BASIC OF TDS ON SALARY

The Indian Income Tax department is governed by the Central Board for Direct Taxes
(CBDT) and is part of the Department of Revenue under the Ministry of Finance.

The government of India imposes an income tax on taxable income of individuals, Hindu
Undivided Families (HUFs), companies, firms, co-operative societies and
trusts(Identified as body of Individuals and Association of Persons) and any other
artificial person. Levy of tax is separate on each of the persons. The levy is governed by
the Indian Income Tax Act, 1961

Heads of Income

There are five heads of income that are taxable.

1. Income from Salary

2. Income from House Property
3. Income from Business and Profession
4. Income from Capital Gains
5. Income from Other Sources

Individual Income Tax

All residents are taxable for all their income, including income outside India. Non
ordinary and non residents they are taxable only for income received in India or Income
or income accrued in India.

Income from Salary

All income received as a salary is taxed under this head. Employers must withhold tax
compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source
(TDS), and provide their employees with a Form 16 which shows the tax deductions and
net paid income. In addition, the Form 16 will contain any other deductions provided
from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by

bills. (Company pays Fringe Benefit Tax on this amount)
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if
provided as conveyance allowance. No bills are required for this amount.
3. Professional taxes: Most states tax employment on a professional basis, usually a
slabbed amount based on gross income. Such taxes paid are deductible from
income tax.

Income from salary is net of all the above deductions.

Income From House property

Income from House property is computed by taking what is called Annual Value. The
annual value (in the case of a let out property) is the maximum of the following:

• Rent received
• Municipal Valuation
• Fair Rent (as determined by the I-T department)

If a house is not let out and not self-occupied, annual value is assumed to have accrued to
the owner. Annual value in case of a self occupied house is to be taken as NIL. (However
if there is more then one self occupied house then the annual value of the other house/s is
taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From
this Net Annual Value, deduct :

• 30% of Net value as repair cost (This is a mandatory deduction)

• Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a maximum limit
of Rs,1,50,000 (if loan is taken on or after 1st April 1999) and Rs.30,000 (if the loan is
taken before 1st April 1999). For all non self-occupied homes, all interest is deductible,
with no upper limits.

The balance is added to taxable income.

Income from Capital Gains

Sale of capital assets results in capital gains. A Capital asset is defined under section
2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate,
equity shares, bonds, jewellery, paintings, art etc. but does not include some items like
any stock-in-trade for businesses and personal effects.

For tax purposes, there are two types of capital assets: Long term and short term. Long
term asset are held by a person for three years except in case of shares or mutual funds
which becomes long term just after one year of holding. Sale of such long term assets
gives rise to long term capital gains. There are different scheme of taxation of long term
capital gains. These are :

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares
or securities or mutual funds on which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. STT has been applied on all stock market
transactions since October 2004 but does not apply to off-market transactions and
company buybacks; therefore, the higher capital gains taxes will apply to such
transactions where STT is not paid.
 2. In case of other shares and securities, person has an option to either index costs to
inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The
indexation rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax
rate is 20%.

All capital gains that are not long term are short term capital gains, which are taxed as
such:

• Under section 111A, for shares or mutual funds where STT is paid, tax rate is
10% .
• In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT
is not paid).

Income from Other Sources

This is a residual head, under this head income which does not meet criteria to go to other
heads is taxed. Also there are also some specific incomes which are to be taxed under this
head.

1. Income by way of Dividends

2. Income from horse races
3. Income from wining of lotteries
4. Any amount received from key man insurance policy.

Income Exempt from Tax

Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not form part
of an assessee's total income. While section 10 provides a list of income absolutely
exempt from tax, sections 10A, 10AA, 10B, 10BA, and 13A deal with specific
exemptions available to newly established industrial undertakings in free trade zones, and
political parties. These exemptions are provided from social, political, Constitutional
considerations, for avoiding double taxation, on the basis of casual and non-recurring
nature ,on the basis of non-residents and non-citizens status, on the basis of Certain
specific securities, bonds, certificates, funds and the like, on the basis of Education,
science, research, achievements, rewards, sports, charity, on the basis of certain types of
bodies, funds and institutions, Subsidies to promote business, and international,
economic, and other considerations.

Dividends
Dividends paid by Companies and Mutual Funds are exempt from tax. A 15% dividend
distribution tax is paid by companies before distribution. Equity mutual funds (with more
than 65% of assets invested in equities) do not pay a dividend distribution tax, though
other funds do. Liquid and Money Market funds pay 25% dividend distribution tax.01123

Other Exempt Income

The Indian Income tax act specifically exempts certain income from tax:

1. Money received from an Insurance company as proceeds of an insurance policy

(by way of an insurance claim, or by maturity) is generally exempt. However
there are three types of payments under life insurance policy that are not tax free .
These are :
2. any sum received under sub-section (3) of section 80DD or sub-section (3) of
section 80DDA - this refers to specific policies for disabled dependants; or
3. any sum received under a Keyman insurance policy; or
4. any sum received under policies issued on or after 1 April 2003 where premium
paid is greater than 1/5th the sum assured
5. Maturity proceeds of a Public Provident Fund (PPF) account.

Deduction
While exemptions is on income some deduction is calculation of taxable income is
allowed for certain payments.

Section 80C Deductions

Section 80C of the Income Tax Act allows certain investments and expenditure to be
tax-exempt. The total limit under this section is Rs. 100,000 (Ruoees One lakh) which
can be any combination of the below:

1. Contribution to Provident Fund or Public Provident Fund

2. Payment of life insurance premium
3. Investment in pension Plans
4. Investment in Equity Linked Savings schemes (ELSS) of mutual funds
5. Investment in specified government infrastructure bonds
6. Investment in National Savings Certificates (interest of past NSCs is reinvested
every year and can be added to the Section 80 limit)
7. Payments towards principal repayment of housing loans.Also any registration fee
or stamp duty paid.
8. Payments towards tuition fees for children to any school or college or university
or similar institution. (Only for 2 children)

The investment can be from any source and not necessarily from income chargeable to
tax.

Section 80D: Medical Insurance Premiums

Medical insurance, popularly known as Mediclaim Policies, provide deduction up to Rs
15000 . This deduction is additional to Rs.1,00,000 savings. For senior citizens, the
deduction up to Rs. 20,000 is allowable. This deduction is available for premium paid on
medical insurance for oneself, spouse, parents and children.

LTA (Leave Travel Allowance)

LTA is a concession that an employer may pay you as a reimbursement towards any
travel expenses within India that you may incur while on leave. These travel expenses
may be incurred by you and your family.

Interest on Housing Loans

For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is
exempt from tax. However, this is only applicable for a residence constructed within
three financial years after the loan is taken and also the loan if taken after April 1, 1999.

For let out properties, the entire interest paid is deductible under section 24 of the Income
Tax act

If the house is not occupied due to employment, the house will be considered self
occupied.

Tax Rates--

In India, Individual income tax is a progressive tax with three slabs.

1. No income tax is applicable on all income up to Rs. 1,10,000 per year. (Rs.
1,45,000 for women and Rs. 1,95,000 for senior citizens)
2. From 1,10,001 to 1,50,000 : 10% of amount greater than Rs. 110,000 (Lower
limit Rs. 1,45,001 for women and 1,95,000 for senior citizens)
3. From 1,50,001 to 2,50,000 : 20% of amount greater than Rs. 1,50,000 + the full
tax on the first slab.
4. Above 2,50,000 : 30% of amount greater than Rs. 2,50,000 + the full tax on the
first two slabs.

From April 1, 2008 new tax slabs will apply:

 • No income tax is applicable on all income up to Rs. 1,50,000
per year. (Rs. 1,80,000 for women and Rs. 2,25,000 for senior
citizens)
• From 1,50,001 to 3,00,000 : 10% of amount greater than Rs.
1,50,000 (Lower limit changes appropriately for women and
senior citizens)
• From 3,00,001 to 5,00,000 : 20% of amount greater than Rs.
3,00,000 + the full tax on the first slab.
• Above 5,00,000 : 30% of amount greater than Rs. 5,00,000 +
the full tax on the first two slabs.

Surcharge

A 10% surcharge (tax on tax) is applicable if the taxable income (taking into
consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs
was increased to Rs. 1 crore (Rs. 10 million) with effect from 1st June 2007 for corporate
assessees.

Education Cess

All taxes in India are subject to an education cess, which is 3% of the total tax payable.

Refund Status for Salaried tax payers

The Income Tax Department has put on its website the list of income tax refunds of all
salary tax payers which could not be sent to the concerned persons for want of correct
address.

Salary taxpayers who have not received refunds for assessment years 2003\04 to 2006\07
can click on the link below and query using the PAN number and assessment year
whether any refund due to them has been returned undelivered.

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10%
surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10
million). Foreign companies pay 40%..An education cess of 3% (on both the tax and the
surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies
and 41.2% for foreign companies.

From 2005-06, electronic filing of company returns is mandatory.

 Fringe Benefit Tax
Fringe Benefit Tax is a tax payable by companies against benefits that are seen by
employees but cannot be attributed to them individually. This tax is paid as 33.99% of the
benefit, which is only a percentage of the actual amount paid.

Some fringe benefits and their taxable rates are mentioned:

Fringe Benefit Taxable percentage Effective Tax Rate

Medical reimbursements 20% 6.8%

Telephone bills 20% 6.8%

Employee Stock Options (Difference

between market value and purchase price on 100% 33.99%
vesting date)

PROFESSIONAL TAX
Professional tax or employment tax is a state-based tax in India on
Professions, Trades, Callings and Employments. It is allowed as a deduction
from the gross income before computing the tax.

The following Indian states levy Professional Tax –

1. West Bengal,
2. Karnataka,
3. Maharashtra,
4. Andhra Pradesh,
5. Gujarat,
6. Tamilnadu and
7. Madhya Pradesh.

The set of professional tax slabs in India are different for all the states in
India and some of the states have formulated different professional tax slabs
for men, women, and the senior citizens of the respective states.