Every year we are required to calculate the taxes to be paid by us on the total income earned during a financial year. Total income is arrived at by totalling income from various sources like income from salary, interest income, capital gains and so on.
Gross Income is divided into five categories as per the Income-tax Act, 1961 which are as follows: (a) Income from salary, (b) Income from house property, (c) Income from business and profession, (d) Income from capital gains, and (e) Income from other sources.
However, one can avail various tax breaks such as house rent allowance (HRA), leave travel allowance (LTA) and others under sections 80C to 80U of the Income Tax Act to reduce their tax outgo.
Tax payable by you on the net taxable income will depend on the income tax slab applicable to your income. For FY 2018-19, income tax slabs will be applicable as follows:
For resident individuals below 60 years during the financial year
For resident individuals above 60 years but below 80 years during the financial year
For resident individuals above 80 years during the financial year
A 4 percent cess will be added from FY 2018-19 to your tax liability. Till FY 2017-18, cess was charged at 3 per cent. In addition to that, surcharge will be applicable if your annual income is more than Rs 50 lakh. For income above Rs 50 lakh but less than Rs 1 crore, surcharge at rate of 10 per cent will be levied. For income above Rs 1 core, a surcharge of 15 per cent will be applicable. A rebate is available under section 87A of Rs 2,500 for those earning between Rs 2.5 lakh and Rs 3.5 lakh.
Salary is divided into various components such as basic, HRA, special allowance and any other components. Of these, some will be fully taxable, some will be fully exempt from tax upon submission of actual bills, and others up to a certain extent.
Here, one must remember that medical reimbursement up to Rs 15,000 and transport allowance up to Rs 19,200 in a year are exempt from tax till and for FY 2017-18. Therefore, starting from FY 2018-19 onwards, these two allowances will be fully taxable in the hands of the employee.
However, in a relief to the salaried class, from FY 2018-19, standard deduction of Rs 40,000 has been introduced in lieu of these two allowances. Pensioners will also be able to avail the benefit of this deduction. Similarly, interest earned from fixed deposits, savings bank account, recurring deposits are taxed under the head ‘Income to other sources’.
Here is how your tax liability will be calculated:
Let us assume you are monthly salary break up is as follows:
You are living on rent paying a monthly rent of Rs 20,000 in a metro city. Apart from that, you have also received Rs 4,200 as interest from your savings bank account and Rs 5,000 from fixed deposits. During the year, you have made some tax-saving investments such as PPF of Rs 1 lakh and paid LIC premium of Rs 5,000. You are also paying premium of Rs 10,000 on your health insurance policy.
Here’s how your total income chargeable to tax will be calculated for FY 2017-18 and FY 2018-19:
In the above example, communication reimbursement is fully exempt from tax because we have assumed that you have submitted actual bills. Similarly, for LTA since the actual bills submitted was of Rs 25,000, therefore the balance of Rs 5,000 will be taxable. The amount of tax exempted HRA is calculated on the basis of the HRA exemption rules. Click here to use our HRA calculator.
The net taxable income in the above mentioned example after availing all the deduction available under sections 80C to 80U and standard deduction for FY 2018-19 is Rs 5,37,200 and for FY 2017-18 is 5,43,000.
Income chargeable to tax for FY 2018-19 is less than FY 2017-18 because standard deduction of Rs 40,000 offered from FY 2018-19 onwards is higher than combined tax benefit offered on medical reimbursement and transport allowance till FY 2017-18.
After arriving at the net taxable income, this is how your tax liability on this will be calculated for FY 2017-18 and 2018-19:
*For income tax slab between Rs 5 lakh to Rs 10 lakh, Rs 43,000 is taxable for FY 2017-18 and Rs 37,200 for FY 2018-19 at the rate of 20 percent.
Cess levied in on tax liability is higher for the FY 2018-19 as Budget 2018 has increased it from 3% to 4%. Therefore, for FY 2017-18 the cess will be levied at 3% and from FY 2018-19 onwards, it will be 4%.
If your net income chargeable to tax is more than Rs 10 lakh, then any income above Rs 10 lakh less of 10 lakh will be charged at 30 percent.