Here is all you need to know about your Salary and its Tax Implications:
Mr. Anil Gupta, recently got his first salary. When he was verifying the salary amount that was credited to his account, he was surprised to find a lesser amount than expected. As it was Mr. Anil’s first job, he was unaware of the salary structure and its components and the difference between the gross and take home salary. Obviously, he was also not aware that as per the law, the employer deducts the tax at source on his estimated income before crediting the salary to his account.
In this article, I will take you through the definition of Salary and its components, various exemptions from salary income and allowances under the head ‘Salary’, as well as the tax implications.
What is a Salary?
Salary is said to be the payment received by or accruing to an individual for service rendered for an express or implied contract. The law gives an inclusive but not the exhaustive definition of salary. As per Section 17(1), salary includes the following:
• Annuity or Pension
• Commission, fees, perquisites or profits in lieu of salary
• Advance salary
• Receipt from provident fund
• Contribution of employer to a recognized provident fund over prescribed limit
• Leave encashment
• Compensation as a result of variation of service contract etc.
• Government contribution to a pension scheme
Exemptions from Salary Income
Under the provision of Section 10 of the IT Act, there are certain categories of payments which are exempted from tax either partly or wholly. These payments are not to be included in the head ‘Salary’ for the tax deduction. Below is the list of such payments:
• Leave encashment: Exempted to the limit defined under Section 10(AA).
• Compensation on Voluntary Retirement: Exempted to the limit provided under Section 10(10C).
• Death cum Retirement Gratuity or any other Gratuity: Exempted to the limit defined under Section 10(10).
• Retrenchment Compensation: Exempted to the limit provided under Section 10(10B).
• Commutation of Pension: Exempted to the limit defined under Section 10(10A).
• Interest income & investments: Exempted to the limit provided under Section 10(15).
• Payment from the Provident Fund: Exempted to the limit provided in Section 10(11) & Section 10(12).
• Exemption of family pension/ pension to the awardees of “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra”: Clause (18) of Section 10 provides for the exemption in case of such income.
• Payment from approved Superannuation Fund: Exemption allowed under Section 10(13).
There are some additional payments regularly distributed along with the salary to meet the specific requirements of the employees. These are referred to as ‘Allowances’. Below table illustrates a few of them:
• City Compensatory Allowance
• Fixed Medical Allowance
• Dearness Allowance
• Overtime Allowance
• Servant Allowance
• Project Allowance
• Tiffin/Lunch/Dinner/Refreshment Allowance
• Telephone Allowance
• Holiday Allowance
• Any other cash Allowance
Now that, you are aware of the Salary components and various exemptions & allowances provided under the head ‘Salary’, let me take you through the tax component of your salary income.
As per the provision under Section 192 of the IT Act 1961, TDS has to be deducted by every employer making any payment in the form of Salary to its employees on the estimated income of the payee. According to the regulation, the tax has to be necessarily deducted at source from the income under the head “Salary” when:
• The employer makes payment to the employee.
• Payment is in the form of the salary.
• The income under the head “Salaries” is above the threshold limit not chargeable to tax.
For the deduction of tax, the employer first needs to calculate the net taxable income of the employee and then the tax liability at the average rate of income tax based on the rates in force.
Steps for the determination of the tax liability
Below are the steps to be followed in the given sequence for the calculation of the tax liability:
1. The employer first needs to calculate the gross salary payable to the employee during the year, taking into account any other salary received or receivable from any other/ previous employer.
2. Then the payments exempted from tax needs to be deducted from the gross salary.
3. For arriving at the net salary payable, the deduction under section 16 shall be reduced from the amount obtained in Step 2.
4. This step includes the calculation of Gross total income by adding any income chargeable under any other head to the sum obtained in Step 3, as reported by the employee.
5. Any deductions under Chapter VI-A has to be reduced from the Gross total income to arrive at the net taxable income.
6. After that, based on the rates in force, the tax liability has to be computed on the net taxable income.
7. The tax liability then has to be increased by the surcharge payable (if any) and the education cess to determine the total tax payable.
8. Finally, 1/12th of the total tax payable is to be deducted by the employer every month.
Note: TDS is deducted at the time of the actual payment.
TDS Rates for AY 2018-19
Tables below illustrate the applicable tax rates for individuals under different age group:
1. For Individuals (resident or non-resident)/ HUF/ Association of Person/ Body of Individual:
2. For Senior citizens (people of the age of 60 years or above at any time of course during the previous year but below 80 years of age on the last day of the previous year):
3. For Super Senior citizens (who are of the age of 80 years or more at any time during the previous year):
•The amount of Income tax has to be increased by a surcharge calculated at the rate of 10% on such tax, if the total income Rs 50 Lakh & Rs. 1 crore.
• The amount of Income tax has to be increased by a surcharge calculated at the rate of 15% on such tax, if the total income exceeds Rs. 1 crore.
• A uniform tax benefit of Rs 12500 would be given to assessees falling in income slabs of Rs 500001 and above.
• Income tax amount and the applicable surcharge shall further be increased by Education Cess & Secondary and Higher Education Cess determined at the rate of 2% and 1% respectively on the Income tax amount and the applicable surcharge.
• As per Section 87A, the rebate is available for the resident individuals if their total income does not exceed Rs. 5,00,000. The rebate amount is lower of: 100% of the income tax or Rs.2500.
TDS on change of employment
In case of change of employment in the mid of the year, the details of the salary and TDS from the previous employment can be disclosed to the new employer in Form 12B as per the Rule 26A of the IT Rules. The information to be furnished in the form includes but not limited to:
• The previous employer details like PAN and TAN.
• Salary break up like Basic + DA, HRA, Leave Travel Allowance, etc.
• Deductions if any under various sections such as 80C, 80G, 80E, etc.
• TDS on salary by the previous employer.
The new employer after receiving information from the employee takes into account the salary details and TDS deducted by the previous employer and calculates the tax based on the aggregate salary from all the sources.
Adjustments on Tax Liability
Under Subsection 3 of Section 192, a person deducting the income tax can make adjustments in tax amount, in case of shortfall or excess tax deduction during the previous year, in the subsequent year.
For instance, in the event of advance payments, payment of arrears, salary hike, bonus, etc. the tax liability of the employee increases. In such a scenario, the employer can make adjustments and increase the TDS. Similarly, if there is any rebate required and the employee submits the relevant proof for the reduction of tax liability, then the employer needs to reduce the quantum of TDS.
If the TDS amount is deducted in excess, the deductor can make a claim for the excess amount. The excess amount is refunded based on the procedure laid down for the refund of TDS.
The amount to be reimbursed is first adjusted for any existing tax liabilities falling under any Direct Tax Act, and then the remaining amount is being refunded.
(TDS Certificate) Proof of TDS Deduction
As per the provision under Section 203 of the IT Act 1961, every person responsible for deducting TDS is required to provide a certificate of proof to the income tax payee. This certificate of proof is commonly known as TDS certificate.
Time limit for issuing TDS Certificate
Employers deducting tax at source are necessarily required to provide TDS certificates in Form 16 on a yearly basis to their employees latest by May 31st of the assessment year. The assessment year is the year immediately succeeding the financial year for which the income was paid and tax deducted at source.
Also read: Understanding TDS, Form 16/16A & Form 26AS