How Payroll calculations are done?
Payroll calculations usually constitute 4 main components – Basic pay, Allowances, Deductions, and IT Declarations.
Gross Pay is the sum of Basic pay + Allowances.
Net Pay is the difference between Gross Pay – (Deductions + Total TDS). Total TDS is the sum of TDS, Surcharge, Health & Education Cess.
Basic Pay is 50% of Gross salary (Gross * 0.5)
The amount received as the HRA from the employer. Actual rent paid less 10% of the basic salary and 50% of the basic salary if staying in a metro city and 40% in a non-metro city.
PF deduction(Provident Fund) is calculated on 12% of Basic + PF applicable allowances or 15,000, which ever is lower
Employee State Insurance
Rules for calculating payroll taxes
Old Tax Regime
- Income Tax formula for old tax regime = (Basic + Allowances – Deductions) * 12 – (IT Declarations + Standard deduction)
- Deductions are the sum of PF, ESI, and PT etc.
- TDS is calculated on (Basic + Allowances – Deductions) * 12 – (IT Declarations + Standard deduction)
- Standard deduction (50,000)
New Tax Regime
- Income Tax formula for new tax regime = (Basic + Allowances – Deductions (ESI)) * 12 – (IT Declarations)
- Only ESI is considered as a deduction.
- Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJA)
- Standard Deduction (50,000)
- Interest on housing loan (Section 24)
- House Rent Allowance
- Profession Tax
- Children Education Allowance