Question

Govind earned an annual salary of Rs 330000. His employer deducted Rs 3000 per month from his salary for the first 11 months of the financial year. Find the amount of tax he paid (in \(\mathrm{Rs}\) ) in the last month of that year using the information below. If the standard deduction is \(45 \%\) of the salary or Rs 150000 , which ever is less. The income tax on the TI (taxable income) is calculated in the following manner. (i) Less than or equal to Rs \(50000-\) Nil (ii) From Rs 50000 to Rs \(100000: 20 \%\) of the amount exceeding Rs 50000 (iii) From Rs 100001 to Rs 150000 : Rs \(10,000+30 \%\) of the amount exceeding Rs 100000 (iv) Above Rs 150000: Rs \(25000+40 \%\) of the amount exceeding Rs 150000 (1) 6400 (2) 5600 (3) 4800 (4) 4600

Short answer

Answer: Rs 0

Step-by-step solution

Calculate Govind's total annual salary after deductions

Govind's employer deducted Rs 3000 per month for the first 11 months. So the total deductions are: (11 months * Rs 3000) = Rs 33000. His initial annual salary is Rs 330000. Subtract the total deductions from his initial annual salary to get the salary after deductions: Rs 330000 - Rs 33000 = Rs 297000

Calculate the Taxable Income

We are given that the standard deduction is 45% of the salary or Rs 150000, whichever is less. Calculate 45% of his salary after deductions: (45% of Rs 297000) = 0.45 * Rs 297000 = Rs 133650. Since Rs 133650 is less than Rs 150000, his standard deduction is Rs 133650. Subtract the standard deduction from his salary after deductions to get his taxable income: Rs 297000 - Rs 133650 = Rs 163350

Calculate the Income Tax

We are given the rules to calculate income tax based on taxable income. Since Govind's taxable income (Rs 163350) is above Rs 150000, we need to use the fourth rule: Rs 25000 + 40% of the amount exceeding Rs 150000 Calculate the amount exceeding Rs 150000: Rs 163350 - Rs 150000 = Rs 13350 Now calculate 40% of this amount: 0.40 * Rs 13350 = Rs 5340 Add Rs 25000 to this amount to get the total income tax: Rs 25000 + Rs 5340 = Rs 30340

Find Tax Paid in the Last Month

We know that for the first 11 months, Rs 3000 was deducted each month for tax payment. Hence, for the first 11 months, the total tax paid was: (11 months * Rs 3000) = Rs 33000 Govind's total income tax for the year is Rs 30340. By comparing it with the total tax paid in the first 11 months, we can find the tax paid in the last month: Tax paid in last month = Total income tax for the year - Total tax paid in the first 11 months Tax paid in the last month = Rs 30340 - Rs 33000 Tax paid in the last month = Rs -2660 Since the tax paid cannot be negative, we can conclude that the deductions done during the first 11 months are enough to cover Govind's income tax and no additional tax needs to be paid in the last month. Thus, the tax paid in the last month is: Rs 0

Key concepts

Taxable Income

Understanding taxable income is crucial for calculating how much tax an individual owes. Taxable income refers to the portion of your income that is subject to taxes by the government. To find Govind's taxable income, we first need to consider his total deductions, which include both salary deductions and the standard deduction allowable by tax laws.

In this case, after deducting Rs 33000 (deductions over 11 months) from Govind's gross annual salary of Rs 330000, we arrive at an adjusted income of Rs 297000. To determine the taxable income, we then subtract the standard deduction applicable, which we'll discuss in more detail below.

Standard Deduction

A standard deduction is a flat amount that reduces the amount of income on which you are taxed, so it lowers your overall tax burden. In Govind's situation, the standard deduction can be either 45% of his adjusted salary or Rs 150000, whichever is lower. Calculating 45% of Rs 297000 gives us Rs 133650. Since this amount is less than Rs 150000, Rs 133650 is selected as the standard deduction.

By subtracting this amount from the adjusted salary of Rs 297000, Govind's taxable income comes out to Rs 163350. Thus, through the standard deduction, we see a significant reduction in the taxable portion of his income.

Salary Deductions

Salary deductions play a critical role in determining net income. These deductions include mandatory or voluntary subtractions from the gross salary. In Govind's case, Rs 3000 was deducted each month for the first 11 months, totaling Rs 33000 annually. Such deductions could include tax withholding, pension plans, insurance premiums, or loan repayments.

These deductions effectively lower the salary subject to taxation, impacting the taxable income calculation, and consequently the tax liability. Salary deductions, when executed properly, align with individual financial planning and ensure compliance with tax regulations.

Income Tax Rules

Income tax rules define the rate at which income is taxed, and these rates can vary depending on income brackets defined by the government. Govind's taxable income falls into the "above Rs 150000" bracket, meaning the applicable rule for his income involves a constant sum plus an additional percentage of the excess over 150000. Specifically, it adds Rs 25000 plus 40% of the amount exceeding Rs 150000.

To calculate his tax:

• The excess amount over Rs 150000 is Rs 13350 (i.e., Rs 163350 minus Rs 150000).
• 40% of this excess is Rs 5340.
• Adding Rs 25000 results in a total tax liability of Rs 30340.

Understanding these tax rules is essential, as they directly inform the financial obligations encountered during tax filing.