Computation of income from salaries, and deductions allowed under income tax

Preamble:
The Central Board of Direct Taxes (CBDT) has been charged with all matters relating to various direct taxes in India and it derives its authority from Central Board of Revenue Act 1963, since 1 January 1964. The CBDT is a part of Department of Revenue in the Ministry of Finance. CBDT provides essential inputs for policy and planning of direct taxes in India and it is also responsible for administration of direct tax laws through Income Tax Department.

The Chairman, who is also an ex-officio Special Secretary to Government of India, heads the CBDT. In addition, CBDT has six Members, who are ex-officio Additional Secretaries to Government of India. The Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier civil service of India, whose members constitute the top management of Income Tax Department. The support staff for CBDT is drawn from IRS as well as other premier civil services of the country and is assisted by several attached offices.

Central Board of Direct Taxes comprises of,

Chairman

Member (Income Tax)

Member (Legislation)

Member (Revenue and Widening of Tax)

Member (Personnel & Vigilance)

Member (Investigation & Computerization)

Member (Audit & Judicial)

Areas for collective decision by CBDT:

* Policy regarding discharge of statutory functions of the CBDT and of the Union Government under the various direct tax laws.

* General Policy relating to,

  1. Set up and structure of Income Tax Department;
  2. Methods and procedures of work of the CBDT;
  3. Measures for disposal of assessments, collection of taxes, prevention and detection of tax evasion and tax avoidance;
  4. Recruitment, training and all other matters relating to service conditions and career prospects of all personnel of the Income-tax Department;
  5. Laying down of targets and fixing of priorities for disposal of assessments and collection of taxes and other related matters;
  6. Write off of tax demand exceeding Rs.25 lakhs in each case;
  7. Policy regarding grant of rewards and appreciation certificates.

The Income tax act is divided into chapters and sections for convenience of operation and interpretation. Given below are the chapter numbers with heading related to salaries and deductions.

Chapter no. Chapter Heading
Chapter IV COMPUTATION OF TOTAL INCOME
Chapter VIA DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME
Chapter VIII REBATES AND RELIEFS

In this abstract we are dealing with ‘Computation of total income’ from salaries and deductions allowed from the total income under income tax act.

Computation – Income chargeable under ‘Salaries’,

The following income shall be chargeable to income-tax under the head ‘Salaries’:

  1. any salary due from an employer or a former employer to an assessed in the previous year, whether paid or not;
  2. Arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

For the removal of doubts, if any salary is paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.

Salary, perquisite and profits in lieu of salary defined

    1) Salary includes,

      (i) wages;

      (ii) any annuity or pension;

      (iii) any gratuity;

      (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

      (v) any advance of salary;

      (vi) any payment received by an employee in respect of any period of leave not availed of by him

      (vii) the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80 CCD;

    2) Perquisite includes,

      (i) the value of rent-free accommodation provided to the assessed by his employer;

      (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessed by his employer;

      (iii) the value of any benefit or amenity granted or provided free of cost or at concession rate in any of the following cases

      (a) by a company to an employee who is a director thereof;

      (b) by a company to an employee being a person who has a substantial interest in the company;

    3) Profits in lieu of salary includes,

      (i) the amount of any compensation due to or received by an assessed from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

      (ii) any amount due to or received, whether in lump sum or otherwise, by any assessed from any person

      (A) before his joining any employment with that person; or

      (B) after cessation of his employment with that person;

        This sub-clause shall not apply to the value of any benefit provided by a company free of cost or at a concession rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any employees stock option plan or Scheme of the company offered to such employees.

        Any vehicle provided by a company or an employer for journey by the assessed from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit for the purposes of this sub-clause;

      Medical treatment:

      This is excluded from salary income as below:

      (i) value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer;

      (ii) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family including treatment abroad.

      (iii) any sum on the premium paid by an employer in relation to an employee, to effect or to keep in force an insurance on the health of such employee under any scheme approved by the Central Government ;

      (iv) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family. However, that such sum does not exceed Rs 15000 – fifteen thousand rupees in the previous year;

Deductions from salaries:

80A. (1) In computing the total income of an assessed, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter VI A, the deductions specified in

sections 80 C to 80 U.The income chargeable under the head ‘Salaries’ shall be computed after making the following deductions, namely:

* a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessed who is in receipt of a salary , a sum equal to one-fifth of his salary exclusive of any allowance, benefit or other perquisite or five thousand rupees, whichever is less;

* a deduction of any sum paid by the assessed on account of a tax on employment ;

Deduction in respect of life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc

Sections 80CCC, 80CCD and 80CCE:

The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any case, exceed one lakh rupees being the aggregate of the sums referred to in (2) below.

(1) In computing the total income of an assessed, , there shall be deducted the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed 100,000 rupees.

(2) The sums referred to in sub-section (1) above shall be any sums paid or deposited in the previous year by the assessed

    (i) to effect or to keep in force an insurance on the life of persons namely the individual, the wife or husband and any child of such individual

    (ii) to effect or to keep in force a contract for a deferred annuity, not being an annuity plan provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity;

    (iii) by way of deduction from the salary payable by or on behalf of the Government to any individual being a sum deducted in accordance with the conditions of his service, for the purpose of securing to him a deferred annuity or making provision for his spouse or children, in so far as the sum so deducted does not exceed one-fifth of the salary;

    (iv) as a contribution by an individual to any provident fund to which the Provident Funds Act, 1925 (19 of 1925) applies;

    (v) as a contribution by an employee to a recognized provident fund;

    (vi) as a contribution by an employee to an approved superannuation fund;

    (vii) as a contribution for persons specified in (i) above for participation in the Unit-linked Insurance Plan, 1971 of the Unit Trust of India

    (viii) as a contribution in the name of any person specified in persons specified in (i) above) for participation in any such unit-linked insurance plan of the LIC Mutual Fund;

    (ix) to effect or to keep in force a contract for such annuity plan of the Life Insurance Corporation as the Central Government may specify in the Official Gazette;

    (x) as subscription to any such deposit scheme of, or as a contribution to any such pension fund set up by, the National Housing Bank.

    (xi) as subscription to any such deposit scheme of

      (a) a public sector company which is engaged in providing long-term finance for construction or purchase of houses in India for residential purposes; or

      (b) any authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both,

    (xv) as tuition fees whether at the time of admission or thereafter to any university, college, school or other educational institution situated within India for the purpose of full -time education of any of the persons specified in (i) above

    (xii) Housing loan installments:

      (a) any installment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or

      (b) any installment or part payment of the amount due to any company or co-operative society of which the assessed is a shareholder or member towards the cost of the house property allotted to him; or

      (c) Repayment of the amount borrowed by the assessed from

      (1) the Central Government or any State Government, or

      (2) any bank, including a co-operative bank, or

      (3) the Life Insurance Corporation, or

      (4) the National Housing Bank, or

      (5) any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purpose.

      (d) stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessed.

We are giving below the Income Tax payable under the heading ‘salaries’,

Rates of income-tax

    (1) where the total income does not exceed Rs. 1,00,000
Nil;
    (2) where the total income exceeds Rs.1,00,000 but does not exceed Rs. 1,50,000
10 per cent of the amount by which the total income exceeds Rs. 1,00,000;
    (3) where the total income exceeds Rs. 1,50,000 but does not exceed Rs. 2,50,000
Rs. 5,000 plus

20 per cent of the amount by which the total income exceeds Rs. 1,50,000;

    (4) where the total income exceeds Rs. 2,50,000
Rs. 25,000 plus 30 per cent of the amount by which the total income exceeds Rs. 2,50,000.

(II) In the case of every individual, being a woman resident in India, and below the age of sixty-five years at any time during the previous year,

Rates of income-tax

    (1) where the total income does not exceed Rs. 1,35,000
Nil;
    (2) where the total income exceeds Rs. 1,35,000 but does not exceed Rs. 1,35,000;
10 per cent of the amount by which the total income exceeds Rs. 1,50,000
    (3) where the total income exceeds Rs. 1,50,000 but does not exceed Rs. 2,50,000
Rs. 1,500 plus 20 per cent of the amount by which the total income exceeds Rs. 1,50,000;
    (4) where the total income exceeds Rs. 2,50,000
Rs. 21,500 plus

30 per cent of the amount by which the total income exceeds Rs. 2,50,000.

(III) In the case of every individual, being a resident in India, who is of the age of sixty-five years or more at any time during the previous year,

Rates of income-tax

    (1) where the total income does not exceed Rs. 1,85,000
Nil;
    (2) where the total income exceeds Rs. 1,85,000 but does not exceed Rs. 2,50,000
20 per cent of the amount by which the total income exceeds Rs. 1,85,000;
    (3) where the total income exceeds Rs. 2,50,000
Rs. 13,000 plus 30 per cent of the amount by which the total income exceeds Rs. 2,50,000.

Surcharge on income-tax

(i) in the case of every individual or Hindu undivided family or association of persons or body of individuals having a total income exceeding 1,000,000 rupees, be reduced by the amount of rebate of income-tax calculated under Chapter VIII-A, and the income-tax as so reduced, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax;

(ii) in the case of every person, other than those mentioned in item (i), be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent of such income-tax:

Provided that in case of persons mentioned in item (i) above having a total income exceeding ten lakh rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of 1,000,000 rupees by more than the amount of income that exceeds 1,000,000 rupees.

Rebate on life insurance premium, contribution to provident fund:

An assessed being an individual, or a Hindu undivided family, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to

(i)in the case of an individual or a Hindu undivided family, whose gross total income before giving effect to deductions under Chapter VI-A shown above is 150,000 rupees or less, twenty per cent of the aggregate of the sums detailed below:

The sums referred above paragraph shall be any sums paid or deposited in the previous year by the assessed

(i) to effect or to keep in force an insurance on the life of self, spouse and children;

(ii) to effect or to keep in force a contract for a deferred annuity on the life of self, spouse and children;

(iii) by way of deduction from the salary payable by or on behalf of the Government to any individual being a sum deducted in accordance with the conditions of his service, for the purpose of securing to him a deferred annuity or making provision for his wife or children, in so far as the sum so deducted does not exceed one-fifth of the salary;

(iv) as a contribution by an employee to an approved superannuation fund;

(v) in a ten-year account or a fifteen-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, as amended from time to time, where such sums are deposited in an account standing in the name of wife and children

(vi) as subscription to the National Savings Certificates (VI Issue) and National Savings Certificates (VII Issue) issued under the Government Savings Certificates Act, 1959 (46 of 1959);

(vii) as a contribution for participation in any such unit-linked insurance plan of the LIC Mutual Fund notified by Government in the Official Gazette.

[This article is meant to help entrepreneurs and organizations understand their tax liabilities better and has been written with best intentions and to the best of our knowledge and does not claim to the final word on tax liabilities. Kindly confirm the information from the official Income Tax India website]

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