,000
Dearness Allowance – Rs. 4,000 (forming part of retirement benefits)
ity compensatory allowance – Rs. 700
House rent allowance – Rs. 3,500
He resides in Kochi in a rental house and pays rent Rs. 5,000 per month.
He owns a residential house at his native place for which he earns rent Rs. 6,000 per month. Municipal taxes paid Rs. 2,000.  He has taken a housing loan and has repaid principal Rs. 35,000 and interest Rs. 9,000 during the year.
He received interest from savings bank account with Federal Bank Rs. 12,000.

He makes the following payments during the year:

• Life Insurance premium of his own and his wife Rs. 10,000 paid to Birla Sun Life Insurance Company. Premium of his dependant parents Rs. 15,000 is also paid by him.
• School tuition fees of 3 children Rs. 2,000 each.
• Mediclaim of his wife Rs. 9,200.

TAX CALCULATION FOR FINANCIAL YEAR 2015-16 (ASST. YEAR 2016-17)

Income from Salary [Note 1] - 5,71,200
Income from House Property [Note 2] - 40,000
Income from Other Sources [Interest - 12,000
Gross Total Income -  6,23,200
Less: Deductions [Note 3] -  68,200
Total Income -  5,55,000
Tax liability [Note 4] - 37,080
Tax to be deducted every month [Note 5]- 3,090

Note 1- Income from Salary

Calculation of taxable House rent allowance

Actual HRA received (3500 x 12)  - 42,000

Less: Least of the following

• Actual amount - 42,000
• 40% of salary -  211200
• Excess of rent paid over 10% of salary

[(5000x12) – 10%(480000+48000)]        7,200          7,200

Taxable HRA                                                               34,800

Note 2- Income from House Property

Note 3 – Deductions

Section 80C –

• LIC Premium paid                  10,000
• Tuition fees paid                      4,000

[Limited to two children]

Housing loan principal                        35,000                                                                                                                
                                                         49000

Note: Life insurance premium of parents shall not be included in Section 80C.

• Section 80D
• Mediclaim of wife                                    9,200
• Section 80TTA
• Interest on savings account                     10,000

[upto a maximum of Rs. 10,000]

Total deductions                                              68,200 

Note 4 – Tax calculation

Total Income - Rs. 5,55,000

Tax on above

• Tax upto Rs. 2,50,000                                        Nil
• Tax from 2,50,000 to 5,00,000(10%)                 25,000
• Tax from 5,00,000 to 5,55,000 (20%)                11,000      36,000

Add: Education Cess at 3%                                                            1080

Total tax liability                                                                       Rs. 37,080

Note 5 – TDS
Tax to be deducted every month by PQR Limited shall be 37,080/12 = Rs. 3,090

NOTE: This write up is made based on law applicable for financial year 2015-16 (assessment year 2016-17).