Income Tax Act – Meaning, taxability, slab and calculation
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Income Tax Act – Meaning, taxability, slab and calculation

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?

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.

Who can pay income tax?

It is classified into different categories, who can pay – 

  1. Hindu undivided family (HUF)
  2. Firms 
  3. Companies
  4. Associations of persons
  5. Individuals 
  6. Artificial judicial persons 
  7. Local authorities 
  8. Body of individuals 

The income tax return is necessary to file for individuals whose gross income is over Rs.2.5L every financial year. And the limits exceed up to Rs.3L for senior citizens, and for super senior citizens Rs.5L. Non – residential persons are also liable to pay tax on their income, i.e, earned in India.

Taxability for different heads of salary income

Heads of salaryTaxability
BasicFully taxable
Dearness Allowance (DA)Fully taxable
House rent allowance (HRA)Partially taxable
ConveyanceFully taxable
Other AllowancePartially taxable

Income tax slab for salary

General (<60 yrs)Senior Citizen (60-80Yrs)Super Senior citizen( 80yrs and above)
Exempt 0-2.5 lakh0-3 lakh0-5 lakh
5%2.5 – 5 lakh3-5 lakhNil
20%5-10 lakh5-10 lakh5-10 lakhs
30%>10 lakh>10 lakh>10Lakhs

Additional Cess of 4% to calculate the above amount.

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 salaryIncomeTaxable income
Basic2500025000
Dearness Allowance (DA)1500015000
House rent allowance (HRA)100006500*
Conveyance50005000
Special Allowance50005000

* 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 slabTaxable AmountTax
 0 – 2.5L (0%)2500000
 2.5 – 5L (5%)25000012500
5 – 6.14L (20%)1,14,00022800
Total6,14,00035300

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.

Types of Income-tax collection in India

Income tax is collected by the Indian government in three parts are-

  1. TDS (Tax Deducted at Source) is deducted from your monthly income before paying you.
  2. Voluntary payment such as – Advance tax and Self-assessment tax.
  3. TCS (Tax Collected at Sources) is collected by the seller at the time of sales of goods.

For more details you can go through our (TCS) Tax Collected at Sources 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.

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