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Process documentation Income Tax Calculation 

Purpose

This process computes tax on the income received by an employee, for a financial year.

Prerequisites

The master data records for the employee must exist.

Process Flow

India Income Tax computations payroll function (INTAX) processes tax on the income earned by the employee.

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  1.  Gross Salary wage type (/416) = Ann Reg Income wage type (/410) + Ann Irr Income wage type (/411) + Annual Perk wage type (/413) + Prev Gross salary wage type (/4V1) + Val of perk u/s 17(2) wage type (/4VJ) + Profts wrt sal u/s 17(3) wage type (/4VK) - Exm.under pro.to sec17(2) wage type (/414).

  2.  Balance wage type  (/418) = Gross Salary wage type (/416) - Exemption U/S 10 wage type (/130).

  3.  Aggregate of deductions wage type (/424) = Empmnt tax (Prof Tax) wage type (/422).

  4.  Incm under Hd Salarywage type (/426) = Balance wage type  (/418) - Aggrg Deduction wage type (/424).

  5.  Gross Tot Incomewage type (/430) = Incm under Hd Salary wage type (/426) + Any other Income wage type (/131).

  6.  Total Income wage type (/434) = Gross Tot Income wage type (/430) - Agg of Chapter VI wage type (/432).

Total Income wage type (/434) is rounded off to the nearest multiple of Rs.10.

  7.  Tax on total Incomewage type (/436) = Tax calculated on Total Income wage type (/434).

Total Income wage type (/434) comprises of the following components, which are taxed at different tax rates:

  i.  Long Term Capital Gains (Normal Rate) = Lng trm cap gns normal wage type (/3O3). This is taxed at the rate stored in the Long capital gain normal rate constant (LCNRT) of table view Payroll Constants (V_T511K).

  ii.  Long Term Capital Gains (Special Rate) = Lng trm cap gns special wage type (/3OD). This is taxed at the rate stored in the Long capital gain special rate constant (LCSRT) of table view Payroll Constants (V_T511K).

  iii.  Short Term Capital Gains (Listed Securities) = Short Gains on Listed Sec wage type (/3OS). This is taxed at the rate stored in the ST Cap. Gain rate (Listed Sec) constant (SCGRT) of table view Payroll Constants (V_T511K).

Note

In case the annual income of an employee falls in the non-taxable income slab, and the employee has any of the above capital gains income, the taxable amount of the capital gains is reduced by the amount of non-taxable income slab upper limit. Normal income and remaining amount of the capital gains is taxed. If there is more than one capital gains income, then the one with the highest tax rate is given priority for this benefit.

  iv.  Other Income = Income from other sources wage type (/3O7). This is taxed at the rate stored in the Other Income - rate constant (OTHRT) of table view Payroll Constants (V_T511K).

  v.  Normal Income = Total Income wage type (/434) - (Lng trm cap gns normal wage type (/3O3) + Lng trm cap gns special wage type (/3OD) + Income from other sources wage type (/3O7)). This is taxed at the rate configured in table view Taxation Slabs (V_T7INT3).

  8.  Tax payable wage type (/446) = Tax on total Income wage type (/436) - Agg of Chapter VIII wage type (/444).

  9.  Surcharge payablewage type (/448) = Surcharge calculated on Tax payable wage type (/446).

  10.  Education Cess wage type (/449) = 2% (Tax payable wage type (/446) + Surcharge payable wage type (/448))

  11.  Seconday and Higher Education Cess (/447) = 1% (Tax payable wage type (/446) + Surcharge payable wage type (/448))

  12.  Tax payable and surcharge wage type (/450) = Tax payable wage type (/446) + Surcharge payable wage type (/448) + Education Cess wage type (/449).

Tax payable and surcharge wage type (/450) is rounded off to the nearest rupee.

  13.  Tax deducted so far wage type (/456) = Prev Tax Deducted wage type (/4V5) + TDS other than salaries wage type (/4OC) + Income Tax wage type (/460) in the Cumulative Results Table.

  14.  Net tax payable wage type (/458) = Tax payable and surcharge wage type (/450) - Sec 89 relief wage type (/451) - Tax deducted so far wage type (/456).

  15.  Income Tax wage type (/460) = Net tax payable wage type (/458) divided by (Projection Factor wage type (/401) +1).

Rounding off monthly tax amounts rule (INTR) does the rounding off of the Income Tax wage type (/460) to the nearest rupee in all payroll periods, except for the last payroll period.

This payroll function calculates the monthly values for the following components:

·  Tax payable

  Education cess

  Surcharge

  Monthly taxable income

Print Program for Form 24 report (HINCF240) reads these monthly values and reports them on Form 24Q e-file.

The monthly values are calculated as follows:

  Monthly Tax Payablewage type (/4MT)

  a.  Tax Payable Ded Till Date wage type (/4TT) = Prev Emp Tax Payable wage type (/4PT) + value of Monthly Tax Payable wage type (/4MT) deducted till date.

  b.  Monthly Tax Payablewage type (/4MT) = (Tax Payable wage type (/446) - Tax payable Ded Till Date wage type (/4TT) - tax payable part of Sec 89 relief wage type (/451)) / Projection Factor wage type (/401).

  Monthly Education Cesswage type (/4ME)

...

  a.  Edu Cess Ded Till Datewage type (/4TE) = Prev Employment Edu Cess wage type (/4PE) + value of Monthly Education Cess wage type (/4ME) deducted till date.

  b.  Monthly Education Cesswage type (/4ME) = (Education Cess wage type (/449) - Edu Cess Ded Till Date wage type (/4TE) - tax payable part of Sec 89 relief wage type (/451)) / Projection Factor wage type (/401).

  Monthly Surchargewage type (/4MS)

...

  a.  Surcharge Ded Till Date wage type (/4TS) = Prev Employment Surcharge wage type (/4PS) + value of Monthly Surcharge wage type (/4MS) deducted till date.

  b.  Monthly Surchargewage type (/4MS) = (Surcharge Payable wage type (/448) - Surcharge Ded Till Date wage type (/4TS) - tax payable part of Sec 89 relief wage type (/451)) / Projection Factor wage type (/401)

  Monthly Taxable Incomewage type (/4MI)

The system provides the closest approximation to the monthly gross income. This value is calculated as follows:

Assuming that the Gross Total Income (GTI) is represented as:

¡  Gross Total Incomewage type (/434) for April = G1 * 12

¡  Gross Total Incomewage type (/434) for May = G1 + G2 * 11

¡  Gross Total Incomewage type (/434) for June = G1 + G2 + G3 * 10,

where, Gn is the Monthly Gross Income for the nth period. Now, to calculate the value of G1 (Monthly Gross Total Income for April), the system divides the Annual Gross Total Income by the projection factor. Once G1 is available, the system can calculate further values using the following formula:

  G2 = ((G1 * Projection factor of previous period) + (GTI of current period - carried forward amount in the In Period due to retroactive run) - GTI of previous period) / Projection factor of current period.

Here, before computation, the GTI for current period and previous periods are reduced by the irregular incomes earned during that period because the irregular income is a one time payment. Also, as in the equation, the carried forward amount in the current period is not considered for the computation. This amount is also a one time payment and is added separately to the computed value.

  Monthly Taxable Incomewage type (/4MI) = G2 (as computed above) + Mon Irr Income wage type (/125) + Carried forward amount (BF Basic Arrears wage type (/ZBS) + irregular income carried forward, if any)

Result

The system calculates the income tax liability of the employee for the month.

Example

A male employee in your organization has the following pay structure for the financial year 2005 - 2006:

·  Monthly Regular Income - The employee receives the following allowances that are cumulated in the Mon Reg Income wage type (/124).

¡  Basic Pay = Rs.9500.00

¡  Dearness Allowance = Rs.4200.00

¡  House Rent Allowance = Rs.3000.00

¡  Conveyance = Rs.1000.00

·  Irregular Income - The employee receives the following allowance in the month of June 2005 that gets cumulated in the Mon Irr Income wage type (/125).

¡  Annual Bonus = Rs.15400.00

·  The employee pays a house rent of Rs.2500.00 per month.

·  The employee has invested Rs.20000.00 in National Savings Scheme (Section 88).

You are running the payroll for the month of June 2005. The taxable salary is calculated as follows:

·  Annual Regular Income = Ann Reg Income wage type (/410)

= Rs.35400.00 (Value of Reg Income wage type (/124) in the Cumulative Results Table)

+ Rs.17700.00 (Value of Reg Income wage type (/124) in the Results Table)

+ Rs.159300.00 (Value of Mon Reg Income wage type (/124) in the Results Table multiplied by the value of Projection Factor wage type (/401))

= Rs.212400.00

·  Annual Irregular Income = Ann Irr Income wage type (/411)

= Rs.15400.00 - Annual Bonus (Value of Mon Irr Income wage type (/125) in the Cumulative Results Table)

+ 0.00 (Value of Mon Irr Income wage type (/125) in the Results Table)

= Rs.15400.00

·  Gross Salary wage type (/416)

= Rs.212400.00 + Rs.15400.00

= Rs.227800.00

·  Exemption U/S 10wage type (/130)

= Conveyance Annual Exempt wage type (/4E3) + HRA Annual Exemption wage type (/4E4)

= Rs.800.00 multiplied by 12 + minimum of Rs.(65760.00,36000.00,13560.00)

= Rs.9600.00 + Rs.13560.00

= Rs.23160.00

·  Balance wage type  (/418)

= Rs.227800.00 - Rs.23160.00

= Rs.204640.00

·  Deductions

¡  The professional tax liability of the employee is Rs.200.00 per month.

Empmnt tax (Prof Tax)wage type (/422) = Rs.2400.00

·  Incm under Hd Salarywage type (/426)

= Rs.204640.00 - Rs.2400.00

= Rs.202240.00

·  As the employee does not have any income from other sources, Any other Income wage type (/131) = 00.00.

Gross Tot Incomewage type (/430) = Incm under Hd Salary wage type (/426)

= Rs.177240.00

·  The employee has invested Rs.20000 in a scheme under Section 80 deductions.

·  Monthly Provident Fund deduction = 12% of (Basic salary + Dearness Allowance)

= Rs.1644.00

Ee Ann PF contributionwage type (/3F6) = Rs.19728.00

  Agg of Chapter VIwage type (/432) = Rs.20000 + Rs.19728 = Rs.39728

  Total Income wage type (/434) = Gross Tot Income wage type (/430) - Agg of Chapter VI wage type (/432)

= Rs.202240 - Rs.39728 = Rs.162512

Since, the year of assessment is 2005 – 2006,

·  Tax on total Incomewage type (/436) = Tax calculated on Total Income wage type (/434)

= Rs.7502.40

·  Tax payable wage type (/446) = Rs.7502.40

Surcharge payablewage type (/448) = 0

·  Education Cess wage type (/449) = 2% of (Rs.7502.40)

= Rs.150.048

= Rs.150.00 (rounded off to the nearest rupee)

·  Tax payable and surcharge wage type (/450) = Rs.7502.40 + Rs.0.00 + Rs.150.00

= Rs.7652.40

= Rs.7652.00 (rounded off to the nearest rupee)

·  Tax deducted so far wage type (/456) = Rs.811.00 (Tax paid by the employee in the previous periods of the financial year)

·  Net tax payable wage type (/458) = Rs.7652.00 - Rs.811.00

= Rs.6841.00

·  Projection Factor wage type (/401) = 9 (July 2005 to March 2006)

·  Income Tax wage type (/460) = Rs.6841.00 divided by (9+1)

= Rs.684.10

= Rs.684.00 (rounded off to the nearest rupee)

The employee has to pay a tax of Rs.684.00 for the month of June 2005.

See also:

Income Tax