Income Tax is a direct tax, that is, levied on any individual’s or entity’s income during a financial year. It is directly paid to the government, like all the other direct taxes. The net taxable income is considered to calculate the tax liability of the individual or entity based on the income slabs provided by the Income-tax Department for the current financial year. The amount of tax paid depends on the money earned by the individual in that particular financial year. The Income Tax Slab for FY 2023-24 is announced by Finance Minister Nirmala Sitharaman on 1st February 2023 in the Budget 2023-24 presented by her. The major highlight of the Budget related to taxpayers was the Rebate under Section 87A being increased to ₹7 Lakh earlier which was ₹5 Lakh i.e. Income up to ₹7 Lakh p.a. will be exempted from paying any Income Tax.
Income tax on Salary:
The compensation received against services provided in connection with employment by an employee from a current or former employer is termed Salary. Section 15 of the Income Tax Act provides for the tax levied on salary. According to Income Tax Act, the term Salary includes Wages, Annuity or Pension, Gratuity, Fees, Commissions, Perquisites or Profits (In addition to salary/wages), Advance of Salary, Encashed Earned Leaves, Contribution in Provident Fund (up to the extent it is taxable), Contribution in Pension Scheme (refer to section 80CCD, i.e., NPS), etc.
Taxability of Various Salary Components:
Income Tax Slab Rates for Salaried Employees:
The amount of tax one needs to pay depends upon the income tax bracket the person is falling into. Any individual with an annual income of more than ₹3 Lakh in the New Income Tax Regime and ₹2.5 Lakh in the Old Income Tax Regime needs to pay Income tax to the government according to the Income Tax Act.
In the Union Budget 2023, a new income tax slab has been announced by the Finance Minister of India. As compared to the old tax regime, the new tax regime has a lower tax slab rate but it eradicates most of the deductions available in the old tax regime. The New Income Tax Regime will be the default regime from now on. Taxpayers will still have the option to choose the old tax regime.
1. Income Tax slab rates for FY 2023-24 applicable for all Individuals and Hindu Undivided Family (HUFs) [New Tax Regime]:
For more details on the New Tax Regime, do read New Income Tax Slab for FY 2023-24
2. Income Tax slab rates for FY 2023-24 [Old Regime]:
In the old regime of filing Income Tax, individual taxpayers are divided into three categories:
- Individuals below 60 years of age.
- Senior citizens above 60 years but below 80 years of age.
- Super seniors above 80 years of age.
*NRIs: Non-resident Indians
*HUFs: Hindu Undivided Families
Various Deductions Allowed for Salaried Employees:
1. House Rent Allowance (HRA):
Expenses incurred by employees on staying in rented accommodations can be claimed for deduction under the old tax regime. However, the whole amount of HRA can not be claimed for deduction. The amount for which deduction can be claimed is the least of the following:
- Total HRA paid/received by an employee.
- Actual rent paid less 10% of basic salary
- 50% of the salary for metro cities and 40% of the salary for non-metro cities
Any amount exceeding the limit will be taxable at the prescribed rate.
2. Leave Travel Allowance (LTA):
Leave Travel Allowance provided by the employer to travel for professional work is also taxable under the Income Tax Act. Deduction on the amount received as LTA can be claimed by the employees up to the amount of actual expense incurred (bills should be produced), only twice in 4 years. It doesn’t include any expenses on personal travel.
Leave Travel Allowance is restricted to:
- It should be domestic travel only.
- Mode of travel should be rail, air or any other public transport.
3. Standard Deduction:
A flat deduction of ₹50,000 to all individuals earning a salary is known as standard deduction. It is offered to all individuals opting for the old tax regime.
4. Various Deductions Under Section 80C:
Provisions in the Income Tax Act 1961 also provide for various deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual. Here is the list of various sections mentioned under the Income Tax Act 1961:
1. Section 80C: A maximum deduction of ₹1,50,000 (including 80CCC and 80 CCD) can be claimed under this section. Certain investments, saving schemes and some expenditures are allowed under this section. Some of them are:
- Amount paid towards premium of life insurance
- Amount paid towards premium or subscription for deferred annuity for self or immediate family
- A contribution made to Employee’s Provident Fund Scheme
- A contribution made to Public Provident Fund
- A contribution made to any recognised provident fund
- Investments done in Post Office Savings Bank (deposits) for 10 years or 15 years
- Investments made to any recognised securities or deposits scheme (Eg. National Savings Scheme)
- Investments made to any notified savings certificate, Unit Linked Savings Certificate (E.g. NSC VIII)
- Investments made to ULIPs (Unit Linked Insurance Plans) of any Mutual Fund
- A contribution made to the fund set up by the National Housing Scheme
- Payments against the principal of any housing loan
- Payments towards the tuition fees of any two children’s full-time education in institutes based in India
2. Section 80CCC: Deductions under this section are mainly:
- Payment of premium to any insurance company towards annuity plans.
- Payment of premium for annuity plan of LIC or any other insurer (maximum cap of ₹1,00,000)
Premium paid in those plans must be kept deposited in order to avail a deduction.
3. Section 80CCD: Any contribution made in a pension scheme notified by the central government by the assessee or the employee comes under this section. The limit under this section is:
- In the case of an employee, 10% of the salary in the previous year.
- 10% of gross total income in any other case.
4. Section 80D: In this section of the Income Tax Act 1961, deductions can be claimed for a maximum amount of ₹40,000 on medical insurance. It further states:
- Deduction allowed for self, spouse and dependent children: ₹15,000 (₹20,000 for senior citizens)
- Deduction allowed for parents (individual or both): ₹ 5000 (₹20,000 for senior citizens)
- Deduction allowed for preventive health check-ups (within the ₹40,000 limit) : ₹ 5000
5. Section 80DDB: In this section, deductions can be claimed on the amount not exceeding ₹40,000 spent on medical expenses that arise for treatment of a disease or ailment mentioned in Rule 11DD of the Act.
6. Section 80E: Under this section, a claim can be made on the amount paid as interest on loans taken for the cause of higher education for self or a relative.
7. Section 80EE: Under this section, first-time homeowners can claim a deduction on their taxable income. Individuals having their first home purchased of value not more than ₹40 Lakh and the loan taken for which is ₹25 Lakh or less are eligible to claim a deduction under this section.
8. Section 80G: This section provides a deduction from the tax to be paid on the amount given away as charitable donations or contributions made within the given fiscal year. The most unique feature of this section is that it provides no maximum limitation on the amount of tax-deductible donation. Besides, tax deductions on contributions or donations made to specific funds or charitable organisations only are allowed under this section.
9. Section 80RRB: Under this section, tax can be saved up to an amount of ₹3,00,000 on receiving any income by way of royalties or patents registered under the Patents Act, 1970
10. Section 80TTA: Under this section, any income earned through an interest in a savings bank account, post office, or cooperative society up to ₹10,000 can be claimed for deduction.
11. Section 80U: This section specifically provides a flat deduction on income tax only applied to disabled people. Up to ₹1,00,000 can be claimed for deduction depending on the severity of the disability.
How to Calculate Income Tax on Salary?
Sahil, a 28-year-old boy, is working with GFG Pvt. Ltd. earning ₹25,00,000 per annum. He made investments in various options available under section 80C of ₹1,50,000. He also claimed ₹40,000 as LTA and paid rent of ₹3,00,000 in the year in a non-metro city. The salary breakup of Sahil is:
Let’s determine the payable tax amount of Sahil in both the old and new regimes.
Solution:
At first, we have to calculate the Net Taxable income of Sahil in both the old and new tax regimes:
*The HRA deduction is the least of:
- Total HRA received = ₹6,00,000
- Actual rent paid less than 10% of basic salary, i.e., ₹3,00,000 – (10% of ₹15,00,000) = ₹1,50,000
- 40% of the basic salary for non-metro cities, i.e., 40% of 15,00,000 = ₹6,00,000
Tax Payable as per the Income Tax Slabs:
So, the net tax payable under the new tax regime is ₹5,07,000, and in the old tax regime ₹4,63,320, which is ₹43,680 higher.