The first job is imperative for every individual but as soon as an employee receives the first pay cheque, he is under scanner of the Income Tax Department, and becomes a taxpayer. If the individual is earning income more than the threshold limit prescribed, being the exemption limit, he is required to pay income-tax and file income-tax return.
The central government levies Income tax on taxable income at the rate prescribed every year through the annual Union budgets. Some of the rules of calculation of Income Tax are changed every year by the government to plug in some loopholes or to provide benefits to the taxpayers or to adjust the provision as per changed circumstances. Therefore, tax is calculated as per relevant provisions as they exist in the relevant Assessment Year.
Individuals are required to pay Income tax progressively which means that individuals earning more have to pay more taxes. The taxes are levied as per the slabs rates. The minimum tax rate for an individual earning above Rs. 2,50,000 is 5 percent and maximum rate is 34.50 percent for the high net worth individuals who earn more than Rs 1 crore in a year.
To ensure timely collection of income tax, the government requires the payer to withhold some amount towards the liability of Income-tax which is known as Tax Deduction at Source or TDS. As per this concept, employer withholds some amount towards the TDS liability at the time of payment of salary to the employee. Employers deposit amount of TDS with the government. on behalf of employee before the prescribed due dates. The employee gets the credit of such TDS against his annual tax liability, which he can reconcile with the amount appearing in his personal tax passbook in shape of ‘Form 26AS’.
A salaried employee cannot claim deduction of expenditures incurred in the course of employment from his taxable income. Only self-employed professional or a businessman can claim such deduction of expenditures. However, several deductions are allowed which can be claimed by an employee against his salary income. These deductions are allowed from various allowances given by the employer or when an employee makes some investment in tax saving schemes. It is noteworthy that a salaried individual is allowed to claim a standard deduction of Rs. 40,000 which is in addition to other tax deductions. This deduction is allowed only to an employee without submitting any proof of expenditure or investment.
The detailed break-up of salary in monthly salary slip might look like a jigsaw but lot of tax savings can be planned. To name a few of those, house rent allowances is exempt if you pay rent for the accommodation. If you go for vacations, leave travel concession will help you to reduce the tax burden.
Besides this if an individual develops investment habits he can substantially reduce his tax liability as several deduction are allowed if investment is made in specified schemes. Investments in insurance policies, mutual funds, repayment of housing loan, repayment of education loan, medical insurance policies give financial stability and help to reduce the tax burden.
Since, the responsibility to deduct tax is upon the employer in case of salaried class taxpayer. Therefore, it is important to plan deductions in advance and submit a declaration and proof of investments to the employer of all investment which will be considered by the employer for calculating your annual tax liability. If you declare all investments, less tax shall be deducted from your monthly salary and you can expect more in-hand salary.
In the last quarter of the financial year, employers ask employees to submit the proof of investments and these proofs shall be compared with the declarations made by employee in the beginning of the year. If there is any deficiency in the two figures, it will result in higher deduction of TDS from the salary in last three months. So it is advisable to plan well, execute well and get hard earned money.
Even after the financial year ends, tax worries would not be over because individuals need to give the details of taxable income to the Govt. by filing the Income-tax Return. To file the Income-tax return, employee needs to obtain Form 16 from the employer and create an account with Incometaxindiaefiling.gov.in. Through this article, we hope that you would get a fair idea of taxation for salaried person which will help you in planning your tax affairs.
(The writer is Deputy General Manager, Taxmann.com)
Updated Date: Jun 01, 2018 15:11 PM