Understanding Salary Components: Which Parts Are Taxable and Which Aren't?

Hi all,

As per my knowledge, different heads of salary receive different slabs for tax deduction. For example, Medical Allowance comes under tax deduction, but reimbursement of medical expenses is tax-free. Similarly, there are other heads that are taxable.

Please help me understand the different heads in salary, the tax rates applicable to these heads, and identify which heads are not taxable.

Regards, Sandeep Singh

Dear friend,

I shall provide a brief on Income Tax Calculation for the Financial Year 2010-11 (Assessment Year 2011-12).

On gross salary, the following deductions are applicable:

1) Professional Tax
2) House Rent in excess of 1/10th of salary subject to ceiling equivalent to HRA
3) Interest on Housing loan subject to ceiling Rs. 1,50,000
4) Refund on Housing loan, savings, tuition fee for 2 children, etc., altogether subject to ceiling Rs. 100,000
5) In addition, savings on infrastructure bonds up to Rs. 20,000
6) Other than the above one lakh, 15000 to 20000 towards mediclaim premium, 40000 to 60000 towards treatment of specified diseases like Motor Neuron disease, 75000 to 100,000 towards disability, etc., are also admissible for deduction.

Now, taxable income can be calculated as follows:

Gross salary - total deductions = Taxable income

Taxpayers can be categorized into 3 groups:

1) Non-Seniors - Male
2) Non-Seniors - Female
3) Senior Citizens (65 years old and above)

If the taxable income is Rs. 2,40,000, a Senior Citizen is fully exempted from paying tax. Non-Senior Females have to pay in excess of Rs. 1,90,000, and Non-Senior Males in excess of Rs. 1,60,000.

Beyond the above income, one has to pay 10% up to Rs. 5,00,000, 20% thereafter up to Rs. 8,00,000, and 30% in excess of Rs. 8,00,000. Additionally, an education cess at 3% will be charged on the Total Tax.

Here is an example:

Gross income of a Non-Senior Male - Rs. 12,00,000

Deductions (actual): Professional Tax - 12000, Housing loan interest - 2,00,000, Total savings/deductions - 2,50,000, Savings on Infrastructure bond - 25,000, other deductions over 1,00,000 - 50,000.

Admissible total deductions (subject to ceiling limits) - 12000 + 150000 + 100000 + 20000 + 50000 = 332000

Taxable income, 1200000 - 332000 = 868000

For Non-Senior Males:

Rs. 1,60,000 is exempted.

For the next 340000 (500000-160000), 340000 x 10% = 34000 -(1)

For the next 300000 (800000-500000), 300000 x 20% = 60000 -(2)

For the next 68000 (868000-800000), 68000 x 30% = 20400 -(3)

Tax - (1) + (2) + (3) = 114400

Also, for Non-Senior Females, Tax is 114400 - 3000 = 110400

and for Senior Citizens, Tax is 114400 - 8000 = 106400

Education Cess, 114400 * 3% = 3432

Total Tax - Rs. 1,17,832

Now, I shall come to your details. HRA up to 50% may be exempted. The balance salary is 11400 + 800 + 3650 + 1250 = 17100 p.m., i.e., Annual income 2,05,200. EPF will be 1368 x 12 = 16416 (This may vary subject to your organizational policies). The balance taxable income is 1,88,784.00 (You may also deduct professional tax, etc., which I don't know).

Up to 1,60,000, no tax. 10% will be charged as tax on 1,88,784 - 1,60,000 = 28,784 i.e., 2,878 & cess at 3% is 86. Total tax = 2,878 + 86 = Rs. 2,964.00

See Excel Sheet. Enter gross salary and deductions/savings applicable in the green color column. Results will be shown in the yellow color. The red color is used for static data.

ABBAS.P.S.