Tax computation in case of varibale income

Question

Hi Experts,
I have a tax scenario wherein client computes taxable income of employee at the start of the year  Now when they pay salary arrears (salary increment) to employees in novemeber/december they want that tax should not be calculated on the cumulative amount of salary for that month but tax liability of employee should be spread across the remaining periods of the year and tax should be accordingly calculated.
As i understand in sap tax get's deducted on the amount for a particular month (Variable + fixed). If the amount for a particular month is high for any reason then tax get's deducted accordingly for that month, the tax liablity does not get spread,
Ex:
Employee fixed monthly payment
basic - 27580
hra - 5516 (rent exemption - non metro)
Employee variable monthly payment
conve - 2713 (conve reimbursement - totally taxable)
savings
Agg of Chapter VI - 10000
conv exemption  -  2713 (monthly)
Income Tax coming - 653
Now if in October he get's salary arrear of 100000 will system deduct tax as 30% for that month and change Income tax for that month (653/-) to any other amont (30% tax ded for that month) or will the system spread the tax to other month's and calculated tax accordingly.
Thanks so much for all the help extended.
Regards,
Jyoti

Answer 1

Well Jyoti, you are actually getting confused with the tax concepts for India -
Let me explain it in brief -
Whatever income employee will get in whole year, it will be keep on adding up and accordingly tax will be calculated as per the slab. Here we divide the income into 2 part that  is regular income and irregular income.
Since the taxation for India is annual, regular part needs to be projected for the rest of year to get the estimated annual income. It is based on the formula -
Year till date value of regular income (CRT value of /124) + current month value + current month value X projection factor(/401)  - this is calculated and stored as wage type /410 in system. As you know /124 generate based on cumulation class 24 and processing class 20.
Irregular income based on formula -
Year till date value of regular income (CRT value of /125) + current month value - this is calculated and stored as wage type /411 in system. As you know /125 generate based on cumulation class 25 and processing class 20.
After that we get all the exemption etc and finally generate the taxable income on which slabs are applied and deducted accordingly. This taxation will spread uniformly throughout the year subjected to the active status of employee. - This is just to make you understand that how regular and irregular income plays an role. I am also not explaining the rest part as i feel that is not the part of problem here.
There are 2 type of processing possible for taxation of arrears in India provided by SAP-
1. You just add in simply into /125 wage type as it is a irrgular income. Accordingly it will be cumulated into /411 and will be considered for taxation. Here as you are not treating the arrears differently, taxation will spread uniformly here.
2. Now If you want that taxation on arrears/ bonus happens on the same period of the whole amount, then you will be required to configure INBTD for the particular payment (Check the documentation for the details).
Hence if you are not configuring INBTD then tax will spread uniformly for rest of the year.
Let me take some of your example to make it more clear -
Annual Gross - 397152
Income under head salary - 356075
Total income - 256080
Tax on total income - 7608
Monthly tax - 653
Employee monthly salary April , May, june, july - 35269 (tax 653)
Salary Arrears /Leave encashment Aug - 2 lac
So for the month of Aug what will be his taxable amount , will it be 235269 * 30% or will the tax amount for Aug be spread over to coming months (sep, oct, nov, dec, jan, feb, mar)
Here till  july it is correct. But after getting arrears, calculation will happen like this  -
Total income in month of aug - 256080 + 200000 = 456080 (Note i am not considering exemption etc so may be the amount vary lil bit).
Tax on total income= slab rate applied on 456080.
tax deducted till date = 2612
tax remaining = tax on 456080 -2612
tax for aug month = tax remaining / 8.
Prerequisite is you need to tick cumulation class 25 here and also need to set processing class 20 accordingly.
Now suppose you are configured the INBTD for this 2 lac payment then calculation will hapen in following way -
Tax calculated on 200000 = say 30% slab applied then 66666. This processig will happen in INBTD.
But astill this amount will be cumulated into /125 and accordingly into /411.
Total income in month of aug - 256080 + 200000 = 456080
Tax on total income= slab rate applied on 456080.
Remaining tax =  Tax on total income (calculated in previous step) u2013 66666 u2013 2612
August part of this remaining tax = Remaining tax  (calculated in previous step) / 8.
Total tax for august = August part of this remaining tax (calculated in previous step) + 66666.66
This is subjected to the total tax liability. IN your case tax liability may not reach at 66666. Then tax will be adjusted accordingly.
Since you are not using INBTD, it will not have any impact on your calculation. Hence the remaining tax including all the income will be uniformly for the rest of the periods
I know the answer become bit lengthy but hopefully will clear all your doubts
Edited by: Praveen Tiwari on Jul 7, 2011 12:26 PM