What is Salary?
Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. In short it is your right of remuneration against your full one month efforts.
The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.”
Does all payout by organization to people working for them is Salary?
No, the payment made to professional in their professional capacity is payment of “Professional / Technical fees”. the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary received by a person as MP or MLA is taxable as “Income from other sources”.
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein:
Wages, Annuity or pension, Gratuity, Fees or Commission, perquisites or profits in lieu of salary, Advance of Salary, Leave Encashment, Compensation as a result of variation in Service contract etc.
Who is responsible to deduct TDS on Salary?
So what is CTC?
Now a days CTC (Cost to company) is new term used by corporate while offering salary to its employee. It is nothing but total cost which an organization end up paying on an employee for the period under consideration. In addition to the wages paid to salary it also includes employer liability towards employee i.e. Statutory liability viz. all taxes like PF, ESIC, LWF and other commitments like Gratuity, Pension, Statutory bonus, Leave Encashment, Employees Accident Insurance, Medi claims etc.
Formula is CTC = Gross Salary (wages) + PF + ESIC + LWF + Insurance + Leave pay + Gratuity
Understanding TDS on Salary
TDS i.e. Tax deducted at source is nothing but Income Tax on Salary; it is also called as withholding tax.
On which amount TDS to be deducted?
Before determining on which amount lets understand components of salary.
When employer pays any amount to employee in form of salary it is bifurcated in to two parts: Salary & Perquisite.
Salary is pure cash payouts; however on other hand perquisite which is also called as perks are benefits & facilities enjoyed by employee while providing his services to organization which are generally transportation, car service, canteen subsidy, accommodation in hotels, lodging & boarding, travelling expenses, fuel & gas subsidy, interest free loans etc.
So u/s 10 income tax do allows exemptions i.e. some portion of allowances & perquisites are not loaded to your taxable income however same is exempted. E.G. Conveyance allowance upto Rs. 800 pm is exempt, HRA exemptions and in case of perks Interest free loan or advances upto Rs. 20,000-, cost of meal served during office hours etc.
So here goes calculation of Taxable Salary for TDS:
Section 192: TDS on Salaries (Paid to Resident as well as Non-Residents)
Computation of Monthly TDS on Salary
|Add: Value of Perquisites u/s 17(2)||Y|
|Add: Any other reported by Employee||Z|
|Less: Loss on House Property reported by Employee||Z1|
|Gross Total Income||(X+Y+Z+Z1)|
|Less: Deduction under Chapter VI-A (Section 80C to 80U)||R|
|Total Taxable Income||(X+Y+Z+Z1-P)|
Calculating Tax on Total Taxable Income Computed above
|Tax on Above||A|
|Add: Education Cess and Secondary Higher Edu Cess||B|
|Less: Relief under section 89||C|
|Less: Tax Deducted by other as reported by Employee||D|
|Balance Tax Payable||(A+B-C-D)|
|Monthly Tax Deductible from Salary||(A+B-C-D)/12|
Let us understand the above format with Example
Step -1 : Calculate Total Gross Salary (X+Y)
Gross salary is sum total of all salary components which employer has agreed to pay under terms of contract which are Basic + Dearness Allowance + House Rent Allowance + Conveyance / Transport Allowances + Special Allowances + Other allowances
Why so many salary components & not few?
Income Tax is evolving with change in time & various other laws related to labor requires employer to pay some allowances. So Basic salary is kept as low as Minimum wages of that particular state & above that allowances are paid.
EG. Maharashtra State requires mandatory payment of HRA to the extent of 5% of Basic Wage. If we segregate Basic in to Basic & HRA, employee can enjoy HRA exemption benefits if they are staying in rented property and so on.
So lets take example of Mr. A, he is CA and Finance Manager and drawing Monthly Gross Salary of Rs. 70,000/- (Basic = 40000, HRA = 20000, Travel Allowance = 800, Child education allowance =200, Medical Allowance = 1250, Other allowance = 7750)
Step – 2: Give exemptions to Allowances
Allowances paid are exempt u/s 10 as mentioned earlier. So we need not consider that portion to the extent it is exempt, and balance to be taxed.
So in case of Mr. A, Travel allowance Rs. 800, CEA Rs. 200 & Medical allowance Rs. 1250 is fully exempt assuming he will submitting bill of Rs.1250 pm. No HRA assuming he is living in owned property taken on loan. So total exemption for him is Rs. 2,250.
Step – 3: Calculate annual taxable Gross Salary for the financial year.
Net of Step 1 Less Step 2 gives monthly taxable gross salary. We have to project annual taxable gross salary same can be done by multiplying monthly taxable gross salary with 12 if we are calculating TDS from the month of April else we need to multiply the said amount with number of month remaining in the financial year.
So we will be arriving at annual taxable gross income taxable under the head Salary by doing this exercise.
Why to project salary for 12 months or full financial year?
Since income tax is payable on annual taxable income we have to project salary payout.
So in case of Mr. A, Rs. 67,750 x 12 (70000 – 2250) which amounts to Rs. 8,13,000.
Step – 4: Add any Income / Loss reported by employee
In step 3 value add any other income earned by employee which is reported to employer. Such includes Income from house property or Loss from house property (Interest paid on Housing loan taken), Interest Income on bank deposits etc.
So Step 4 plus/minus Step 4 will give us Gross Total Income of employee.
So in case of Mr. A suppose he declared Loss on House Property for Interest he paid for loan taken on purchase of his house Rs. 150000. So his Gross total income will be Rs. 6,63,000/-
Step – 5: Calculate deductions available to employee against gross salary
Chapter VI-A of income tax act mentions deduction that can be allowed from taxable gross salary by way of investments. So From Gross total income calculated above we have to deduct all total of
So Step 4 Less Chapter VI-A deduction will give us Total taxable income of employee.
So in case of Mr. A, if he declares investment of Rs. 1 lakh u/s 80C & Rs. 30,000 u/s 80D. Total benefit available Rs.1.30 lakh under Ch. VI-A. So total Taxable Income will be Rs. 3,33,000/ (663000-130000).
Step – 6: Calculating net Taxable Income & Tax amount
Section 2 of the Finance Act gives maximum amount not chargeable under Income Tax Act. So while calculating of net taxable income we have to deduct maximum amount not chargeable under income tax act from the total taxable income.
For FY 2013-14 it is Rs. 2 lakh, so end result after subtraction will be net taxable income. So we have to calculate Income tax liability as per given slab under Chapter II of finance Act.
Current slab are as follows:
For Individual below 60 years:-
|Upto Rs. 2,00,000 –||Nil|
|From Rs. 2,00,000 – Rs. 5,00,000||10%|
|From Rs. 5,00,000- Rs. 10,00,000||20%|
|Above Rs. 10,00,000||30%|
For Senior Citizens (from 60 years to 80 years):
|Upto Rs. 2,50,000 –||Nil|
|From Rs. 2,50,000 – Rs. 5,00,000||10%|
|From Rs. 5,00,000- Rs 10,00,000||20%|
For Citizens Above 80 years:
|Upto Rs. 5,00,000 –||Nil|
|From Rs. 5,00,000 – Rs. 10,00,000||10%|
So in case of Mr. A, on Rs. 5,33,000 tax liability will be as follows:
First 2 lakh = Nil, on balance Rs. 300,000 @ 10% = Rs. 30,000/-and on balance Rs. 33,000 @ 20% Rs. 6,600. Total annual tax Rs. 36,600 add Edu. Cess & Higher Edu. Cess @ 3% on it Rs. 1098 would be Rs. 37,698/-.
So monthly TDS amount will be Rs. 3,142/-