Understanding Tax Computation Process Flow

To calculate payee income tax to be withheld, the system:

1. Calculates taxable earnings.

   Taxable earnings are the sum of all earnings that a payee has received for the tax period, including previous employment earnings, basic salary from current employment, house rent allowance, and perquisites.

2. Totals previous and current employer exemptions.

   Previous and current employer exemptions for the payee are totaled. These exemptions can be items such as house rent allowance, conveyance, or leave travel allowance.

3. Calculates gross salary.

   Gross salary is calculated as taxable earnings minus exemptions.

4. Calculates the standard deduction, based on the previously calculated gross salary. Profession tax is taken into consideration during this step.

   Note: Standard deduction is limited to Gross Salary. Gross Salary cannot be a negative value.

   Standard Deduction is a flat deduction available for Income from Salary. It is available on the cumulative salary earned in a year. In the 2024 Budget, the Standard Deduction for taxpayers choosing the new regime (Section 115BAC) has been increased from Rs 50,000 to Rs 75,000 per annum. However, the Standard Deduction for the old regime remains unchanged at Rs 50,000 per annum. Profession Tax contribution is also considered to arrive at Salary Income.

5. Calculates salary income.

   Salary income is Taxable Earnings – Exemptions = Gross Salary – Standard Deduction = Salary Income.

6. Calculate other income. I

   Income from other sources is income derived by the employee from sources such as business income and income from capital gains, Loss and Profits from House Property. Differential tax treatments are given to such incomes under the New and Old Regimes respectively, depending on what the employee chooses. Any changes, will be notified by position statement issued by PeopleSoft oracle to all its existing customers. The employee may choose to declare this income to the employer. Such income or loss is added or reduced from taxable income while taxes for the year are determined.

7. Calculate gross total income.

   Gross total income is calculated by considering the total of all heads of incomes before allowing any deductions under chapter VIA.

8. Total chapter VIA deductions.

   Chapter VIA Deductions

   These deductions are predominantly available only for old tax regime. Employees choosing new tax regime are not eligible to claim deductions under Chapter VIA.

   However, under the new tax regime, we have an exception where contributions to National Pension Scheme (NPS) is permitted even under the new regime.

   NPS serves as a long-term savings and retirement planning initiative, offering various contribution methods. Employees can make voluntary contributions under Section 80CCD (1) and can also utilize Section 80CCD (1B) for additional contributions. Note that these sections are applicable to the new regime also. The tax implications vary according to the Act, and our system adheres to these regulations. There are no amendments to sec 80 CCD(1) and 80CCD(1B) for the FY 2024-25. Another section - Section 80CCD (2) addresses employer contributions to employees' NPS accounts. In the 2024 budget, applicable from the AY 2024-25 , Section 80CCD(2) permitted private sector employers also to contribute upto 14% ( from the earlier 10%) akin to government sector employers. Please note that these changes specifically impact only employees opting for taxation under Section 115BAC (new regime). For the old tax regime, the employer contribution remains unchanged at 10%.

   All chapter VIA deductions (such as medical insurance or self-education) that the payee claims are calculated. Each deduction has a statutory limit defined in variables. Please note that there are differential tax treatments for claiming deductions under Chapter VIA. As of the FY 2024-25 - all Chapter VIA deductions ( with a few exceptions) are eligible only for employees opting for the old regime subject to individual limits as prescribed in the Income Tax Act from time to time. Any legislative changes will be modified and notified by way of position statements that will be updated from time to time. Customers are encouraged to continuously watch the document from time to time. Blogs are also published on changes to these.

9. Calculate total taxable income (net income).

   Total taxable income (net income) is calculated as gross total income minus chapter VIA deductions. The tax liability of the assessee is determined based on this result. The rates of taxes applicable, and the rebates that are given, are all based on this amount. The applicability of the surcharge also depends on this result.

10. If employee has not furnished the Permanent Account Number (PAN), the deductor will deduct the tax which is higher of the following rates, namely:

    1. At the rate specified in the relevant Provisions of this Act; or

    2. At the rate or rates in force; or

    3. At the rate of twenty percent.

11. Calculate tax liability.

    The total taxable income (net income) is used to determine the applicable income tax rate. The income tax rates are stored in a bracket. Income tax rates effective 2021, had differential rates for those opting for old regime and those opting for the new regime.

12. Apply rebates.

    Marginal Relief u/s 87A for New Tax Regime u/s 115BAC(1A)

    Section 87A of the Income Tax Act, 1961 allows an income tax rebate on the tax payable by the employee making the employee’s tax rebate makes one's income tax liability zero. Marginal relief was available for Incomes between 6-7 lakhs. But certain transactions are taxed at a specific rate and are hence not allowed for section 87A tax rebate. if the total income of the resident individual (opting section 115BAC(1A)) exceeds Rs. 7,00,000 and the tax payable on such income exceeds the difference between the total income and Rs. 7,00,000, the employee is entitled to a rebate with marginal relief to the extent of the difference between the tax payable on such total income and the amount by which it exceeds Rs. 7,00,000.

    Rebate u/s 87A for FY 2024-25

    A resident individual having taxable income upto Rs 7,00,000, will get a tax rebate of 20,000 u/ s 87A for FY 2024-25(AY 2025-26) under the new income tax regime. Under the old tax regime, the rebate is retained at 12500/- for income upto Rs 5,00,000. Refer Position paper for detailed information. Rates may change year on year depending on budgetary changes.

13. Calculate balance tax.

    Net tax payable is calculated as the result of the tax liability minus the rebates.

14. Calculate surcharge.

    Surcharge is an additional levy on the net taxes of an employee. When the net tax payable is determined, the surcharge is calculated. The amount calculated is added to the taxable income and considered for tax deduction. This is the last step in the tax computation process. The amount calculated is prorated and deducted on a monthly basis.

    Marginal Benefit/Relief for surcharge

    The Income-tax Act, 1961 provides marginal relief to individuals whose taxable income exceeds the threshold limit after which a surcharge becomes payable, but whose net income is less than the surcharge.

    Note: The marginal relief is calculated based on the surcharges and marginal benefits provided by the Government.

15. Calculate net tax liability.

    The final tax liability is the result of the net tax payable plus the surcharge.

16. Determine monthly tax deduction.

    To determine the month's tax deduction for the payee, the balance tax of the employee is determined after reducing the tax deducted so far from the employee's tax liability for the year, and the balance determined. This is divided by the number of months left in the year and tax for the month determined. This is the amount that will reflect as TDS (tax deducted at source) month on month.

The frequency with which you must deduct profession tax varies among states. The deduction frequencies for each state (monthly, quarterly, semiannually, or annually) are stored in variables, one variable for each state.

Rates and slabs that are applicable to each state are stored in brackets, one bracket for each state.

Each employee is linked to an establishment and the establishment is linked to a state. The rates that are applicable to each state are stored in a bracket.

Profession tax differs from state to state, and the deduction occurs based on the specified frequency. The amount deducted for profession taxes is considered for the calculation of the standard deduction as discussed in step 4 of the Income Tax process flow.