Every individual including the salaried people like us have to pay taxes on the salary that we earn.

But of course, you know that.

But what we don’t know is how to manage our finances once tax slab kicks in.

Sources of Income

It is important for us to note that first of all, we should know that there are five heads of income under which taxes are charged.

One of these heads is Salary Income and the income of working professionals is charged under this head.

The components of salary include:

  • Basic salary
  • Dearness allowance
  • Bonus
  • Leave Salary Encashment
  • Conveyance Allowance
  • House Rent Allowance etc.

 

Income Tax Slabs

After knowing this we should also be aware of the fact whether our income is taxable or not. To know whether we are eligible to pay tax or not we can refer to this Income Tax slab

Income Tax Slabs Tax Rate
Income up to Rs 2,50,000 No Tax
Income from Rs 2,50,000 to 5,00,000 5 %
Income from Rs 5,00,001 to 10,00,000 20 %
Income above Rs 10,00,000

30 %

 

In the above table, it shows that we do not have to pay taxes if the taxable income is less than Rs 2,50,000. The tax rate for income from Rs 2,50,000 to Rs 5,00,000 has been reduced from 10 % to 5 %.

The maximum tax rate applicable for us is 30 % if our income exceeds Rs 10,00,000. There is a surcharge of 4 % applicable for all the income tax brackets.

If our income is more than Rs 50 lakh, we need to pay a surcharge of 12 % and if it is more than Rs. 1 crore then we pay a surcharge of 15 %.

Example1:

A person with a taxable income (after deductions) of Rs 2,00,000 will not pay any tax.

Another person with taxable income of Rs 4,00,000 will pay 5 % tax on Rs 1,50,000 (which is excess of 2,50,000) which is Rs 7,500.

Example 2:

Another person with a taxable income of say 8,00,000 will pay a tax of 72,500.

No tax was charged on the first 2,50,000, 5 % was charged on next 2,50,000 which comes to 12,500 and finally on the last 3,00,000 ( which is excess of 5,00,000), 20 % was charged which is Rs. 60,000.

When we add Rs. 60,000 to Rs 12,500 we get Rs 72,500. In a similar way, tax calculation is done for any amount in excess of Rs 10,00,000.]

Example 3:

Lastly, a person with an annual salary of say Rs. 12,00,000 will be charged no tax for the first Rs 2,50,000, 5 % tax for the next Rs. 2,50,000 i.e Rs. 12,500, 20 % for the next Rs. 5,00,000 (which makes it a total of Rs 10,00,000) i.e Rs 1,00,000 and lastly, 30 % on last Rs 2,00,000 (which is excess of Rs. 10,00,000) i.e Rs. 60,000.

Now, when we add all these tax amounts we get a total tax of Rs 1,72,500. All these amounts have been taken without taking the deductions to make it simpler for people like us to understand.

Income Tax Calculation

Taxpayers, have to add all the components of salary income to get salary income.

To this, we add the income from the other four sources and we get Gross Total Income. From this gross total income, a standard deduction of Rs. 40,000 is done from Financial Year 2018-19 onwards.

Particulars FY 2017-18 FY 2018-19 Onwards
Gross Salary (in Rs.) 4,80, 000 4,80,000
(-) Transport Allowance 19,200 Not Applicable
(-) Medical Allowance 15,000 Not Applicable
(-) Standard Deduction Not Applicable 40,000
Net Salary 4,45,800 4,40,000

The standard deduction of Rs.40,000 has replaced transport allowance of Rs 1,600 per month adding up to Rs 19,200 per annum and medical allowance of Rs 15,000 per annum.

In total, we see a reduction in net salary of Rs.5,800. The saving of Rs 5,800 is the additional benefit introduced by the government in the last year’s union budget.

The standard deduction is a fixed deduction that can be availed by all salaried individuals without submitting any documents or bills. We will not include the house rent allowance while calculating the net income.

TDS on Salary

Under section 192, the employer has to mandatorily deduct TDS on salary and then pay the salary after deducting the necessary TDS.

This TDS is deducted on the basis of the average rate of income tax of salaried people like us for that particular financial year. This average rate of income tax is decided on the basis of the tax slab in which we fall.

The calculation of the tax can be explained with an example.

Example 1

Say an individual earns Rs 50,000 per month. He earns Rs 6,00,000 per annum for a particular financial year. Let’s say that he has claimed a deduction of Rs 50,000 in that year.

Now, the taxable income after deductions is Rs. 5,50,000. The tax on this amount as per tax slab rates would come out to Rs 22,500.

A surcharge of 4% will be charged and the final tax will become Rs.23,400. Now the average tax rate will be calculated by dividing the final tax amount of Rs.23,400 by the total salary i.e Rs.6,00,000 which would come out to 3.9%.

Now TDS on salary for this individual for that particular financial year will be deducted at 3.9 %.

The TDS on salary is reflected in form 16 which is given to the taxpayer at the end of that financial year. This TDS amount can be crosschecked with form 26AS which can be checked online by logging into the assessee’s account in the Income Tax Department’s website.

Section 80C Deductions

After understanding the method of calculating the net income, it is important for salaried individuals like us to know the investments that are allowed as a deduction under section 80C.

The Income Tax Act states that Indian citizens and companies can avail of tax deductions under Section 80C, 80CCD, 80CCC, 80CCCE, to save tax by investing up to 1.5 lakh in various options. The different deductions all suit unique investment and tax savings needs of an individual.

Example- If an individual’s taxable income is 8 lakhs and he has invested Rs 1.5 lakhs in 80C investments then his taxable income will come down by Rs 1.5 lakhs and will become 6.5 lakhs.

The investment amount under section 80C is limited to Rs 1.5 lakhs, so in case a person invests only Rs 1.2 lakhs in 80C then he will get a deduction of 1.2 lakhs and not 1.5 lakhs.

Options Available Under 80C Are:

1.Public Provident Fund (PPF)

Investment in Public Provident Fund is eligible for tax deductions under Section 80C.

The maximum deposit can be made in a PPF account is Rs. 1,50,000 per year, therefore, all deposits made to your PPF account can be claimed by us as deductions under Section 80C.

The money that we invest in this account will be locked-in for a period of 15 years. Partial withdrawals can be allowed after a period of 7 years.

2.Bank Deposits

Most banks offer tax saving fixed deposits where deductions can be claimed by an assessee like us under Section 80C of the Income Tax Act.

The maturity period for the tax saver fixed deposits is that they come with a maturity period of 5 years which means that the amount cannot be withdrawn before 5 years.

Premature withdrawal is not permitted under tax saver fixed deposit. Interest earned on tax saver fixed deposits, however, are taxable and will be deducted at source i.e TDS will be charged.

3.Equity Linked Saving Scheme (ELSS)

ELSS is an open-ended equity mutual fund that helps us save tax, and also gives us an opportunity to grow our money by investing in the market through the mutual fund.

ELSS generally gives inflation-adjusted growth in the long-term. Minimum lock-in period for this scheme is 3 years. Investment through ELSS is made in equity so the return is directly linked to the capital market performance.

It is more suitable for investors with a risk appetite as there is no guarantee of a fixed return. The minimum investment amount that can be invested is Rs 500 and there is no upper limit.

4.Sukanya Samriddhi Scheme

Parents can open a Sukanya Samriddhi Account in the name of a girl child till she becomes 10 years old and a maximum of two accounts can be opened for two girls by their legal guardian.

This account can be opened at public sector banks and post offices. The deposit should be made every year till the end of 14 years from the year in which the account was opened.

Partial withdrawal is allowed up to 50% of the balance in the account as per the end of the previous financial year, for higher education or marriage of the girl after she is 18 years old.

Maturity period is 21 years from the date of opening of the account. Minimum & maximum investment limit is Rs 1,000 & Rs 1.5 lakh p.a. respectively.

5.Post Office Time Deposit

Just like fixed deposits, time deposits are opened in the post office. These time deposits are also eligible for tax benefits under section 80C.

These deposits come with an option of a 5-year time deposit where investments become eligible for benefits. These deposits also offer attractive interest rates.

Conclusion

It is very essential for a working professional to understand his finances and how the tax is charged on his or her salary.

After a person understands this, it further helps him/her to understand how to manage his finances and invest in tax saving investment instruments.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww