The Ultimate Guide To Tax

Wondering what is tax? Have a lot of questions regarding how does taxation work, why do we need to pay it, who is liable to pay, etc. Don’t worry, we are here to answer all your questions.  

Let’s start with the basics first! 

Tax is a duty or fees levied on the individuals or organizations by the government to raise funds to finance various welfare activities of the government. It is referred to as a form of generating revenue for the government to carry out several functions like developing infrastructure, ensuring social security, enhancing educational programs and so on. In India, taxes are levied by State or Central governments. However, some of the minor taxes can be levied by the local bodies or municipal corporations.  Also, these taxes should be in accordance with the laws passed by State Legislature or Parliament.  

Types Of Taxes: 

As shown in the figure above, there are various types of taxes levied by law. But one of the most common and significant form of tax is Income Tax. So let’s have a detailed view on it. 

What Is Income Tax?

Are you someone who has just been graduated and stepped into the corporate world? Or someone who is going to file tax for the first time? You need not to worry as you are at the right place to discover all that you need to know about income tax.  

Income Tax is a form of direct tax that is levied by the central government on the citizens who have any kind of income, according to the Income Tax Act, 1961. The tax slabs and the rate at which the citizens are taxed is defined by the government and is subject to change every year with the Union Budget. So basically, every person who earns or has an income is liable to pay tax. And, income is not just salary but can also be earned from various sources too, as specified below: 

1. Income from Salary/Pension: It consists of salary, allowances, leave encashments, pension covered and so on, as per the employment agreement. 
2. Income from House Property:  This includes of income from house which may be self-occupied, owned or rented.  
3. Income from Capital Gains: It is the income gained from the sale of capital assets such as mutual funds, stocks, gold, house property, etc.  
4. Income from Business or Profession: This involves the income earned through a business or when you are self-employed/ work as a freelancer.  
5. Income from Other Sources: This consists of income through savings bank account, family pensions, fixed deposits or even winning KBC for that matter! 

All these entities summed up together is your Total Income, that is liable to be taxed. 

Who Are Entitled To Pay Income Tax?

Now that you have a clear picture about what is income tax, lets dive in to see which category of tax payers you fall into and how to figure out the rate at which you need to pay.  

Government has classified the set of liable tax payers into the following categories:  

The tax rates are further restricted to the residential status and age of the tax payer as follows: 

1. Individuals below the age of 60 years (resident or non-resident)   

2. Individuals(resident) with the age of 60 years or more (but less than 80 years)

3. Resident super senior citizen with the age of 80 years or more

Assessment Year 2019-20 

1. Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.

2. Rebate under Section 87A: The rebate is available to a resident individual if his total income does not exceed Rs. 5, 00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500, whichever is less.

3. Surcharge:

Surcharge is levied on the amount of income-tax at the following rates if total income of an assesses exceeds specified limits:  

i) Where income exceeds Rs. 50 lakhs, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 50 lakhs by more than the amount of income that exceeds Rs. 50 lakhs.  

ii) Where income exceeds Rs. 1 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore. 

iii) Where income exceeds Rs. 2 crore, the total amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 2 crores by more than the amount of income that exceeds Rs. 2 crore  

iv) Where income exceeds Rs. 5 crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 5 crore rupees by more than the amount of income that exceeds Rs. 5 crore rupees

Example: 

Let’s consider a salaried individual Mr. Sanil (below 60years of age) with an income of Rs. 7,50,000 staying in Mumbai.  

So the individual’s total income is Rs. 7,50,000. His salary consists of various components as mentioned below: 

• The basic salary of Mr. Sanil is Rs. 35,000 per month.  
• The HRA (House Rent Allowance) is Rs. 16,250.  
• Annually, Rs. 15,000 has also been included in his salary as LTA (Leave Travel Allowance). 
• Special allowance of Rs. 10,000 per month. 
• PF contribution (12% of basic salary per month) is Rs. 4,200, which, when calculated annually will amount to Rs. 50,400.  

Computation of HRA Component: 

The lowest value among the three mentioned components below will be exempted from tax: 

• Actual HRA received: Rs. 1,95,000 
• 50% (for metro cities & 40% for non-metro cities) of annual basic salary (Rs. 4,20,000 in this case) – Rs. 2,10,000 
• Rent paid less 10% of basic salary (Rs. 1,80,000 – (10% of Rs. 4,20,000))- Rs. 1,38,000 

Taxable HRA Amount- Rs. 1,95,000 – Rs. 1,38,000 = Rs. 57,000 

**In this case, the least amount among the above mentions entities is Rs. 1,38,000. Hence, it is exempted from the total HRA received i.e. Rs. 1,95,000.  

Computation of Income Taxable from Salary: 

Know more about how Keka makes tax computation easy with just a click.   

Computation of Total Deductions: 

Here, the investments of Mr. Sanil come into consideration through which he can claim deductions under various sections:  

• Investments in Public Provident Fund Rs. 50,000  
• Investments in EPF (Employer Provident Fund) Rs. 50,400 
• Interest from Savings Account is Rs. 6,000.

Hence, Mr. Sanil can claim deductions under the following sections: 

Computation of Gross Taxable Income: 

Computation of Income Tax:  Mr. Sanil is liable to pay a tax of Rs. 10,379.2 after claiming all the deductions and exemptions from his investments. We hope this gives you a clear picture of how tax is calculated for a salaried employee.  

With the New Union Budget- 2020, as announced by the FM minister Nirmala Sitharaman, we can now opt for either the new regime or continue to follow the old regime.