October 3, 2013

Presentation On Calculation of Income Tax from Salary



Definition of Income Tax
As per section-16 of Income Tax ordinance 1984, "income tax for any assessment year at any rate or rates shall be charged, levied, paid and collected in respect of the total income of the income year or income years of every person."
A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.
Source: "investopedia"  (3,October 2013 ) 

Income tax is a direct and single tax charged on the total income of a person for relevant income year, in relevant assessment year.

Who is to pay tax?
Taxability of a person is determined on the basis of his residential status. As per section 2(55) of ITO 1984, all the residents of Bangladesh has to pay tax on their taxable income during any income year and non-residents have to pay tax on the amount that is earned from Bangladesh.
Non-resident except a Bangladeshi non-resident has to pay tax at the maximum rate of 25% irrespective of total income. Moreover, a Non-Resident shall not be entitled to any sort of tax rebate like investment tax rebates etc.

Who is resident?
There is 2 rules for a person being resident of a country. The rules are:
Ø   Anyone staying in the taxable territory for 182 days or more in the income year .
Ø  Anyone staying in the taxable territory for 90 days or more in the income year and the person had stayed 365 days at a time or consecutively within 04 years immediately before the income year just preceding the assessment year, shall be deemed to be resident.
Otherwise, the person will be treated as a non-resident.

Who should submit Income Tax Return?
If total income of any individual other than female taxpayers, senior taxpayers of 65 years and above and retarded taxpayers during the income year exceeds Tk 200,000/-.
If total income of any female taxpayer, senior taxpayer of 65 years and above and retarded taxpayer during the income year exceeds Tk 225,000/-.
If any person was assessed for tax during any of the 3 years immediately preceding the income year.
A person who lives in any city corporation/paurashava/divisional HQ/district HQ and owns a building of more than one storey and having plinth area exceeding 1,600 sq. feet/owns motor car/owns membership of a club registered under VAT Law.


Who should submit Income Tax Return?
If any person subscribes a telephone.
If any person runs a business or profession having trade license.
Any professional registered as doctor, lawyer, income tax practitioner, Chartered Accountant, Cost & Management Accountant, Engineer, Architect and Surveyor etc.
Member of a Chamber of Commerce and Industries or a trade Association.
Any person who participates in a tender.
A person who has a Taxpayer's Identification Number (TIN).
Candidate for Union Parishad, Paurashava, City Corporation or Parliament.

Heads/sources of income for the purpose of computing income tax
As per income tax ordinance 1984, there are seven Heads of income namely:-
(a) Salaries.
(b) Interest on securities.
(c) Income from house property.
(d) Agricultural income.
(e) Income from business or profession.
(f) Capital gains.
(g) Income from other sources.

Definition of salary
As per section 21 of ITO 1984, the following income of an assessee shall be classified and computed under the head "Salaries", namely:-
(a) any salary due from an employer to the assessee in the income year, whether paid or not;
(b) any salary paid or allowed to him in the income year, by or on behalf of an employer though not due or before it became due to him; and
(c) any arrears of salary paid or allowed to him in the income year by or on behalf of an employer, if not charged to income-tax for any earlier income year.
 Where any amount of salary of an assessee is once included in his total income of an income year on the basis that it had become due or that it had been paid in advance in that year, that amount shall not again be included in his income of any other year.



Elements of salary
According to ITO 1984, following items will be considered as  the elements of income:
  1. Basic salary: According to section 33(2)A, basic salary is the amount paid or payable by an employer to the employee on monthly basis for services provided by him. Basic salary is fully taxable.

Structure of Salary:
The structure of salary may be like that:
11000-1500-20000.
Here, 11000 is the basic salary. The total amount of salary is calculated on the basis of basic salary. 1500 is the annual increment.
Structure of Salary
For the calculation of income tax, taxable income from basic salary will be (11000*12) tk. 132000.
If we want to calculate taxable income from salary for the income year 2012-2013, then,
Basic salary will be tk.(11000*12) or tk. 132000.
If the period of annual increment is 1st April 2013, then
Amount of Basic salary will be:
from July to March tk.(11000*9) or tk.99000
From April to June tk.(12500*3) or tk.37500
                             Total                          tk.136500.

2. Dearness Allowance
Dearness allowance is the amount paid by the employer to the employee to cope with the highest cost of living, which is a certain percentage of basic salary. The full amount of dearness allowance is taxable.
For example: if the basic salary is tk.11000 and dearness allowance is 10% of basic salary, then, tk.(11000*12*10%) or tk.13200 will be included in the taxable income.

3. Bonus
Bonus is the amount paid based on basic salary for the purpose of festival like, Eid, christmas or rewards for good performance. Bonus may be (1) Festival Bonus, (2) Performance Bonus and (3) Incentive Bonus. Bonus is fully taxable.
For example: if 2 festival bonus is given each equal to one months basic salary, then, tk.(11000*2)m or tk.22000 will be included in the taxable income from salary.

4. Medical Allowance:
If any amount is paid to meet medical expenses of the assesse, spouse, children, parents, then, the amount exceeding the actual expenditure is to be included under the head salary.
For example: if medical allowance is tk. 700 per month and actual expenditure is tk.5000 for the income year, then tk.(8400-5000) or tk.3400 will be included in the taxable income.

5.House Rent allowance:
When house rent allowance is provided in cash, then, the amount exceeding 50% of basic salary or tk. 15000 per month, whichever is lower, shall be added with salary. For example: if House Rent allowance is 6500 per month and paid in cash , then
                                                                           
6. Conveyance Allowance in cash
When conveyance allowance is paid in cash, then, the amount exceeding tk.24000 annually is to be added with salary.
For example: if conveyance allowance is given tk.3000 per month, then

7. Provident Fund:
Provident Fund is 4 types: (1) general provident fund, (2)Contributory provident fund, (3)Recognized provident fund, (4) Unrecognized provident fund.
General provident fund and Contributory provident fund is not taxable.
Employee’s contribution to recognized provident Fund is not taxable. Only employer’s contribution to recognized provident Fund is fully taxable.
For example: if Employee’s and employer’s contribution to recognized provident Fund is 10% of basic salary, then, tk.(132000*10%) or tk.13200 will be added under the head salary.
 
8. Interest on provident Fund:
Interest on General provident fund, Contributory provident fund and Unrecognized provident fund is not taxable.
Interest on Recognized provident fund is taxable. Amount of interest exceeding 14.5% rate or 1/3 of basic salary, whichever is lower will be added with salary.
For example: if the employee receives tk7200 as 18% interest on recognized provident fund, then
Calculation of 14.5% interest=(7200/18)*14.5%
                                                    =5800

9. Travelling Allowance
If any amount is paid for travelling purpose, then, the amount exceeding actual expenditure will included under the head salary.
For example: if tk.10000 is given as Travelling Allowance and tk.8000 is actually expended, then tk.2000 will be added under the head salary.

10. Overtime
Full amount of overtime is taxable.

11. Telephone/mobile bill allowance
Full amount of the telephone/mobile bill is taxable.
Items included in investment allowance to facilitate tax rebate:
As per rules explained in part-B of sixth schedule of the ITO 1984, the following items are considered as a part of the investment allowance and will be deducted from tax under the head investment allowance :
  1. Employee’s contribution to General provident fund and Contributory provident fund.
  2.  Employee’s and Employer’s contribution to recognized provident Fund
  3. Employee’s contribution to group insurance scheme and deposit Pension Scheme.
  4. Employee’s contribution to life insurance premium(maximum 10% 0f policy value).
  5. Purchase of primary and secondary shares of listed company.
  6. Purchase of debentures and savings certificate
  7. Contribution to government zakat Fund.

Rates of Taxes as per Finance Act, 2012:
Individual / Firm / Hindu Undivided Family Association of Person (AOP)
First Tk.200,000 ----------------------------------------Nil
Next Tk.300,000 -----------------------------------@ 10%
Next Tk.400,000-------------------------------------@ 15%
Next Tk.300,000------------------------------------@ 20%
On the balance ------------------------------------@ 25%
Provided  that a lady tax payer or a Senior person of 65 and above shall enjoy the initial exemption of Tk.225,000, the other slabs shall remain as aforesaid. A disable person shall belong to the minimum ceiling of Tk.275,000.
 Non-residents except a Bangladeshi Non-resident, (NRB) shall be charged to tax at the maximum rate of 25%.
But the amount of tax shall be not be less than Tk.3,000/- for any particular assessment year.

Computation of Investment Allowance
Tax rebate is applicable @10% of allowable investment, that is, (34400*10%) or tk.3440. Tax rebate is to be deducted from gross tax to calculate net tax liability.

Calculation of net tax liability:
For women,
Up to tk. 225000, tax rate is Nill.
So no tax is to be paid.





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