Concepts of income tax: concept, examples, types, taxation and exemption (2023)

Employees often receive benefits in the form of money or in-kind from their employer. These are some additional privileges or benefits that the employee has in addition to her salary. In accordance withLaw on Income Tax, there are taxable and non-taxable deductions. Read on to find outgratuities importance, its types, benefits, taxes and more.

Conditions Importance in income tax

When your employer gives you fringe benefits and other benefits in addition to your basic salary or wages, they are calledincome tax prerequisites. However, this does not include benefits offered by your employer. It is part of its rate structure and CTC (Total Cost to the Company). Depending on the nature of the benefits, the benefits may be taxable or non-taxable.

What are salary entitlements?

Salary benefits are benefits you get from your company in addition to your monthly salary. you can receiveproducts exempt from income taxor you may have to pay taxes on certain benefits. It includes simple benefits like fuel allowance, company-provided car or lodging, etc.

Rights may also include medical facilities, interest-free loans, credit cards, etc. According to article 17, paragraph 2 of the Income Tax Law, the right to salary includes:

  • Your employer is paying you for something you are responsible for.
  • Cost of perks or benefits given to a particular employee for free or at a discount, etc.
  • Housing costs you receive from your employer at a reduced price or free.
  • The value of any specific security or principal provided by the employer or former employer to the beneficiary directly or indirectly free of charge or at a reduced rate of interest.
  • The cost of any other prescribed benefits or additional benefits.

Examples needed for better understanding.

Transportation, accommodation, etc. are the most common prerequisites that the best companies offer their employees. Here is a detailed description of it.necessary examplesfor a better explanation:

(Video) Understanding the U.S. Tax System in 5 Minutes - Types of Taxes in the United States

  • Hosting is provided by your company.

Rented accommodation is a common form of service delivery that you can use with your employer. Although it is a benefit or privilege offered by your company, this right is taxable. However, the tax will depend on the ownership and valuation of the accommodation.

If the property is owned by your company and its price is less than Rs 10,00,000, you must pay 7% tax. For properties with a value between Rs 10,00,000 and Rs 25,00,000, the tax rate is 10% and for properties above Rs 25,00,000, the tax rate is 15%. However, if the accommodation is rented by the employer, the tax is not calculated if you pay the full amount of the rent or 15% of the amount. On the other hand, a 24% tax must be paid if the hotel stay is longer than 15 days.

  • Transportation provided by the employer.

The procedure for calculating the tax for this right depends on the ownership and intended use of the car. Your employer may own the car or rent it to you. On the other hand, you can use it for official purposes, personal purposes, or both. The tax calculation process will depend on these factors.

For small cars with a fuel consumption of less than 1.6 litres, the monthly tax rate is Rs 1,800 and for large cars with a fuel consumption of more than 1.6 litres, the monthly tax rate is Rs 2,400.

  • Stock options granted by the employer to employees

Most companies reward their employees with stocks and shares. Net capital gains you earn as an employee are taxable. It is the difference between the sale price of the stock and its fair market value. The applicable amount of tax on shares in the form of rights is equal to the FMV less the amount returned by the employee.

Types of income tax conditions

Here's a quick overview of thisproducts and their types:

(Video) Basic Concepts of Income Tax in India - Exempt Income, Deductions, Rebate, FY, AY, TDS, Advance Tax

  1. Tax Free Permits

Some of the fringe benefits, such as company-provided laptops and computers, employer-provided snacks during work hours, per diem, etc., are not taxable. Also, phone or mobile phone bills, interest-free payday loans, employer contributions to provident funds, entertainment facilities and free medical services, etc., are not taxed.

  1. Taxable royalties

Employee benefits such as water and electricity, medical allowances, free accommodation rental, gas supply, etc.,are taxable royalties. Apart from this, the employee's salary, other benefits such as gifts above Rs 5000, free meals, gym and club facilities etc. They are taxable profits.

  1. Conditions Taxable Employees Only

If you use cars owned by your company, use educational facilities for your children and household services, etc., these allowances are taxable and the tax must be paid by the employee.

Difference Between Compensation and Rights

Rights and fees are similar, so you may get confused between the two. So knowing the basicsdifferences between rights and benefitsit is necessary.

DefinitionEmployer benefits for the professional service provided.The employer provides a fixed amount to cover the specific expenses of the employee.
fiscal responsibilityIt may or may not be taxable, depending on the type, and may not increase your tax liability.When paid in addition to salary, benefits are taxable. Therefore, it increases your tax liability.
Payment methodsEmployers usually pay for the prerequisites. However, they pay compensation in cash.Employers generally pay cash benefits.
Impact on employee wagesRights do not affect salary in any way.When benefits are added to your salary, your income increases.
examplesAccommodation without rent, means of transport provided by the company, etc.Health benefits, rental subsidy, etc.

Non-taxable allowances

See the following requirements available for tax exemption:

(Video) Income Tax Basic Concept | Exemptions, Deductions, Rebate and Relief Differences Explained 🔥🔥🔥

  • Officials like the Union Minister, Supreme Court or Supreme Court judges, Parliament clerks etc. they get free housing from the government. These are examples of tax-free benefits.
  • If you get interest-free loans or soft loans for the treatment of diseases included in Rule 3A, it is a tax-free right. Also, if you get a loan of less than Rs 2,00,000, it will not be taxable.
  • The rights contained in Section 10(7) of the Income Tax Act are provided by the Government of India to its citizens. These are also non-taxable types of benefits.

Copyright Tax Calculation

The average income tax payable determines the taxability of the assets. The following factors affect the calculation process:

  • Specific use tax rate.
  • Income refers to "wages."
  • The cost of compensation for the amount of tax paid by the employer.

Here is an example for better illustration:

Let's say your declared income in 'Wages' is Rs 10,00,000 including employer-provided non-cash benefits of Rs 1,00,000. In accordance with the Income Tax Law, the mandatory tax will be:

Income attributable to 'wages': Rs 10 lakh

Wage tax including education and health severance pay at 4%: Rs 54,600 (if new tax regime of FY 2023-24 is opted for)

So, the average tax rate will be: (54600/10,00,000 x 100) = 5.46%

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Tax paid on Rs 100,000 = Rs (5.46% x 100,000) = Rs 5,460

Amount paid each month: Rs 455 (Rs 5460/12)

Therefore, your employer will pay Rs 455 as TDS in your salary.

Gratuity Benefits

See the benefits of the conditions for the employee:

  • It helps to increase the loyalty of the employees towards the company.
  • It attracts suitable and talented employees to the organization.
  • Helps improve employee productivity and increase employee retention.

last word

Rights benefit the employee in many ways. For example, an employee who works in the fields has to travel a lot for her job. In this case, if his employer bears the cost of food and travel, he releases the employee to a certain extent.

(Video) Ch#1 Lecture (Federal Taxation: Comprehensive): Intro to Individual Income Tax


Concepts of income tax: concept, examples, types, taxation and exemption? ›

All taxes can be divided into three basic types: taxes on what you buy, taxes on what you earn, and taxes on what you own. Every dollar you pay in taxes starts as a dollar earned as income. The main difference is the point of collection. Sales taxes are paid by the consumer when buying most goods and services.

What are the 3 types of taxes and explain what is being taxed? ›

All taxes can be divided into three basic types: taxes on what you buy, taxes on what you earn, and taxes on what you own. Every dollar you pay in taxes starts as a dollar earned as income. The main difference is the point of collection. Sales taxes are paid by the consumer when buying most goods and services.

What are the three different types of taxes give an example for each? ›

Property taxes are an example of a regressive tax; the U.S. federal income tax is a progressive tax example; and occupational taxes are a type of proportional tax. Regressive taxes have a greater impact on lower-income individuals than on the wealthy.

What are the 3 types of income? ›

Three of the main types of income are earned, passive and portfolio. Earned income includes wages, salary, tips and commissions. Passive or unearned income could come from rental properties, royalties and limited partnerships. Portfolio or investment income includes interest, dividends and capital gains on investments.

What types of income are taxed? ›

Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.

What are the two types of taxes explain? ›

There are several very common types of taxes: Income tax—A percentage of generated income that is relinquished to the state or federal government. Payroll tax—A percentage withheld from an employee's pay by an employer, who pays it to the government on the employee's behalf to fund Medicare and Social Security programs.

What is the most common type of tax? ›

Income tax is one of the most common forms of taxation that every American taxpayer must pay and is one of the most important streams of revenue for the federal government. This form of taxation typically involves the government taking a percentage of the annual income or revenue of an individual or company.

What are the three indirect taxes? ›

Different types of indirect taxes in India
  • Service tax: This is charged on the services availed by the customer. ...
  • Excise duty: This is paid for the manufacturing of goods. ...
  • Value Added Tax (VAT): This is paid on the value addition in price during the sale of goods.

What are the 4 sources of where the government gets its tax revenue? ›

Sources of Federal Revenue

Most of the revenue the U.S. government collects comes from contributions from individual taxpayers, small businesses, and corporations through taxes. Additional sources of tax revenue consist of excise tax, estate tax, and other taxes and fees.

What are 3 things taxes are used for? ›

Federal government spending pays for everything from Social Security and Medicare to military equipment, highway maintenance, education, and more.

What are the big 3 taxes? ›

Consistent with this, our updated estimates suggest collections from the state's “big three” taxes—personal income, sales, and corporation taxes—are likely to fall below the Governor's Budget assumption of $200 billion.

What are the differences between direct and indirect taxes? ›

Taxes can be either direct or indirect. A direct tax is one that the taxpayer pays directly to the government. These taxes cannot be shifted to any other person or group. An indirect tax is one that can be passed on-or shifted-to another person or group by the person or business that owes it.

What are examples of state taxes? ›

State income taxes are lower than federal income taxes. Mainly because the states also assess various types of property taxes, sales taxes, and even locality taxes in some states.


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