Sunday, August 21, 2016

How do I Calculate Income Tax on Salary?

It is a nice feeling to get paid at the end of every month for all the effort you put in your work, but aren't you disappointed when the employer deducts higher tax? So how do you avoid the high tax deduction from your salary?

Any income received by an employee is taxed under the head Income from Salaries. It is only taxable when an employer-employee relationship exists. The first thing one needs to know is the salary slab they fall under. Then the employee needs to submit their declaration about their proposed investments so that the employer can take them under consideration before deducting the income tax from the employee's salary. By declaring the taxes in advance you do not have to go through the lengthy process of having to file for refunds from the Income Tax Department.

Salary includes your Gross salary, Provident Fund, Insurance, Leave pay, Gratuity , Employee State insurance and Labour Welfare Fund.
Gross Salary:

Gross salary is the sum total of Basic pay + Dearness allowance + House Rent Allowance + transport allowance + special allowance + other allowance.

You can invest under the Section 80C to a maximum of Rs.1,50,000. Or if you are in a higher tax bracket, you can save Rs.45,000 in tax.

You can make the investment in Provident Fund, Life Insurance Premium, Equity Linked Savings Scheme, Home Loan monthly instalment, National Savings Certificate, Infrastructure Bond, Pension Funds, Tuition fees and Unit Linked Insurance Plan.

Under Section 80D , you can claim Rs.25,000 as medical expenses and Rs.30,000 can be claimed by senior citizens.

The deductions on House Rent Allowance is the least of the following:
Either the actual HRA amount.
50% of your basic pay if the employee is living in metro and 40% if the employee is living in a non-metro area.
Additional rent paid above 10% of his salary.

While you have a house of your own, you cannot claim deductions for Home loan interest payment and rent. But some people do claim both while they are living in their own homes. If they are staying with their parents, they show that they are paying rent to their parents and claim the HRA. The other case is when you have your own house, but you stay in a rented accommodation, as the workplace is far from your home. You can then claim HRA as well as deduction for the home loan interest payment.

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