10 December 2018

Gratuity meaning, applicability, calculation

Meaning

The word 'Gratuity' was derived from Latin word 'Gratuitous', Which means free gift. Once under British rule, employers used to offer such gift on retirement or resignation of an employee after giving a long and meritorious service. In later stage, the concept becomes the Gratuity act 1972.
Now a day gratuity is benefit provided to employee for working more than 5 years and did not participate any activity, which caused employment injury or any offence involving moral turpitude in the course of employment.

Applicability

1. Gratuity act 1972 is applicable in all factories having:
  • 10 or more worker strength during any day in the preceding year, if the manufacturing process is running with aid of power.
  • 20 or more worker strength during any day in the preceding year, if the manufacturing process is running without aid of power.
2. Gratuity act 1972 is applicable in shops or other establishment having:
  • 10 or more employee strength during any day in the preceding year.
3. Gratuity act 1972 is applicable in the following cases irrespective to the employee/worker strength.
  • Mine
  • Oilfield
  • Railway company
  • Major Port
  • Plantation of Tobacco, Coffee or Sugar

Calculation

To calculate gratuity in India, always remember the following formula:

Part-1                                  Part-2                                 Part-3
  • Part-1: Here Salary Includes Basic & DA.
  • Part-2: This part represent 15 working days out of 26 in a month.
  • Part-3: Here the number of years should be rounded up only if the decimal value is 6 months or more.
Although employer may give a higher amount of gratuity if he/she wish to do so, but the tax free gratuity will be, least of the followings:
  1. Calculated value as per the formula stated above
  2. Maximum threshold limit (ie: Rs. 20 Lakh Currently)
  3. Actual Gratuity Amount Received.
[332 Words]
[Estimated reading time: 1 Min. 40 Sec.]

09 December 2018

TDS on Salary


Applicability

TDS should be deducted form employees' salary by the employer, if the employee fallen under any tax bracket irrespective they are government or non-government employees'. It is the liability of employer that he/she should deduct the amount of TDS from employees' salary and pay the same to the government. The employer is also authorized to do to.

Employer's Primary Formalities

First of all, the employer should apply for TAN(Tax Deduction/Collection Account Number). No employers are authorized to deduct TDS, without obtaining a valid TAN. [Click here to Apply for TAN]. Once employer obtain the TAN, he is liable to deduct TDS from employees' salary, basis of their estimated total annual income. After deducting TDS, employer should issue from 16 to the employee. Employer should pay the deducted tax through challan (ITNS 281) to the appropriate government and he is also liable to file quarterly return in Form 24Q.

Computation

The employer should estimate the taxable income of the employee, and calculate the annual income tax on that income, on the basis of current year tax slab. After that the total annual tax should be divided by the number of working month(s).

Lets say Mr. X is an employee, who earn income from salary only, and his monthly salary is Rs. 20,000. That means his annual salary is Rs. 2,40,000 [20,000 * 12] right? Now in the current assessment year (ie: 2018-19), Income upto 2,50,000 , is exempted. Hence, no TDS will be deducted from Mr. X.

In another example, lets assume Mr. Y is another employee, and his monthly salary is  Rs. 50,000.
That means his annual salary is Rs. 6,00,000 [50,000 * 12] right? So, lets find out his income tax below:
  • For the 1st 2.5 Lakh , Tax will be 0
  • For the amount more than 2.5 Lakh but under 5 lakh, Tax will be 12,500 [2.5 Lakh * 5%]
  • For the amount more than 5 Lakh but under 10 Lakh), Tax will be 20,000 [1 Lakh * 20%]
Hence, the total estimated annual income tax of Mr. Y is, Rs. 32,500 [0 + 12,500 + 20,000]
Now the amount of monthly TDS will be Rs. 2708 [32,500/12]

From the Employees' Point of View:

If TDS is deducted from salary, then always ask Form 16 from your employer. Because Form 16 is the certificate of TDS deduction. Don't worry, when you will file the income tax return, the Income tax department will consider every penny of the TDS, you paid already. If the assessment shows that you do not have any tax liability , then you can claim refund in full of the TDS amount, or you can adjust with your tax liability.

If the employee has invested anything under Chapter VI-A, and he will be entitled to avail the benefit of deduction from his income. Then he can declare such investments in Form 12BB, so the employer can consider those benefits , while estimating your taxable income, and deduct lower TDS from the salary.
[483 Words]
[Estimated reading time: 2 Min 30 Sec]