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Calculating Taxable Income

There are only two things in life you can’t duck: Death and Taxes

I agree that you can’t duck the first but second part I disagree. We, the salaried people, have to pay our taxes and as a patriotic person we should not avoid to do so. We are generous people and we do charity by distributing money to poor people, we do consider there how much should I give but while paying taxes we don’t. We leave our taxes part to be handled by a tax filing agent or broker, without knowing what he did was that right? We have to do it but still we never plan it. This is to take the first step to know our liabilities in terms of taxes and making us little more educated to plan it accordingly to minimize it, to have larger share to spend by ourselves.

In case of a salaried person our incomes are segmented under various heads. Different companies have different type of salary structures to be followed, but the major components you can find are

  • Basic salary
  • House rental allowance (HRA)
  • Dearness allowance (DA)
  • City compensatory allowance (CCA)
  • Conveyance
  • PF deductions
  • Bonuses
  • Special allowances/ Reimbursements (Cell phone, Travel, Entertainment, Attire, Education etc.)

Not all the components of the salary are taxable and most of the companies try to structure their Employees salary in a manner that company and employees both should get the most out of it.  

Fully taxable components are

  • Basic salary
  • Dearness allowance
  • Bonuses

Partially taxable parts and their treatments are as follows

1.       House rental allowance (HRA): HRA which is deducted for our income tax calculations is the minimum among

  • 50% of the basic salary (In 4 Metros), 40% of the basic salary (In rest of country)
  • Actual rent -10% of your basic salary (In Non metro), Actual rent (In 4 Metros)
  • HRA given by  Company

If the HRA received is more than any other calculations on the remaining amount one have to pay the income tax as per his tax bracket. For e.g. if;

Naresh works in Delhi and his HRA is INR 10,000 pm while his basic salary is INR 22,000 pm and he stays in a rented flat of INR 8,000 pm. Then calculations will be

  • 50% of basic salary à INR 11,000
  • Actual rent à INR 8,000
  • HRA given by company à INR 10,000

Therefore out of actual HRA only INR 8,000 is Non-taxable and extra INR 2,000 becomes taxable.

2.       Special Allowances: Most of the special allowances are based on actual bills and can be treated as Non taxable components for general considerations. But in cases when actual bills under various heads are for less than the amount received then the extra amount is taxable at your end. For e.g. if;

Mahesh is eligible to get LTA of INR 22,000 pa but his cost of travel is INR 12,000 so company pays him his extra eligible amount of INR 10,000 then this amount is taxable as per your tax brackets.

Non-taxable components in ones’ salary are

  • PF deductions
  • Conveyance

Apart from normal salary people have various other sources of incomes which are taxable as per applicable income tax rate these other incomes can be

  • Rent received from house
  • Capital gains on sales of real estate property
  • Capital gains through Investments
  • Income from business or secondary employment

All these are treated differently, for which consult your investment advisor.

Once you know your taxable components we can look for availing deductions under various sections of income tax through investments and repayments which we’ll cover in next blog on Deductions under income tax on 1st Oct, 2010. Till then you can start using income tax calculation sheet after down loading from following link:

http://www.2shared.com/document/PXTsgfLr/Income_Tax_calculations_2010-1.html

the password for the link is eduform1

To use it just fill in the cells in yellow and it will automatically calculate your income tax payable to Govt. at the end of the financial year.   

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