Tuesday, August 2, 2011

Basics on tax and its computation ( INDIA )



Most of my friends, colleagues complain about such a huge amount of tax being deducted from their salary component. I write this blog to give them a basic understanding of how the tax is computed and what they can do to reduce the amount of tax being deducted from their income or TDS (tax deducted at source).

What is TAX?
Tax is a compulsory contribution of a part of income to the government by either individual or a business entity or a product or by any activity. If a tax is directly levied on person or business entity then it is direct tax. If tax is levied on price of goods and services then it is called as indirect tax.
Purpose of tax is to finance government expenditure and public goods and services.
Before we understand how tax is calculated below mentioned information is important.


For General tax payers

Income tax slab ( Rs )
Tax
Income between 0 to 180000
No Tax
Income between 180001 to 500000
10%
Income between 500001 to 800000
20%
Income above 800000
30%

For Women employees

Income tax slab ( Rs )
Tax
Income between 0 to 190000
No Tax
Income between 190001 to 500000
10%
Income between 500001 to 800000
20%
Income above 800000
30%



Let’s consider an example of an employee named Mr. Zed who is earning an annual income of 600000. In simple words his salary is 600000 per annum. Now let’s compute and understand how much tax he needs to pay for the year 2011-2012. Let’s assume that he has not invested (LIC policy or tax exempted Mutual fund), nor has any housing loan or education loan. This is a plain vanilla example.


SI no
Gross salary
600000

Less professional tax deducted (200 * 12 = 2400)
2400

gross taxable salary
597600

Deductions as part of any investment done
(Sec 80 C , Sec 80 CCC , Sec 80 CCD , Sec 80G or Sec 80 E)
0

Total Taxable income
597600




Computation of tax

a)
As per the slab there is no tax on Rs180000
0
b)
As per next slab there is 10% tax on income
between 180000 to 500000
( 500000 - 180000 = 320000)
320000
c)
taxable income after deducting 180000
(597000 - 180000 = 417600)
417600
d)
Tax deducted on b or c whichever is lesser
( 320000 * 10%)
32000
e)
As per next slab there is 20% tax on income
between 500000 to 800000
( 800000 - 500000 = 300000)
300000
f)
taxable income remaining
(417600 - 320000 = 97600)
97600
g)
Tax deducted on e or f whichever is lesser
(97600 * 20%)
19520




Total tax payable for the year (19520 + 32000 = 51520)
51520

Tax payable monthly (51520 / 12 = 4293)
4293







Let’s consider an example of an employee named Mr. Red who is earning an annual income of 600000. In simple words his salary is 600000 per annum. Now let’s compute and understand how much tax he needs to pay for the year 2011-2012. Let’s assume that he has invested in PF 12000 has a LIC policy with premium 25000 has invested in Tax benefit mutual fund of 25000 and in government bonds for 25000 and in fixed deposit for 5 years for 13000. Lets compute and find out how much tax he pays as per the tax slabs.


SI no
Gross salary
600000

Less professional tax deducted (200 * 12 = 2400)
2400

gross taxable salary
597600

Deductions as part of any investment done
(Sec 80 C , Sec 80 CCC , Sec 80 CCD , Sec 80G or Sec 80 E)( 12000 + 25000+25000+25000+13000)
100000

Total Taxable income
497600




Computation of tax

a)
As per the slab there is no tax on Rs180000
0
b)
As per next slab there is 10% tax on income
between 180000 to 500000
( 500000 - 180000 = 320000)
320000
c)
taxable income after deducting 180000
(497000 - 180000 = 317600)
317600
d)
Tax deducted on b or c whichever is lesser
( 317600 * 10%)
31760




Total tax payable for the year
31760

Tax payable monthly (31760 / 12 = 2647)
2647





From the example mentioned we infere that by doing a right investment in to various tax savings instruments , be it pension fund , public provident fund , Insurance policies, fixed deposit for a period of 5 years , investment in government bonds and tax saving mutual funds we will reduce our tax burden. So Invest intelligently and wisely. Before investing try to always find a reason not to invest into particular scheme.

CHEERS

Comments Welcome

3 comments:

  1. We are hearing about NPS (New Pension Scheme) - On top of 80C's 1 Lakh exemption, will this come?
    Is it really beneficial - Udhay.

    ReplyDelete
  2. As we are aware that government employees are benefited from the pension scheme provided by their respective organisation. This facility is enjoyed by them post their retirement. Addressing your querry:

    It is exempted as part of Sec 80C , only investment in infrastructure bonds are eligible for exemption other than the Sec 80C 1 lakh bracket. Infrastructure bonds exemption is allowed upto Rs 20000 annually.


    Yes, it is beneficial also Public provident scheme also acts the same way... Thanks udhay for the concerns you have, now you will find my next blog on NPS

    ReplyDelete
  3. making the sample computation worksheets available for download may be a good idea.

    -= Mandar

    ReplyDelete