Income from wages: how to calculate income tax on wages with the example tax year 2022-23 and save tax for salaried employees (2023)

New income tax scheme from the 2023 budget

As soon as the tax filing season begins, the earning classes are in a frenzy about the taxes they have to pay for the said tax year. It is important to understand your tax table and what each of the components of your pay schedule means. This can help you figure out how to save on tax. If you want to understand the components of your salary or want to learn how to save tax on your earned income, this guide is for you.

SECTION I – Understanding Your Payslip

Basic salary

This is a fixed component of your payslip and forms the basis for other parts of your salary, hence the name. For example, HRA is defined as a percentage (at the company's discretion) of this basic salary. Your FP is deducted at 12% of your basic salary. It is usually a large part of your total salary.

Subsidy for rent

Wage earners living in a rented house/flat can claim the House Rent Allowance or HRA to reduce the tax expenditure. This can be fully or partially tax-free. The Income Tax Act has prescribed a method of calculation of HRA which can be claimed as an exemption.

Read more about how to claim the HRA exemption.

Also remember that if you receive an HRA and do not live off the rent, your HRA will be fully taxable.

Case study: Malvika works in a multinational in Bangalore. Your company gives you a housing rental subsidy. But she does not live in rented accommodation, as she lives with her parents.

How can Malvika make use of this grant?

Malvika can pay rent to her parents and claim the subsidy as long as they own the place where they currently live. All you have to do is sign a lease with your parents and transfer money to them every month. This way, Malvika can make a nice gesture and give back to her parents and two, save some taxes. But remember that Malvika's parents must show the rent she has paid on their tax returns.

Leave travel allowance

Civil servants can avail the exemption for a journey within India under LTA. The exemption only applies to the shortest distance on a journey. This allowance can only be claimed for a trip taken with your spouse, children and parents, but not with other family members. This particular exemption depends on actual expenses, so unless you actually take the trip and incur those expenses, you can't claim it. Submit invoices to your employer to claim this exemption.

Read more about how to claim this exemption.

Prima

The bonus is usually paid out once or twice a year. Bonus, performance incentive, by whatever name, is 100% taxable. The performance bonus is usually linked to your evaluation grades or your performance over a period of time and is based on company policy.

Employee contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative of the Government of India. Both employer and employee pay each month the equivalent of 12% of the employee's basic salary to the employee's pension and subsidy fund. According to the Union Budget 2023, the current rate of interest on EPF will remain unchanged at 8.10%. However, the TDS rate for taxable EPF withdrawals has been reduced from 30% to 20% for non-PAN holders. This is a pension benefit that companies with more than 20 employees are required to provide under the EPF Act of 1952.

standard deduction

The standard deduction was reintroduced in the budget for 2018. This deduction has replaced transport allowance and sickness allowance. The employee can now claim a flat deduction of Rs 50,000 (pre-Budget 2019, it was Rs 40,000) from the total income, reducing the tax expense.

In the latest EU budget 2023-24, a standard deduction of Rs 50,000 was introduced under the new tax regime, which was previously only available under the old tax regime.

Professional lawyer

The profession tax or employment tax is a tax levied by a state, just like the income tax levied by the state. The maximum amount of business tax that can be levied by a state is Rs 2,500. It is usually drawn by the employer and deposited with the state. On your tax return, the business tax is allowed as a deduction from your salary income.

SECTION II

The difference between net pay and CTC

Your job may entitle you to some benefits in the form of food stamps or a taxi service in addition to your salary. Total amountcosts for the companyIt is the sum of all benefits offered plus your salary.

Below is an example of the components of your CTC found in your offer letter.

Although this is what your payment receipt for the above mentioned CTC will look like.

Generally, your CTC will include:

in.Salary received every month.

b.Pension benefits such as PF and tips.

C.Non-monetary benefits, such as an office taxi service, company-paid health insurance or free meals at the office, a phone provided to you, and bills reimbursed by your company.

Your net pay will include:

in.Gross salary received each month.

b.Something smallerallowable exemptions like HRA, LTA etc.

C.Something smallerincome taxes due (calculated after consideration of Section 80 deductions).

TITLE III – Retirement benefits

Exemption from license fee

Ask your employer about their licensing policy. Some employers allow you to carry over a certain number of leave days and pay them out, while others prefer that you finish using them within the same year. The amount received as compensation for accrued holiday days is called holiday pay and is taxable as salary.

Exemption from charging holiday from the tax:

It is completely exempted for state and government employees. For non-public employees, the lowest of the following three is excluded.

in.Average salary for 10 months before retirement or resignation (where average salary includes basic and DA and excludes bonuses and allowances)

b.License fee actually received (this is limited to Rs 300,000 for retirement after 02/04/1998)

C.Salary-equivalent amount for the accrued leave (where the accrued leave may not exceed 30 days for each year of service)

The amount attributable to the tax will be the total collection of holidays received minus the exemption calculated above. This is added to your income from your salary.

Exemption in accordance with section 89, subsection

You get tax relief according to Article 89, subsection 1, when you have received part of your salary in arrears or in advance, or have received a family pension in arrears.

Calculate the tax relief yourself

in.Calculate the tax payable on the total income, including the additional salary, in the year it is received.

b.Calculate the tax payable on the total income, excluding the additional salary, in the year in which it is received

C.Calculate the difference between step 1 and step 2

d.Calculate the tax due on the total income for the year to which the arrears relate, excluding arrears

mi.Calculate the tax due on the total income for the year to which the arrears relate, including arrears

F.Calculate the difference between step 4 and step 5

gram.The excess amount in step 3 over step 6 is the tax relief that will be allowed.

Please note that if the amount in step 6 is greater than the amount in step 3, the deduction will not be allowed.

Waiver of Receipts at the Time of Voluntary Withdrawal

Any compensation received for voluntary retirement or separation is exempt from tax under section 10(10C). However, the following conditions must be met

in.The compensation received is for voluntary retirement or separation

b.The maximum compensation received does not exceed Rs 5,00,000.

C.The Beneficiary is an employee of an authority established under Central or State Act, Local Authority, University, IIT, State Government or Central Government, Notified Institute of Management or Notified Institute of All India Importance or any State, PSU, Company or Co-operative Society.

d.Receipts comply with rule 2BA.

No exemption may be claimed under this section for the same AY or any other if an employee has taken exemption under section 89 for voluntary retirement compensation or separation or termination of service.

Use:The exemption can only be claimed in the assessment year in which the compensation is received.

Pension

The pension is taxable under main salary on the tax return. The pension is generally paid periodically on a monthly basis. You can also choose to receive your pension as a lump sum (also called commuted pension) instead of a periodic payment. When you retire, you can choose to receive a certain percentage of your pension in advance.

This pension, which is received in advance, is called a commuted pension. For example, at the age of 60, you decide to receive 10% of your monthly pension for the next 10 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, 10% of 10,000x12x10 = 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70 and after 70 years your full pension of Rs 10,000 will be paid.

The uncommuted pension or any periodic pension payments are fully taxed as salary. In the above case, the Rs 9,000 received by you is fully taxable. Rs 10,000 from age 70 is also fully taxable.

Commuted and uncommuted pension The pension or single pension received may in certain cases be exempt. For a government employee, the commuted pension is completely exempt. The uncommuted pension or any periodic pension payments are fully taxed as salary.

In the above case, the Rs 9,000 received by you is fully taxable. Rs 10,000 from age 70 is also fully taxable. For a non-public employee, you are partially exempt.

If tips are also received with pension – 1/3 of the pension amount that would have been received if 100% of the pension had been consumed, it is exempt from commuted pension and the rest is taxed as salary. If only the pension is received, the gratuity is not received, then half of the pension amount that would have been received is exempted if 100% of the pension was commuted.

Pension received by a family member, even if taxed accordinglyIncome from other sources' on the tax return. If this pension is exchangeable or a lump sum, it is not taxable. Uncommuted pension received by a family member is exempt to a certain extent. DKK 15,000 or 1/3 of the unpaid pension received, whichever is less, is exempt from tax. The pension that UNO receives from its employees or their dependents is exempt from tax. The pension that family members receive from the Armed Forces is also exempt.

Satisfaction

Gratuities are a pension benefit that employers give to their employees. The employee is entitled to receive the bonus when he has completed five years of seniority in the company in question. However, it is only paid out upon retirement or resignation. Tips received on retirement or death of a central, state or municipal employee are fully tax-exempt for the employee or his family. The tax treatment of your tip is different, depending on whether your employer is covered by the Gratuity Act. Ask your company about your status, then continue calculating.

If your employer is covered by the Gratuity Act, then the smallest of the following three is exempt from tax.

1. 15 days' salary based on the last salary received for each full year of service or part thereof beyond 6 months.
2. $20.00.000
3. tip actually received

If your employer is not covered by the Gratuity Act, the smallest of the following three is exempt from tax.

• Half a month's salary for each completed year of service. In calculating completed years, any fractional part of a year will be ignored.

For example, if you have worked in an organization for 14 years and 9 months, the number of years of employment will be considered as 14 years. Here, the average salary for the 10 months immediately preceding the month in which the person retires is taken as salary.

• $20.00.000
• tip actually received

SECTION IV - Income tax basics

Taxable income

Your income is not equal to your salary. You can get income from various other sources besides your salary income. Your total income, according to the Income Tax Department, can come from home ownership, gains or losses from the sale of stocks, or interest on a savings account or term deposit.

All of these numbers are added together to become your gross income.

tax rates

Add your entire income from the above headings. This is your total gross income. From your total gross income, a deduction can be claimed according to section 80. The resulting figure is the income that is liable to tax.

The ClearTax application allows you to determine your tax or fee refund for the yearDownload appen her.

Your tax is calculated based on the plates below.

Income tax rates for taxpayers under 60 for tax year 2022-23 under old and new tax systems:

Treasure:

• For the financial year 2022-23: the health and education tax is 4% of the sum of the total income tax and the surcharge

Basic exemption limit for seniors (age 60 or older but up to 80 years)

• For the financial year 2022-23, it is Rs 2.5 lakh

Basic exemption limit for seniors (80 years or older)

• For the financial year 2022-23, it is Rs.5 lakh

Rohit's total taxable income for the tax year 2022-23 is Rs 8,00,000 under the old tax regime. How will the tax tables be applied to you?

Skip the steps and use oursUpdated income tax calculator in place.

TDS on salary

TDS is deducted at source. Your employer deducts a portion of your salary each month and pays it to the tax department on your behalf. Based on your total salary for the whole year and your investments in tax saving products, your employer decides how much TDS should be deducted from your salary every month.

For a civil servant, TDS forms a significant part of an employee's income tax. Your employer will give you a TDS certificate called a Form 16, usually around June or July, which will show you how much tax was deducted each month.

Get a better understanding of your Form 16 here.

Your bank can also deduct tax at source when you earn interest on a time deposit. The bank normally discounts TDS at 10% of FD. 20% of TDS is reduced when the bank does not have the information about your PAN.

formulate 16

Form 16 is a TDS certificate. The Income Tax Department requires all employers to deduct TDS from the salary and deposit it with the government. The Form 16 certificate contains details of the salary you earned during the year and the amount of TDS deducted.

It has two parts: Part A with details of employer and employee name, address, PAN and TAN details and TDS deduction.

Part B contains information on salary paid, other income, permitted deductions, taxes owed.

Did you know that Form 16 is all you need to electronically file your tax returns with ClearTax?

Formular 26AS

Form 26AS is a summary of the taxes deducted on your behalf and the taxes you have paid. This is provided by the Income Tax Department. Shows details of taxes deducted on your behalf by deductors, details of taxes paid by taxpayers and tax refunds received in the tax year. This form can be accessed from the IT department's website.

deduction

The lower your taxable income, the less tax you have to pay. So make sure you claim all the deductions and tax benefits that apply to you.Section 80C of the Income Tax Actyou can reduce your gross income by Rs 1.5 lakh. There are a lot of other deductions under section 80 like 80D, 80E, 80GG, 80U etc. which reduce your tax liability.

Frequently asked questions

Does the salary include all forms of pension?

The definition of salary includes pension. However, the pension is what an employer or former employer pays to an employee. When a pension policy is covered by an employment contract, so let's say an employer has bought it, then it is also taxed on wages. However, the pension paid under any policy of a life insurance company cannot be taxed as salary and is taxed under the head "Other source".

Please note that pension received from the UN organization is exempt.

If a business operates from more than one state, a separate GST registration is required for each state. For example, if a candy seller sells in Karnataka and Tamil Nadu, they need to apply for separate GST registration in Karnataka and TN respectively.

What are assignments? Are all allowances taxable?

The definition of salary includes pension. However, pension is what an employer or former employer pays to an employee. When a pension policy is covered by an employment contract, so let's say an employer has bought it, then it is also taxed on wages. However, pension paid under any policy of a life insurance company cannot be taxed as salary and is taxed under the head "Other source".

What are the incentives? How are they taxed?

As a result of their official position, employees receive benefits called gratuities in income tax jargon. These are received over the employee's salary or wages. e.g. Provision of free rental housing, vehicles for employees, etc. These benefits may be taxable or non-taxable depending on their nature. The valuation of gratuity is fixed under Rule 3 of the Income Tax Rules, 1962. My employer has not deducted tax from my salary. Do I still need to submit a Form 16? Form 16 is a statement of taxes that the employer deducts from the employee's earned income. If no tax has been deducted, the employer is not obliged to issue a form 16. They can, however, issue a salary statement.

Are salary arrears taxable?

Yes. Salary arrears are taxable. However, one can claim relief in accordance with section 89 in this regard.

I have loss of housing. I have also suffered losses from my business. Can I offset such losses with my salary income?

Losses from home ownership can be offset against wage income. However, trading losses cannot be offset against trading income.

I have been employed by 2 employers during the same year. Can I claim basic exemption of Rs 2.5 lakh for each of the salary income?

Such basic exemption of Rs 2.5 lakh is for your total income for the year. You cannot claim this against multiple separate incomes. So you have to add up your entire income during the year including salary income from both employers and then claim a basic exemption of Rs 2.5 lakh from such income.

I was employed by 2 employers in the same year and because my earnings did not cross the basic exemption limit of each employer, TDS was not taken. Do I have to pay income tax myself?

Even if none of your employers have made TDS, if you have taxable income after claiming all applicable deductions, you will have to pay tax yourself, calledSelf-employment tax.

Can I claim an HRA benefit if I lease with my spouse?

This is not an advisable tax planning measure. The purpose of Section 10(13A) to claim HRA as an exemption is to help employees who are forced to live closer to their place of work or sometimes in another city for work. When you agree to pay rent to your wife and then claim the HRA exemption, it cannot be said to be within the law because a husband and a wife are generally not in a business relationship. If such a scheme comes to the attention of the Income Tax Department, it will definitely be considered as tax evasion.