In India, bonuses are a common incentive employers offer employees, often during festivals or as a reward for exceptional performance. While bonuses are a great way to boost morale, employers and employees must understand the tax implications of these additional earnings. So, let’s dive deep into the details of bonus tax rate.
What is a Bonus?
A bonus is a financial incentive employers provide employees, typically in addition to their regular salary. Bonuses can come in varied forms like, cash, stock options, etc. They serve numerous purposes in the company:
- Recognition: Bonuses acknowledge and reward employees for their hard work, dedication, and achievements.
- Motivation: They motivate employees to excel and contribute positively to the company’s objectives.
- Retention: Bonuses can enhance employee loyalty and reduce turnover by creating a sense of appreciation and job satisfaction.
- Team Building: Bonuses foster a positive work environment and encourage teamwork, as employees often collaborate to achieve common goals to earn rewards.
- Attraction: Competitive bonus structures can attract top talent to join a company, enhancing its workforce quality.
When is Bonus Taxed?
Tax on bonus in India are taxed in the financial year when they are declared, not necessarily when you receive them. If your company owner announces a bonus in March 2023 but pays it next month, it’s still considered part of your annual income for the financial year and will be taxed as per rules. However, if there’s confusion or your employer doesn’t disclose the bonus amount clearly, the tax rules change. If you can prove this confusion, bonuses are taxed in the year you receive them. For instance, if your employer stated a bonus in March 2023 without specifying the amount and paid it in June 2023, it would be taxed in the financial year 2023-24. So, clarity in income tax on bonus declarations is crucial to understanding when it will be taxed.
How much tax is deducted on bonuses in India?
When employers give employees a bonus, they include it in the total salary. Then, the employer calculates the tax on bonus deducted at source (TDS) based on this combined salary and bonus. This means the tax is calculated on the regular salary and the bonus amount. The tax rate goes up because it’s applied to the total, which includes the bonus.
Let’s understand this with the help of an example:
Let’s consider an employee with a gross salary of Rs. 10 lakh before the bonus. After receiving a bonus of Rs. 1 lakh, the total gross salary becomes Rs. 11 lakh.
1. Calculate Taxable Income
- Deduct tax-free allowances and incentives (Rs. 2 lakh) from the gross salary after the bonus, resulting in a net salary of Rs. 9 lakh.
- Subtract the standard deduction (Rs. 50,000) and Section 80C deductions (Rs. 1.5 lakh) from the net salary. This gives the taxable income, which is Rs. 7 lakh.
2. Calculate Payable Income
- Calculate tax payable on the taxable income. The tax is Rs. 5 lakh for the first Rs. 12,500. For the remaining Rs. 2 lakh (20% of Rs. 2 lakh), the tax is Rs. 40,000. The total tax payable is Rs. 52,500.
3. Monthly TDS Deduction
- Divide the annual tax payable (Rs. 52,500) by 12 to get the monthly TDS deduction. In this case, it is Rs. 4,375.
The employer deducts Rs. 4,375 as TDS monthly from the employee’s salary, considering both the base salary and the bonus.
How Individuals Can Save Taxes on Bonus?
Saving tax on bonus is essential for maximising your earnings. Here are several effective ways to save tax on bonus in India explained in points:
1. Invest in Tax-Saving Instruments
Ensure to utilise deductions under Section 80C of the Income Tax Act by investing in various governmental schemes.
2. Employee Provident Fund and Voluntary Provident Fund
Increase your contributions to EPF or opt for VPF. Both contributions are eligible for deductions under Section 80C.
3. National Pension System (NPS)
Invest in NPS, which offers additional tax benefits of up to ₹50,000 under Section 80CCD(1B) over and above the limit of Section 80C.
4. Health Insurance Premiums
Pay health insurance premiums for yourself, your family, or your parents. These premiums are deductible under Section 80D and offer handsome profit.
5. House Rent Allowance (HRA)
If you receive HRA, ensure you utilize it to claim tax benefits. If you live in a rented house and receive HRA, you can claim exemptions under Section 10(13A) of the Income Tax Act.
6. Home Loan Interest
If you have a home loan, the interest paid is eligible for deductions under Section 24(b) of the Income Tax Act. Ensure you claim these deductions separately from your Section 80C deductions.
7. Standard Deduction
Employees can claim a standard deduction of ₹50,000 under Section 16 of the Income Tax Act. This is applicable irrespective of actual expenses incurred.
8. Leave Travel Allowance (LTA)
If you receive LTA, use it for travel expenses within India and claim exemptions under Section 10(5) of the Income Tax Act.
9. Consult a Tax Professional
Tax laws are complex. Consulting a tax professional can help you navigate the difficulty, ensuring you make the most of the available exemptions and deductions.
The Bottom Line
Bonuses in India are subject to taxation as per the Income Tax Act 1961. That means, employers have to deduct TDS based on the employee’s total income, including the bonus amount. However, eligible deductions and exemptions can significantly impact the final tax liability.
Frequently Asked Questions
1. When is the bonus tax deducted?
Employers usually deduct tax on the bonus at the time of payment. It is deducted along with the regular income tax during each payment cycle.
2. In which category of income is the bonus subjected to taxation?
Bonuses are categorised as part of your salary earnings, leading to their taxation falling under the ‘Income from Salary’ section.
3.How much tax is deducted on a bonus in India?
The tax taken from your bonus depends on your total yearly earnings and the specific income bracket you fall into. Typically, it follows the same tax percentages as your usual income.
4. Do individuals have to pay GST on the bonus?
No, GST does not apply to bonuses received by employees. It is an income tax liability and not a GST liability.
5. Is the bonus tax different from regular income tax?
No, the tax on a bonus is calculated using the same income tax slabs and rates that apply to your annual income.