Latest Update
The last date of income tax return filing for FY 2020-21 (AY 2021-22) is extended to 31st March 2022. For audit cases, the last due date is 15th February 2022.
Hello, in this post we will discuss about the Income Tax Act.
We will cover the following.
- What is the Income Tax?
- Employees as income tax payer
- How is income from salary taxed?
- Income tax slab for salary
- Points to note as an employer calculating IT
- Sample calculation of income tax for salaried income
- Types of Income-tax collection in India
- Types of investment for employees
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 an income within the country.
Employee as Income tax payer
Every employee having the salary as a source of income is eligible to pay income tax. It is necessary to pay the income tax once the annual income crosses the basic exemption limit as per the income tax slab. For an employee, the income tax will be deducted from their salary in the form of TDS by their employer, month-on-month.
This leaves the employee with the responsibilities of only filing their income tax return at the end of the year indicating the total income earned and total tax paid.
How is income from salary taxed?
Salaries have different heads of earnings and are taxed differently.
| Heads of salary | Taxability |
| Basic | Fully taxable |
| Dearness Allowance (DA) | Fully taxable |
| House rent allowance (HRA) | Partially taxable |
| Conveyance | Fully taxable |
| Any other Allowance | Fully taxable |
HRA is partially taxable if the employee is staying in a rented house and declared the same to the employer.
Income tax slab for salary
Old tax regime
| General (<60 yrs) | Senior Citizen (60-80 Yrs) | 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 | >10 Lakhs |
Note : Annual income upto 5 lakh has full rebate
New regime (from FY 2023-24)
| TAXED AT | ANNUAL INCOME |
| Nil | Up to Rs. 3 lakh |
| 5% | Rs. 3 lakh to Rs. 6 lakh |
| 10% | Rs.6 lakh to Rs. 9 lakh |
| 15% | Rs.9 lakh to Rs.12 lakh |
| 20% | Rs.12 lakh to Rs.15 lakh |
| 30% | Above Rs.15 lakh |
Note : Annual income upto 7 lakh has full rebate
Surcharge – It is an additional charge, which is calculated on tax payable.
Rate of Additional Surcharge
| Old tax | New tax | Total Income |
| Nil | Nil | Upto Rs.50 lakh |
| 10% | 10% | >Rs.50 lakh to 1Cr |
| 15% | 15% | >Rs.1cr to 2 cr |
| 25% | 25% | >Rs.2cr to 5 cr |
| 37% | 25% | >Rs.5cr |
Additional Cess of 4% will calculate the tax amount, which is income tax and surcharge.
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:
- You should be aware of the various limits and exemptions provided for Salary income (and others) and calculate tax accordingly.
- You have to provide proper income and exemption details so that it matches with the employees’ actual salary.
- Need to collect declaration and proof of investment from employees for any investment declared by the employees.
- You have to maintain the declaration provided by employees in Form 12BB.
- You have to deduct the correct TDS from the employees based on their income (From salary or other declared sources)
- 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.
- You have to credit the deducted TDS to the proper PAN. I.e. you have to verify the PAN of each employee so that there is no mismatch of credit.
- 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
(Old Regime) |
Taxable income
(New Regime) |
| Basic | 25000 | 25000 | 25000 |
| Dearness Allowance (DA) | 15000 | 15000 | 15000 |
| House rent allowance (HRA) | 10000 | 6500* | 10000 |
| Conveyance | 5000 | 5000 | 5000 |
| Special Allowance | 5000 | 5000 | 5000 |
Old Regime calculation:
* HRA calculation is based on rent paid and place of living.
- 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 50,000 is given for all employees.
6,75,600 – 50000 = 6,25,600
Now, we will consider PF under 80C.
6,25,600 – (1800*12)[PF]
= 6,04,000
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 – 6.04L (20%) | 1,04,000 | 20800 |
| Total | 6,04,000 | 33300 |
Income Tax = 33,300
Cess = 4% of IT = 1332
Total Income Tax = 34,632 (Income Tax + Cess)
TDS = 34, 632 / No. of TDS deduction months
Ex: 36,632 / 12 = 2886 (Considering the entire financial year).
TDS = 2886 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.
New Regime calculation:
Taxable income = 60,000.
Total taxable income after deduction = 60,000 – 200 (PT) = 59,800.
Yearly taxable income = 59,800*12 = 7,17,600
A standard deduction of 50,000 is given for all employees.
7,17,600 – 50000 = 6,67,600
Total Taxable income = 6,67,600
Now, we will calculate tax by applying the Income Tax slab.
| Tax slab | Taxable Amount | Tax |
| 0 – 3L (0%) | 300000 | 0 |
| 3 – 6L (5%) | 300000 | 15000 |
| 6 – 6.676 L (10%) | 67,600 | 6760 |
| Total | 6,67,600 | 21760 |
Income Tax = 21,760
As we get a rebate for Taxable income below 7 Lakh, the total tax payable after rebate in the above example is ZERO.
Hence, TDS per month is also ZERO.
Types of Income-tax collection in India
Income tax is collected by the Indian government in three parts are-
- TDS (Tax Deducted at Source) is deducted from your monthly income before paying you.
- Voluntary payment such as – Advance tax and Self-assessment tax.
- TCS (Tax Collected at Sources) is collected by the seller at the time of sales of goods.
Types of Investments for Employees
Section 80C – Deduction only for individuals and HUF. This section allows for some investments. Such as NSC (National Saving Certificate), and it is exempted from taxation up to Rs. 1.5 Lakh. (HAVE TO LINK WITH BLOG)
Section 80D – Deduction on health insurance premium paid, in case of individuals, spouse, dependent child or parents. Up to Rs.15,000 and in addition deduction of Rs.5000 is applicable if the insured person is a senior citizen. (HAVE TO LINK WITH BLOG)
Section 80E – Deduction on interest paid on education loan for in India.
Section 80U – Deduction on income tax. That applies to disabled people when they show the desirable certificate. Up to Rs. 1 Lakh can be exempted, but it depends upon the disability.
Section 80G – This section allows taxpayers to claim a deduction for various contributions, which are made as a donation, or donated to any charity.
For more details you can go through our (TCS) Tax Collected at Sources and TDS blogs.
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.