Archive for May, 2012

What is my Tax Liability ? How to calculate TDS ?

May 19, 2012 2 comments

Month of April & May , beginning of financial year  and HR/finance guys are on their toes  in collecting investment declaration forms and explaining employees about their tax liabilities.  This exercise is required to calculate employees yearly tax liability and deduct TDS accordingly on monthly basis.

Very sincerely and patiently I try to explain each and every one about their tax liability and details of investment clause, but except few, most of them just nod their heads and pretend to understand everything but at time of deduction ask the very same question. “why my TDS is so much ? ”  or “Why my this month salary is low ?”

Well the answer is here :

Lets take a look how your Income tax is calculated :

Gross Income

– HRA exempted

– Not taxable Allowance

– Not taxable Salary reimbursements

– PF contribution ( employee & employer)

– Investments


Taxable Income


On Taxable income  calculation of TDS as per the income slab

Income tax slab (in Rs.) FY. 2012-13 Tax
0 to 2,00,000 No tax
2,00,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%

End result is TDS.

Your Net income is = Taxable income – (TDS  +  3% education cess on TDS)


Here further question arise……

How  TDS calculate, what is the formula ?

As per the tax slab it has 3 simple formulas to calculate tax.

  • If Income is < = 2,00,000 /-  TAX is Zero.
  • If Income range is (2,00,001 – 5,00,000) the following is the formula 

              TDS =  (Your taxable income  – 2,00,000 ) * 10 %

  • If Income range is (5,00,001 – 10,00,000) then formula is

            TDS = (Taxable income – 5,00,000) * 20 %  + (5,00,000 – 2,00,000) * 10 %

OR….. TDS = (Taxable income – 5,00,000) * 20 %  + 30,000

  • If Income range is above Rs. 10,00,000/- (10 lakh) then formula is

  TDS = (Taxable income – 10,00,000) * 3o% + (10,00,000 – 5,00,000) * 20% + (5,00,000 – 2,00,000) * 10%

OR ….. TDS = (Taxable income – 10,00,000) * 3o%   + 1,00,000 + 30,000

OR…… TDS = (Taxable income – 10,00,000) * 3o%   + 1,30,000

What is Gross Income ?

Gross income means your total income without any tax deduction

What is HRA and how to calculate ?

HRA means House Rent Allowance. If employee shows that he is staying in Rent then he can claim for HRA exemption.

HRA calculation  :  Exempted HRA is minimum figure of following 3 amounts .

  1. Actual House rent  – 10 % of Basic Salary
  2. HRA received = 50% of Basic Salary
  3. 50 % (incase of Metro)  or 40% (other cities ) of Basic  Salary

What is non taxable allowance ?

It is a fixed component irrespective of its actual use. Allowance is what you get before spending.

Following are few non taxable as per the Income tax act :

  • Conveyance allowance : as per Income Tax act. upto Rs. 800/- p.m. is exempted.
  • HRA ( House rent allowance)
  • Children education allowance:   Per child 1200 per annum is non-taxable. Maximum for 2 children, means max non-taxable amount is 2400 per annum.
  • Uniform/Dress Allowance : As per the nature of business and type of company mentioned in Income tax act. At certain extend uniform allowance is exempted. Generally applies in factories or other industries where offices has dress code.

What are non taxable reimbursements and how they get reimburse ?

Reimbursements is what you get after spending. At certain limit payments are taxfree. This component can be claimed as non-taxable only submission of relevant bills.

Following are few most used reimbursement components :-

  • Medical expenses (Rs. 1250/- p.m. means yearly upto Rs. 15000/-)
  • Telephone & Internet expenses The  per  month limit depend upon nature of business and employee’s profile and salary slab. Generally it is  Rs. 1000 – Rs. 3000.
  • Car fuel & Maintenance  ( Rs. 1800/- per month
  • Leave Travel Allowance (LTA) – In a block of four years two trips can be claimed for exemption for travel done inside India. This four year block issued by govt. Current running block is 1st Jan’10 – 31stDec’13. It has following rules :-
    • In order to avail reimbursement against LTA, an employee will have to avail at least 3 days of paid leaves.
    • The employee can avail LTA against Travel Expenses only (local travel not  covered). You must take the shortest route to your destination to be eligible for LTA. You can produce an air (economy class only), rail or any public transport ticket.
    • The travel is applicable anywhere in India and not abroad.
    • LTA covers travel for yourself and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working) and children.
    •  If your family travels without you, no LTA can be claimed. You have to make the trip, either by yourself or, if claiming for your family, you should travel with them
    • If your LTA is not utilised, it gets added to your salary and you will be taxed on it.
    • There is no certain limit is prescribe but it varies as per the salary slab.

As per the salary slabs, different reimbursement component applicable with different limits.  These reimbursement components can be optional or mandatory depending upon company’s policy.

In general practice, on monthly basis companies pay reimbursement component on the basis of submitted documents and accumulate the balance unclaimed reimbursements till the end of financial year . This balance unclaimed reimbursement become taxable by year end  and get credited in employee’s  account after the tax deduction.

So, if your current month’s in-hand salary is low apart from TDS deduction then this is one of the reason, that you have not claimed your reimbursements by submitting relevant bills for that month.

What is PF component and what its min and max limit ?

  • It is govt benefit for all employees at the time of retirement or leaving the job.
  •  In this employee has a PF a/c where  employee and employer every month contribute equal amount i.e. 12% each of employee’s basic salary in other words total 24% of basic salary on which he will get  interest rate of 8.6% yearly.
  • The minimum contribution in PF account is 24% of Rs. 6500/- (the min basic salary). Here employee’s PF deposit will be fixed Rs. 1560/- irrespective of his current basic salary.
  • The  maximum contribution in PF account is 24% of actual basic salary. In this respect at the time of increment, employee’s basic salary change and so as his PF contribution.

Benefits to employees

  • The total yearly PF contribution is totaly tax exempted which comes under section 80C of 1 lakh yearly investment limit.
  • At the time of retirement employee will get the total accumulated PF amount with interest which is tax exempted.

As per today’s scenario, where people change their job instead of getting  retirement. The question arise “What to do with his PF a/c at time joining new company ?

One can continue the same PF account in his /her new company else one can close his previous PF a/c,  withdraw all amount and open a fresh PF a/c with his new company.

Note : One can apply for PF withdrawal after two months of gape of his relieving from previous company with a condition that the he should no’t start working elsewhere in that period. In case person join another job  within the two months gape, the EPF balance must be transferred to the his new PF account at his new company. But till date this process has lot of gray area and tedious process. People generally apply and do PF withdrawal even if they join another company.

What all investment plans are tax exempted ?

Section 80C, 80CCD and 80CCC deductions- Upto Rs. 1,00,000/ (One lakh) investment is exempted from tax.

Following are the list of investments :-

  • Life Insurance(LIC) / Pvt Insurance Plans the premium amount
  • Employee’s contribution towards Employee Provident Fund (EPF)
  • Public Provident Fund (PPF)
  • National Savings Certificate
  • Five year tax saver FDs
  • Interest accrued on old NSC’S
  • Unit Linked Insurance Plan (ULIP)
  • Children Education Fees (Only Tution Fees)
  • Employer contribution into New Pension Scheme (NPS) (Section 80CCD)
  • Pension Plan ( LIC and Other Insurance Companies ) – 80CCC
  • Tax saving mutual funds (ELSS) with three years lock-in
  • Post office tax saving deposit or tax saving bonds
  • Housing Loan repayment of principal amount only

Section 80D  – Mediclaim Insurance Premium –

  • Maximum limit up to 15,000/-
  • Any medical or health insurance premium for self and family.
  • In case of dependent parents insurance an additional deduction of up to 15,000/-
  • In case parents/assessee are senior citizens, employee claim deduction up to Rs 20,000.

Section 80DD:

limit is upto 50,000 for maintenance of a disabled dependent. If the disability is severe, the  amount will be 100,000.

Section 80E :

Interest payments on education loan taken for higher studies for self, spouse or child is tax exempted. It has no maximum limit.

Section 80G :

It is about donation. One can donate upto 10% of his gross income in authorised charitable institution to avail the tax exemption, the eligibility of non taxable amount is 50% or 100% of the donation amount.

Section 24 :

Home loan interest payment : The maximum limit is 1.5 lakh on interest payments of a home loan for a self-occupied house. There is no ceiling on the amount of deduction if the house is let out or deemed to be let out.

Section 80U

(Disabled/Handicapped person): Maximum limit is Rs 50,000. This deduction goes up to Rs. 75,000 if disability is severe.

Section 80DDB

 Deduction (Medical treatment expenses): Expenses done for medical treatment for self, spouse, dependent children, parents, brothers and sisters. Maximum deduction can be Rs 40,000 (goes up to 60,000 in case patient is senior citizen).

Deduction is only allowed in case of following diseases:

  1. Neurological Diseases where the disability level has been certified to be of 40% and above,
    (a) Dementia
    (b) Dystonia Musculorum Deformans
    (c) Motor Neuron Disease
    (d) Ataxia
    (e) Chorea
    (f) Hemiballismus
    (g) Aphasia
    (h) Parkinson’s Disease
  2. Malignant Cancers
  3. ADIS
  4. Chronic Renal failure
  5. Hematological disorders :
    (a) Hemophilia ;
    (b) Thalassaemia.

 Few tips from HR :-

1. Check your Pay-slip carefully for the deductions and their reasoning.

2. Understand your tax liability , its simple you just have to pay little attention in the calculations.

3. Keep a track of your claimed reimbursements. So, that at the year end when you have your actual savings and reimbursements you can recalculate your taxable income and get the final TDS liability.

Though I have not covered all the details of Income tax and tax liabilities but have tried mentioning the general points. Hope this write-up helps you to understand your tax liability and your salary deductions.