Income Tax Act - Meaning, taxability, slab and calculation

Hello, in this post we will discuss about the Income Tax Act. We will cover the following.

What is the Income Tax?

It is the tax levied on the source or income of any individual or entity having earned the income in India, according to the Income Tax Act of 1961. It is applicable to all residents or non-residents who earn income within the country.

Taxability for different heads of salary income

Heads of salary Taxability
Basic Fully taxable
Dearness Allowance (DA) Fully taxable
House rent allowance (HRA) Partially taxable
Conveyance Fully taxable
Other Allowance Partially taxable

Income tax slab for salary

General (<60 yrs) Senior Citizen (60-80Yrs) Super Senior citizen( 80yrs and above)
Exempt  0-2.5 lakh 0-3 lakh 0-5 lakh
5% 2.5 – 5 lakh 3-5 lakh Nil
20% 5-10 lakh 5-10 lakh 5-10 lakhs
30% >10 lakh >10 lakh >10Lakhs

Points to note as an employer calculating Income Tax

As an employer, you will be calculating income tax and deducting TDS for employees for their salaried income. If they have declared any other source of income, then you have to consider that for IT calculation and TDS deduction as well.

In order to ensure you are properly doing the processes, here are a few things you have to keep in mind:

  1. You should be aware of the various limits and exemptions provided for Salary income (and others) and calculate tax accordingly.
  2. You have to provide proper income and exemption details so that it matches with the employees’ actual salary.
  3. Need to collect declaration and proof of investment from employees for any investment declared by the employees.
  4. You have to maintain the declaration provided by employees in Form 12BB.
  5. You have to deduct the correct TDS from the employees based on their income (From salary or other declared sources)
  6. TDS deduction has to be shown from the very first month of the financial year (or employee joining) even if the TDS amount is zero to show proof of income.
  7. You have to credit the deducted TDS to proper PAN. I.e., you have to verify the PAN of each employee so that there is no mismatch.
  8. Once TDS filing is done, you have to provide Form 16 for your employees so that they will be able to get credit for their income and exemptions.

Sample Income Tax calculation for salaried income:

Let us consider an employee who is living in Bangalore and paying a rent of Rs. 7500 per month.

Heads of salary Income Taxable income
Basic 25000 25000
Dearness Allowance (DA) 15000 15000
House rent allowance (HRA) 10000 6500*
Conveyance 5000 5000
Special Allowance 5000 5000

* HRA calculation is based on rent paid and place of living.

calculation:

  • 40% of (Basic + DA) = 16000
  • Rent – 10% of (Basic + DA) = 3500
  • Actual HRA = 10000

Consider the least value for exemption.

So, taxable HRA = Actual HRA – Least value

= 10000 – 3500 = 6500

Taxable income = 56,500. 

Now, we will consider statutory deductions as applicable. Ex: PF = 1800; PT = 200.

Total taxable income after deduction = 56,500 – 200 (PT) = 56,300.

Yearly taxable income = 56,300*12 = 6,75,600

A standard deduction of 40,000 (FY 2018-19) is given for all employees.

6,75,600 – 40000 = 6,35,600

Now, we will consider PF under 80C.

6,35,600 – (1800*12)[PF]

= 6,14,000

Now, we will calculate tax by applying the Income Tax slab.

Tax slab Taxable Amount Tax
 0 – 2.5L (0%) 250000 0
 2.5 – 5L (5%) 250000 12500
5 – 6.14L (20%) 1,14,000 22800
Total 6,14,000 35300

Income Tax = 35,300

Cess = 4% of IT = 1412

Total Income Tax = 36,712 (Income Tax + Cess)

TDS = 36, 712 / No. of TDS deduction months

Ex: 36, 712 / 12 = 3060 (Considering the entire financial year).

TDS = 3060 per month.

Well, this brings us to the end of this post on the Income Tax Act. If you have any questions, drop them in the comment section below.