GreytipOnlineWiki: Detailed IT Calculations

Detailed information on Income Tax calculations#

Income Tax is broadly calculated as follows:

The Income for the year is calculated. (This is the actual income paid to an employee)
To this income, the Perquisites are added. (This is the notional value of the Perqs or benefits given to an employee)
Then the Gov. allowed Exemptions are calculated and deducted from the income.
Then Prof. Tax are deducted from the income.
The balance income at his stage is called as Income chargeable under head Salaries
To this, any other income declared by the employee is added. Any loss is also deducted.
Then Deductions in terms of Medi Claim Premiums, Savings in LIC, Bonds and others (reffered to as Chapted 6A Deductions) are deducted from the income.
The balance income is called as Taxable Income.
On this income, tax is calculated based on the slabs prescribed.

Explanations are provided below:

Income for the Year

Year or Financial Year is the period from April to March of next year. For e.g if you are in July 2009, then the tax (financial) year is the period from April 2009 to March 2010.
Income for the year consists of 2 kinds: Monthly or Regular Earnings and one-time or Other Earnings.

Monthly Earnings consists of all amounts paid to the employee every month. This generally consists of Basic, DA, HRA, Conveyance, Spl Allowance, Personal Pay, etc.

Other Earnings consists of all components that are not paid on a regular basis but more as a one-time payment. This includes components like Performance Incentive, Bonus, Sales Incentive, Taxable Reimbursements, etc.

Income for Income Tax calculations are calculated on an annual basis(yearly). The amounts that are actually paid and mentioned in the payroll is considered as income . To this, we add the income that is expected to be paid to the employee. This is called as Projected Income. For e.g. if you in the month of June, then the actual payout for April, May and June is considered. To this, we add the projected income (projection) from July to March.
- Note - Please note that the amount is calculated on an annual basis. The deductions are done monthly

Projection means, that the income of the current month is assumed to be the monthly income till the end of the financial year, i.e. current month's income is projected till the end of the financial year. For e.g if the employee's Basic is 3000 in June, then the Basic in July, August, etc. upto March is assumed to be 3000 per month. The same logic applies to other monthly components. The summation of all these components, for the financial year is the regular Earnings.
- The amount that is projected may not always be the amount paid in that monmth. Take the example of Basic which is 3000. If in a month, a person has a one day LOP and his Basic paid will be Rs. 2900. In this case, we need to project 3000 and not 2900.

Perquisites

Perquisites or Perks or Perqs are the benefits given to an employee instead of actual cash. Here no cash salary is paid, but a notional value is added to the taxable income of the employee. Some of common Perquisites and their explanations are given below:

House Perquisite or House Perq
- If a company provides housing to the employee or rent for a house instead of paying an HRA (House Rent Allowance), then a House Perqusite needs to be calculated and added to the Taxable Income.
- A very common way of calculating the House Perq is to take 10% of the total taxable income of the employee.
- The actual method involves a calculation based on the actual rent paid for the house or FRV (Fair Rental Value) and whether the employee stays in a metro or non-metro city.
- HRA and House Perq are mutually exclusive components. i.e. if an employee is getting HRA then House Perq is not calculated and vice versa.

Vehicle Perq
- Vehicle Perq is calculated when the company either provides a vehicle to the employee or pays a rent for the vehicle used by the employee for company purposes.
- Vehicle Perq is based on the type of vehicle (above or below 1200cc) and whether the employee employs a driver whose salary is also claimed from the company.
- The calculated amount is added to the taxable income of the employee as Vehicle Perquisite.

Assets at Residence
- If a company provides assets to an employee, then a Perq for the Assets at Residence needs to be calculated. These assets generally include White Goods (TV, Fridge, Washing Machine, Furniture, A/C, etc).
- A general method of calculating the assets at Residence is to take 10% of the value of the assets as the Perq Value.
- The calculated amount is added to the taxable income of the employee as Perquisite on Assets at Residence.

Lunch Perquisite
- If a company provides Lunch to its employees, then a Perq for the Lunch so provided needs to be calculated.

Exemptions

On the income that is paid to an employee, there are certain exemptions that can be claimed. Claiming an exemption, will result in the taxable income of the employee being reduced. The common exemptions are given below:

House Rent Exemption (HRA Exemption)
- An Employees can claim an exemption towards house rent, if he is living in a rented accommodation. This is called as House Rent Exemption. The exemption is calculated as follows:
  - 40% of total Basic. (This will be 50% in case the employee is living in a metro)
  - Total HRA
  - Annual Rent paid in excess of 10% of Basic. ( Rent Paid - 10% of Basic)
  - The least of the above 3 will be taken as the exemption.
- If an employee has to avail HRA Exemption, then he has to provide proof of Rent paid. This will be in the form of rent receipts.
- In case an employee has stayed in a rented accommodation only for part of an year, then the exemption will be given only for the HRA received in that period. Exemptions will only be calculated for the month the rents have been paid.

Conveyance Exemption
- An employee can claim an exemption on the amounts paid to him under Conveyance. This is called as Conveyance Exemption.
- Conveyance Exemption is calculated on a monthly basis. Every month the employee can claim Rs. 800 or actual Conveyance paid whichever is lower, as Conveyance Exemption.

Medical Exemption
- An employee can claim an exemption on the amounts spent by him on Medical expenses for himself and his dependent family members. This is called as Medical Exemption.
- Medical Exemption is calculated as Rs. 15000 or the actual Medical amounts paid for a financial year, whichever is lower.
- The employee will need to produce medical bills to claim this exemption.

LTA Exemption or Leave Travel Allowance Exemption
- An employee can claim an exemption based on the money spent by him during a tour with family. This is called as LTA Exemption.
- LTA Exemption can be claimed twice in a block of 4 years.
- There is no upper limit on the exemption that can be claimed.
- All the amount received by the employee under LTA can be claimed as an exemption, provided the same as been spent.
- There are various rules on how to calculate the exemption amounts.

Education Exemption
- An employee can claim an exemption on the expenses incurred by him towards providing education for upto two dependent children. This is called as Education exemption.

Prof Tax

The Gov. allows the entire Prof. Tax paid by the employee to be deducted from the taxable income of the employee.

Income Chargeable under the head "Salaries"

The income that remains after removal of the exemptions and Profession Tax is called as Income chargeable under the head "Salaries"
Income under head Salaries = Actual Income + Projected Income + Perquisites - Exemptions - Profession Tax.

Other Income

To the salary income, you will then need to add any other income that is declared by the employee. This could be interest income or any other income.
An important element that is commonly used here is the Loss on House Property. If an employee is repaying an housing loan, then the interest that he pays on that loan can be reduced from the Salary income of the employee. This is put as negative income and adding this to the Salaries reduces the Salary income.

Gross Total Income

The amount that is computed when the Other Income is added to the Salaries is called as Gross Total Income

Chapter 6 Deduction

From the Gross Total Income, the investments made by the employee under various approved funds and payments done for Mediclaim, etc can be deducted.
These deductions are called as Chapter 6 Deductions.
There are various sections under which an employee can claim a deduction. The most common are 80C, 80D, 80G and 80CCC. A brief information on the sections and various items under each are listed below. This is not an exhaustive list.
- 80C pertains to investments made under PF, PPF, NSS, Post Office Savings schemes, LIC Premiums, etc.
- 80D pertains to premiums paid for Medical Insurance.
- 80DD pertains to amounts spent on Medical Treatments.
- 80E pertains to interest paid on Education loans.
Aggregate amount deductible under section 80C shall not exceed one lakh rupees
Aggregate amount deductible under the three sections, ie, 80C, 80CCC and 80CCD, shall not exceed one lakh rupees
The total of all amounts deductible under Chapter 6 is added up and removed from the Gross Total Income.
This amount is called as Taxable Income. This amount is always rounded off to the nearest 10 rupees.

Income Tax payable

On the Taxable Income, income tax is calculated.
Income Tax is computed on a slab basis.
On the income tax, depending on various rules and policies in effect, Surcharge and Cess will be calculated.
The sum of the Income Tax, Cess and Surcharge is called as the Total Tax payable.

Tax Deduction at Source (TDS)

The income tax payable is an annual amount i.e. it is the amount to be paid for an entire year.
Deduction of this income tax from the income paid to the employee is the responsibility of the employer. The employer needs to do this deduction.
This deduction is called as Tax Deducted at Source or TDS.
Usually, the employer will compute the total tax. From this tax, the amount of tax already paid will be deducted. The balance amount is divided by the number of remaining months in the financial year and the tax is deducted in equal installments.
This is shown as a the Income Tax deduction in the payslip of the employee.

Detailed information on Income Tax calculations#

See Also#