How employee tax is calculated
Employee tax is calculated on the annual income of an employee. Annual income means income received by an employee for a financial year starting from Shrawan 2083 to Ashadh 2084. The income is taxable on a right-to-receive basis.
Your income is estimated for the whole year based on your current income and the information available at the beginning of the year. It is then updated whenever there are changes or new information during the year.
For example, if you receive Rs. 50,000 salary in Shrawan 2083, your annual income will initially be estimated as Rs. 50,000 per month for 12 months, or Rs. 6,00,000. If your salary later increases to Rs. 60,000 from Magh, the estimate is updated as six months at Rs. 50,000 and six months at Rs. 60,000, making the annual income Rs. 6,60,000.
There may also be additional predictable income such as Dashain allowance. If such income is included from the beginning of the year, tax tends to remain more uniform through the year. If it is added only when paid, the tax can be higher in later months and lower in early months. Your employer's payroll policy usually decides how irregular or special incomes are handled.
Unpredictable income such as bonus, overtime or special allowances is normally added when received. This can make monthly tax fluctuate, unless the employer chooses to distribute the effect through the remaining months of the year.
How to calculate tax for single or couple employees
For the financial year 2083-84, whether an employee is single or married does not change the initial exemption limit in the source article. The same slabs apply to both statuses.
| Income band | Tax rate |
|---|---|
| Up to Rs. 10,00,000 | 1% Social Security Tax (SST) |
| Next Rs. 5,00,000 | 10% TDS |
| Next Rs. 10,00,000 | 20% TDS |
| Next Rs. 15,00,000 | 27% TDS |
| More than Rs. 40,00,000 | 29% TDS |
For employees with disabilities, the initial exemption of Rs. 10,00,000 is raised by another 50%. This makes the initial exemption limit Rs. 15,00,000.
You do not need to pay 1% Social Security Tax if you are contributing to the Social Security Fund.
What is taxable income?
Any income received from an employer, such as salary, allowance, overtime and bonus, is generally taxable income. A benefit received from an employer may also be taxable even if it is not paid in cash.
| Payment or facility | Tax treatment |
|---|---|
| Salary | Taxable |
| Allowance | Taxable |
| Overtime | Taxable |
| Dashain allowance | Taxable |
| Bonus | Taxable |
| Business expense reimbursement, such as travel expenses | Not taxable when it is a genuine reimbursement |
| House provided by company | Generally taxable at 2% of assessable income, except for cases such as security guards or employees who must stay at office or factory premises due to the nature of work |
| Car provided for personal or mixed personal and office use | Generally taxable at 0.5% of assessable income. If the car is provided only for official use, it is not taxable |
Some facilities are included in taxable income even when no money is paid. These are commonly called deemed income.
| Taxable facility or deemed income | Amount included |
|---|---|
| House provided by company for personal stay | 2% of annual income, subject to the exceptions noted above |
| Vehicle provided for personal or mixed use | 0.5% of annual income |
| Any other facility | Estimated value of the facility received |
What you can deduct from taxable income
Certain amounts can be deducted from annual income before taxable income is determined.
1. Retirement fund contributions
If your company has contributed to SSF, CIT or PF, you can deduct retirement fund contributions up to the allowed limit. The maximum limit stated in the source article is Rs. 5,00,000.
The deductible amount is the minimum of one-third of annual taxable income before retirement contributions, actual retirement fund contributions, and the maximum limit.
- If annual taxable income before retirement contribution is Rs. 21,00,000, one-third is Rs. 7,00,000.
- If actual SSF, CIT and PF contribution is Rs. 4,00,000, that is the second value.
- The maximum limit is Rs. 5,00,000.
- The minimum of Rs. 7,00,000, Rs. 4,00,000 and Rs. 5,00,000 is Rs. 4,00,000, so Rs. 4,00,000 can be deducted from annual income.
2. Premium paid for health, life and housing insurance
If you have health, life or housing insurance, and the insured house is in your own name for housing insurance, certain premium amounts can be deducted.
- Life insurance: up to Rs. 40,000
- Health insurance: up to Rs. 20,000
- Housing insurance: up to Rs. 10,000
Employees can submit insurance records or proof of premium payment through the RigoHR mobile app.
3. Charity and donation
Charity and donations made to eligible institutions can be deducted up to a maximum of Rs. 3,00,000 or 5% of adjusted taxable income, whichever applies under the tax rules.
4. Remote area allowance
If you have worked in remote areas specified by the government, you can deduct up to Rs. 50,000 based on the category of the place where you worked during the year.
| Remote area category | Deduction amount |
|---|---|
| Ka | Rs. 50,000 |
| Kha | Rs. 40,000 |
| Ga | Rs. 30,000 |
| Gha | Rs. 20,000 |
| Nga | Rs. 10,000 |
5. Children education fee
From the current financial year covered by the source article, children education fee is included as a deduction category. If you have paid for your children's education, you can deduct up to 25% of the amount paid in the year, subject to a maximum of Rs. 25,000. You need to submit proof and request your HR department.
Employees can add children education fee details from the RigoHR mobile app.
Deduction from tax
After tax is calculated by including taxable incomes and allowable deductions, some items can be deducted directly from the calculated tax.
1. Medical tax credit
If you have paid for health treatment from approved hospitals or institutions, you can deduct up to Rs. 1,500 or 15% of the expense paid for such treatment. If you have claimed health insurance deduction, you cannot claim medical tax credit. If you have health insurance, it is usually more beneficial to claim the health insurance deduction.
2. Female tax rebate
Female employees can deduct 10% of the total tax payable. Total tax includes both SST and TDS.
RigoHR automatically deducts the 10% tax rebate when the employee record is configured accordingly.
How the tax is paid throughout the year
Salary tax is calculated on annual salary income, including actual and estimated income, reduced by applicable deductions and taxed based on the slab rates. The total annual tax is then usually divided across the remaining months in the year.
For example, if annual tax is Rs. 60,000, a simple distribution over 12 months gives a monthly tax of Rs. 5,000. If income, deductions or other tax information changes later, the tax for future months can change.
RigoHR automatically adjusts income and tax calculations for these changes.
Filing your income tax return
For most employees, there is no need to file an income tax return. Filing an income tax return means filling the D-03 form and getting a tax certificate from the Inland Revenue Department.
You do not need to file your income tax return if all of the following apply:
- You have income from salary only.
- You worked in one company at a time during the year. If you leave one company and join another, it is still counted as one company at a time. If you worked for more than one company at the same time, you should file a return.
- You have not claimed charity and donation deduction.
- Your annual taxable income is less than Rs. 40,00,000.
Important note: if annual taxable income is more than Rs. 40,00,000, you should file a tax return and obtain a tax clearance certificate.
Disclaimer
This article is general information and is not legal or tax advice. It covers common cases only. Many other conditions can determine how tax is calculated. For details, refer to the Income Tax Act, official Inland Revenue Department guidance and your qualified tax adviser.
For official reference, visit the Inland Revenue Department.