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How to calculate total taxable income

 

Do you work in accounts department? Are you responsible to disburse salary after deduction of tax before salary transfer to the respective bank accounts?

TDS on salaries


Or frequently we heard that a large amount has been deducted as tax from my salary. I have asked to accounts people. But they reply it is deducted as per income tax law applicable in Bangladesh.

Most of the people fear of income tax. They think that the calculation is very complex. So it is not understandable.

Yes, income tax is complex all over the world.

But it is not impossible to understand the calculations.

Generally the calculation of income tax of salaried person is not so complex. If you try then it is easy to understand.

Just keep your patience for fifteen minutes in this article.

I assure you this article will give you a clear view on how the tax is calculated on income from salary.

We will use simple assumptions here to calculate TDS on salaries and the monthly tax which will be deducted from his salary.

Hope, you will agree with me that most of the people of us the source of income is very simple. Gross monthly salary is divided into few heads which are very familiar to us. The nature of source is only complex for certain groups of people.

For those groups of people, they may require to go income tax consultant.

But as a simple people like other majority of the people you may calculate your own taxable income and tax liability. Then you could understand whether the calculation of TDS on salaries is as per income tax ordinance of Bangladesh or not.

Here Mr Karim is a virtual name who has no real existence in the world. For calculation purpose we only use the name and we will assume the income from salary.

We assume that Mr Karim will be entitled to get the following benefits from his company for the income year 2017-18:

a. Monthly basic salary BDT 60,000

b. House rent 40% of basic salary i.e. BDT 24,000

c. Medical allowance 10% of basic salary i.e. 6,000

d. Conveyance allowance 10% of basic salary i.e. BDT 6,000

e. Employer’s contribution to Recognized Provident Fund (RPF) is 10% of basic salary i.e. BDT 6,000. Employee also contributes the same amount on this fund.

f. Two festival bonuses equivalent to monthly basic salary

Mr Karim will also be entitled to enjoy other benefits as per company policy.

Please don’t feel bore.

Here I will use comparatively more figures and people tend to skip the figures.

But be careful!

Here our main focus is with these figures.

We all are finance people. Our work is with figures. So we like figures!

But in real world, we all have to work with figures.

We earn money. Spend money. Save money.

These all are figures.

So let’s start!

a) Basic salary

Full amount is taxable.

So yearly BDT 720,000 (BDT 60,000X12) will be added with total taxable income.

b) House rent

As the house rent is paid in cash, in this case 50% of basic salary or BDT 25,000 per month, whichever is less shall be deducted from the house rent received by Mr Karim i.e. BDT 24,000.

Here 50% of basic salary is BDT 30,000 (BDT 60,000X50%). The lower amount between BDT 30,000 and BDT 25,000 is BDT 25,000.

So the lower amount BDT 25,000 will be deducted from house rent. As the received amount of house rent is BDT 24,000 which is lower than BDT 25,000 so no amount will be added with total taxable income.

c) Medical allowance

Where any sum received by any employee exceeds 10% of his basic salary or BDT 120,000 per year, whichever is lower shall be deducted from his total amount received as medical allowance.

Mr Karim received yearly BDT 72,000 (BDT 60,000X10%).

As the received amount and the exempted amount are same so no amount will be added with his total taxable income.

d) Conveyance allowance

Where the conveyance allowance is received in cash by any employee then the yearly amount received exceeds BDT 30,000 will be added with his taxable income.

Here Mr Karim receives 10% of his basic salary which is total BDT 72,000 (BDT 60,000X10%X12 months) in a year.

After deducting BDT 30,000 from BDT 72,000 will be added with his total taxable income.

So BDT 42,000 is the taxable income from conveyance allowance.

e) Employer’s contribution to RPF

These funds are available in private organizations where both employer and employee contribute the amount.

The amount contributed by the employer to the fund for employee is fully taxable income.

But the amount has other benefit.

The employee will get tax credit on this amount.

But ensure that the fund is constituted under the conditions mentioned in Part B of first schedule in the income tax ordinance 1984 and approved by the DCT.

As employee is paying tax during the receiving of the income so when he will get the full amount after leaving job then he will not require to pay tax again on that amount.

So the amount contributes by the employer is BDT 6,000 which is yearly BDT 72,000 will be added with total taxable income.

The amount contributes by the Mr Karim and the employer is eligible for tax credit.

f) Festival bonus

Full amount is taxable.

Total bonus amount BDT 120,000 (BDT 60,000X2) will be added with taxable income.

So we have computed the head wise taxable income from salary step by step. Now we will figure out the total taxable income of Mr Karim for the year.

What is the total taxable income?

SI Source of income Amount (BDT)
a Basic salary 720,000
b House rent Nil
c Medical allowance Nil
d Conveyance allowance 42,000
e Emplyer’s contribution 72,000
f Festival bonus 120,000
Total taxable income 954,000

What will be the investment allowance?

So we have calculated his total taxable income from salaries.

Now we will calculate his total tax liability from his total taxable amount BDT 954,000.

But before that you have to do another task.

When we have calculated his total income we have seen he has contributed RPF. And his employer also contributed this fund.

Both are eligible for tax credit.

Besides these he may personally invest in other eligible sectors which are also entitled to get tax credit. In a separate article, I have discussed the areas where you could invest your money to get tax rebate.

You may not know all those investments.

So it is better to assume the total amount for which he is eligible to get as an investment allowance.

Guess you know the maximum limit for investment allowance.

It is 25% of total taxable income.

So his total investment allowance on total taxable income on salaries is BDT 238,500 (BDT 954,000X25%).

On this amount he will get tax credit @ 15%.

So his total tax credit will be BDT 35,775 which will be deducted from his total tax liability.

Don’t know how to calculate tax rebate? Don’t worry. A separate article is published where I have discussed in details about how to calculate tax rebate. You may read that article for details.

You may ask a question now, how I will understand that he has or will invest the exact amount?

It is the responsibility of the taxpayer.

You know he has to submit return of income to NBR in Bangladesh before 30 November in each calendar year.

In that time if he does not invest as you assume then he will have to pay tax on that amount at the time of filing return of income to the NBR.

What will be the total tax liability?

So now finally we will calculate the total tax liability born by him from total income from salaries.

Generally minimum tax exemption threshold limit is BDT 250,000.

Though there are other tax exemption thresholds for different taxpayers we will consider the most used amount.

His total taxable income from salaries is BDT 954,000.

Taxable income Rate Tax (BDT)
First BDT 250,000 0% Nil
Next BDT 400,000 10% 40,000
Rest BDT 304,000 15% 45600
Total 85,600

So Mr Karim’s total tax liability will be BDT 85,600 for the income year 2017-18.

From this tax liability you have to deduct tax credit BDT 33,775 which he is eligible for investment allowance on his total taxable income.

After deducting the tax credit amount his total yearly tax liability will be BDT 51,825.

What will be the monthly TDS on salaries?

We have done a lot of calculations. We have get lots of figures.

But ultimately all these are for one amount to get and it is the monthly TDS on salaries.

His total yearly tax liability is BDT 51,825.

Divide it by 12 months and the monthly TDS on salaries will be BDT 4,318.75.

Every month after deducting the amount as TDS on salaries you have to transfer the monthly salary to the employees’ bank accounts.

Oh, of course you have to deduct other deductable or any other charges as per your company policy.

Please adjust your calculation if any changes occurred during the year due to increment or other benefits.

Besides this, at the end of the income year i.e. June you may require to finally calculating the actual payment made throughout the year and may require to adjust the monthly TDS on salaries.

If you see that you have deducted more or less TDS on salaries than actual requirement then adjust the figure.
Source: jasimrasel.com

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