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Computation of taxable salary

Computation of Taxable Salary

The computation of taxable salary involves aggregating various components of salary, subtracting eligible exemptions, and applying deductions as per the provisions of the Income Tax Act. Below is the step-by-step process to calculate taxable salary in India:

1. Gross Salary

The first step is to calculate the Gross Salary, which includes:

  • Basic Salary: Fixed component of the salary.
  • Dearness Allowance (DA): Usually a percentage of the basic salary.
  • House Rent Allowance (HRA): Allowance to cover rental expenses.
  • Special Allowances: Other allowances such as conveyance, medical, etc.
  • Bonus: Any bonus paid by the employer.
  • Commission: Any commission received as part of the salary.
  • Leave Encashment: Payment received for leaves not availed.
  • Gratuity: Amount received upon retirement or resignation.
  • Other Allowances: Any other allowances like overtime, performance incentives, etc.

Gross Salary = Basic Salary + Dearness Allowance + HRA + Special Allowances + Bonus + Commission + Leave Encashment + Gratuity + Other Allowances

2. Exemptions under Section 10

Certain components of salary are eligible for exemptions under Section 10 of the Income Tax Act. These include:

  • House Rent Allowance (HRA)
    • Exemption is the minimum of the following:
      • Actual HRA received.
      • 50% of salary if living in a metro city, or 40% if living in a non-metro city.
      • Rent paid minus 10% of salary.
  • Leave Travel Allowance (LTA): Exempt if spent on travel within India for the employee and their family, subject to certain conditions.
  • Gratuity: Exempt to the extent of the least of the following:
    • ₹20,00,000.
    • Actual gratuity received.
    • Half month's salary for each completed year of service.
  • Other Allowances: Some other allowances may also be exempt, such as:
    • Conveyance Allowance: Exempt up to ₹1,600 per month.
    • Children's Education Allowance: Exempt up to ₹100 per month per child (maximum of 2 children).

Exempted Salary Components = HRA Exemption + LTA Exemption + Gratuity Exemption + Other Exemptions

3. Net Salary

Subtract the exemptions under Section 10 from the Gross Salary to determine the Net Salary.

Net Salary = Gross Salary - Exempted Salary Components

4. Deductions under Section 16

Deductions are allowed from the Net Salary under Section 16:

  • Standard Deduction: A flat deduction of ₹50,000 from salary income.
  • Professional Tax: Deduction allowed for any professional tax paid during the year.

Deductions under Section 16 = Standard Deduction + Professional Tax

5. Income Chargeable under the Head 'Salaries'

Subtract the deductions under Section 16 from the Net Salary to arrive at the income chargeable under the head 'Salaries.'

Income under the Head 'Salaries' = Net Salary - Deductions under Section 16

6. Total Taxable Income

Finally, add any other income such as interest income, rental income, etc., to the income under the head 'Salaries' to compute the total taxable income. Deduct any deductions under Chapter VI-A (like 80C, 80D, etc.) to arrive at the taxable income.

Total Taxable Income = Income under the Head 'Salaries' + Other Income - Deductions under Chapter VI-A

Example Computation

Let's assume the following details:

  • Basic Salary: ₹6,00,000
  • HRA: ₹2,00,000
  • Rent Paid: ₹1,80,000
  • Special Allowances: ₹50,000
  • Bonus: ₹1,00,000
  • Gratuity Received: ₹2,50,000
  • Professional Tax Paid: ₹2,500

Step-by-Step Calculation:

  1. Gross Salary: ₹6,00,000 + ₹2,00,000 + ₹50,000 + ₹1,00,000 = ₹9,50,000
  2. HRA Exemption:
    • Actual HRA received: ₹2,00,000
    • 50% of Salary: ₹3,00,000 (assuming a metro city)
    • Rent paid minus 10% of salary: ₹1,80,000 - ₹60,000 = ₹1,20,000
    • HRA Exemption = ₹1,20,000 (the minimum of the above)
  3. Exempted Salary Components: ₹1,20,000 (HRA Exemption)
  4. Net Salary: ₹9,50,000 - ₹1,20,000 = ₹8,30,000
  5. Deductions under Section 16:
    • Standard Deduction: ₹50,000
    • Professional Tax: ₹2,500
    • Total Deductions: ₹52,500
  6. Income under the Head 'Salaries': ₹8,30,000 - ₹52,500 = ₹7,77,500
  7. Total Taxable Income: ₹7,77,500 (assuming no other income or deductions under Chapter VI-A)

This is the amount on which tax will be calculated as per the applicable slab rates.

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