Taxation:
People are generally obsessed with the tax that pay on their salaries. Many a times, they don’t even know that on what part of their salary, the tax is imposed. Therefore, they sometimes end up in paying the amount of tax which they would have not paid if they would be knowing the tax structure and the method to calculate their taxes. So, in this article, we have tried our level best to provide you with the knowledge of taxation and its calculation in lay man terms. Have a look below.
Tax is paid on your taxable income. Taxable income is the income left after deducting your tax deductions. So, these deductions play a vital role in the calculation of Tax. For a lay man, we’ll not go deep and help you provide an information on those parameters that will be useful to you.
“Salary” includes your Basic salary, Dearness allowance, allowances, perquisites and profit in lieu of salary. Allowances and perquisites may be fully taxable, partially taxable or nontaxable. Let’s discuss about that.
“Salary” includes your Basic salary, Dearness allowance, allowances, perquisites and profit in lieu of salary. Allowances and perquisites may be fully taxable, partially taxable or nontaxable. Let’s discuss about that.
Salary:
The salary includes our basic salary, dearness allowance, and any fees, commission and bonus received by an employee. These are:
- Basic Salary: It is the salary which is basic in nature that means at least this amount will be credited to an individual’s account and it is fully taxable.
- Dearness allowance: It is an allowance that is given to you at par with inflation. As inflation increases, your dearness allowance also gets increased and it is given at some percentage on your basic salary.
- Fees, Commission and Bonus: Any fees, commission and bonus earned or received by an employee would be fully taxable.
Allowances / Perquisites:
Non Taxable allowances / Perquisites:
Nontaxable allowances includes the following allowances:
- Interest free loan: It is a perquisite that is given to you in the form of a loan on which you need not to pay any interest.
- Foreign allowance: It is an allowance paid by government of India to the employees who are posted out of India.
Fully Taxable allowances / Perquisites: Fully Taxable allowances includes the following allowances:
- Conveyance allowance: It is an allowance that is given to you for your expenses incurred during your commute from home to office and office to home.
- City compensatory allowance: Generally in the metro cities, the cost of living is very high. So, to compensate people onto that, city compensatory allowance is given which is fully taxable.
- Lunch Allowance: This is an allowance that is given for bearing lunch or tiffin expenses which is fully taxable.
- Deputation Allowances: If you have been posted to different locations for some period of time on deputation, the allowance given to you for this purpose is fully taxable.
- Fixed medical allowance: An allowance given to you for medical purposes that is separate from your medical perquisite is fully taxable in nature.
Partially taxable allowance / perquisites: Partially taxable allowances or perquisites are those allowances on to which some portion is exempted from tax: - House rent allowance: HRA is partially exempted from tax and is calculated as follows:
The exemption limit is least of the following:
- Actual HRA received
- The amount of rent you pay which is excess of 10% of your salary.
- 50% of your salary if you live in metro cities or 40% of your salary in case you live in other places. (Salary = Basic salary + DA+ Commission)
- Special allowance to meet office and personal expenses: Any amount that is given to an employee to meet office and personal expenses is exempted to the extent of an amount actually spent.
- Children Education allowance: It is an allowance which is given to carry on the educational expenses of your children. The tax on such allowance is exempted up to the limit of Rs 100 per month for maximum of 2 children.
- Children Hostel allowance: It is an allowance which is given to carry on the Hostel expenses of your children. The tax on such allowance is exempted up to the limit of Rs 300 per month for maximum of 2 children.
- Outstation allowance: It is an allowance that is given to an employee who is sent off the location to carry on the job. Such allowance is exempted up to the limit of 70% of the allowance or Rs 6000, whichever is less.
Therefore, these are the description and the limits assigned for tax exemption on your salary income. There are some other deductions under section 10, 16, 80 C, 80 CC, 80 D etc. that has to be deducted from the salary income to calculate your taxable income.
Some statutory deductions are your Provident fund, gratuity and pension funds.
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