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Today, in this article, I will discuss with you step by step salaried person will calculation and tax return preparation.
You may already know that if taxable income exceeds BDT 300,000 then he shall be eligible to pay tax. So, first we have to know how to calculate taxable income from salaries.
When we will find out the taxable income from salaries then we will consider the investment allowance to calculate tax rebate. Tax rebate is very important for individual taxpayer as it reduces the tax liability significantly.
And finally, we will know how to calculate tax liability by applying the new tax rates introduces by the Finance Act 2020.
By doing this, our calculation will be completed and then we will know what documents are required for the preparation of tax return for filing tax assessment.
You may know that few years ago, a three pages simple tax form IT-11UMA has been introduced for the salaried person. Here, we will discuss about this tax form IT-11UMA.
I will discuss the above issues one by one. We have made a video on this topic which is embedded below for you.
So, let’s start!
Taxable income calculation
First, as a salaried person you have to calculate the taxable income from your salary because the tax liability is calculated on this figure.
Tax is not payable on total income; it is on taxable income.
Why we will say taxable income because each month your salary transferred to your designated bank account by your employer after few deductions like TDS, recognized provident fund and other contributions etc.
The monthly gross salary is break-down into basic salary, house rent, conveyance allowance, medical allowance etc. There are exemptions as per tax law for the house rent, conveyance allowance and medical allowance. After deducting the exemptions, we get the taxable income.
There are separate rules in the Income Tax Ordinance 1984 for each components of salary. Based on the limit provided for each component, you have to calculate the tax liability after deducting the exemptions for each item.
And on this taxable income tax liability is calculated.
Frequently, salaried person asked me my gross salary is like BDT 30,000, shall I pay tax. If yes, how much?
Before asking question like this, please ensure the break-down of your monthly gross salary. If you do not know then ask your accounts people in your company from where your salary is disbursed. And then share the full information with tax people.
Investment allowance calculation
If you want to get the rebate facility then first you have to invest or donate in the particular areas as mentioned in the tax law. If you have any investment or have any donation but not in the mentioned areas then your investment or donation will not be considered for the tax rebate.
As I have discussed in the above that the tax rebate will reduce your tax liability significantly but to get this benefit you have to invest or donate which will be considered as investment allowance.
I have published an article about where to invest or donate for tax rebate where I have described all areas one by one. Besides this, there are two separate videos about investment and donation and embedded below one video for you.
The most important point is that you will get the investment allowance upto a certain limit which is 25% of taxable income. If your actual investment exceeds the 25% of taxable income then you will not get the benefit for the exceeded investment.
On the other hand, if your actual investment is below the 25% of taxable income then you will not get the benefit for the full 25% of taxable amount. You will get tax rebate upon your actual investment at prescribed rate.
The maximum limit for investment allowance is BDT 1.5 crore.
Tax rebate calculation
Tax rebate is calculated on the investment allowance which I have discussed above. After getting the investment allowance, you shall apply the rate to find out the tax rebate.
If the taxable income of individual taxpayer is below BDT 1,500,000 then the tax rebate will be at 15% on investment allowance. But if the taxable income exceeds BDT 1,500,000 then the tax rebate will be at 10% on the investment allowance.
Tax liability calculation
So, we have got taxable income and tax rebate on investment allowance. Now we will do salaried person tax liability calculation by applying slab-wise tax rates. You may already know that as per Finance Act 2020, the tax-free limit for male individual taxpayer is BDT 300,000. Then up to BDT 100,000 is at 5%. Upto last year, the starting tax rate was 10%.
So, after applying the slab-wise tax rate you will get the total tax liability. From this figure first deduct the tax rebate which we have discussed in above.
And finally deduct TDS. If any tax was deducted from your salary by your company then deduct the full TDS amount for the year.
By deducting all the above from the total tax liability, you will get net tax liability which has to be paid with your return submission to your tax circle.
So, salaried person tax calculation is done.
In this article, I have discussed the process step by step so that you could follow during your tax calculation. I have avoided the example to calculate because it will increase the length of size significantly.
Anyway, when your calculation will be completed then you have to collect all the required documents to fill-up the tax return.
After ending the June, start to collect the related documents. Collect your bank statement from July-June, salary certificate and tax challan from your company, proof of investment or donation related documents.
If you have DPS then collect DPS statement from your bank, insurance premium certificate, savings certificate photocopy etc. Ultimately which is required for the supporting about your financial information.
With above documents, you will require the calculation as per Income Tax Ordinance 1984 which I have discussed in above so that tax authority could understand your tax calculation is correct.
You may develop a format one year and preserve it for future so that same things do not require to work repeatedly.
Tax return preparation
When you will fill-up your tax return, take all the required documents and calculations so that you could easily complete the tax return.
There is a prescribed tax form for only salaried person as I discussed above, few years ago National Board of Revenue (NBR) has introduced a new tax form IT-11UMA which consist only three pages.
Taxpayers are afraid of tax payment mainly due to complexity. Therefore, NBR is trying to simplify the procedures so that taxpayers are encouraged to pay tax. The three pages tax form IT-11UMA is one example of this.
In first page, there are two parts. First part consists basic information like name, address, tax circle and zone, NID number etc.
Below this part, you have to provide your income and tax payment related information. Complete this part by following the figures you get from the above calculation.
Second page is related with assets, liabilities and expenses related information. But this statement is not mandatory for all taxpayers. If the gross wealth does not exceed BDT 40 lakh then it is not mandatory. Previously it was BDT 25 lakh. However, any taxpayer may submit this statement voluntarily.
And last page is acknowledgement receipt. This portion will be provided to you after giving sign and seal by tax official as a proof that you have submitted your tax return.
And that’s all!
So, you have got a full overview about how to calculate tax of salaried person step by step and then finally how to prepare tax return. Hope, it will help you.