Setting Up Income Tax Deduction

Setting Up a Tax Deduction for Income

Most businesses, especially big ones, find it hard to figure out how much tax to take out of their employees' pay cheques every month. When set up correctly, Frappe HR makes most tax-related computations easier by automatically figuring out tax deductions when it makes Salary Slips. Here's how to set up Frappe HR to make your payroll processing easier:

Tax-Free Income

In many countries, such as India, the law allows individuals to forego part of their expenses from their taxable income for the year. Some examples of such types of expenses include charitable donations, expenditure on the education of children, some investments, and so on. People need to provide evidence of these expenses in order to receive the exemption from their taxable income.
You can configure Income Tax Slabs within Frappe HR, and the tax depends on how much money the employee will earn in a year. Employees need to inform their employer at the start of the financial year about how much exemption they wish to claim. Through this, the payroll tax deductions will be calculated on the basis of the estimated earnings in a year minus exemption. Employees may claim this using the Employee Tax Exemption Declaration. In case the employee fails to submit a declaration, the monthly withholding shall be on the entire annual salary of the employee.
If the employee files a declaration between pay periods, however, the tax exemption will begin with the subsequent payment. When you have unpaid additional taxes from previous pay cheques, they will be deducted from your last pay cheque or when you apply "Deduct Tax For Unsubmitted Tax Exemption Proof" in Payroll Entry or Salary Slip. Additionally, employees submit proof of their real expenditure at the end of the year via Employee Tax Exemption documentation Submission. Frappe HR verifies the proof submissions of employees during the last payroll of the Payroll Period. If they don't receive any, the exempted income tax will be included in the regular deduction component. Category for Employee Tax Exemption
Typically, you are allowed to claim tax relief only on your salary if you use it to buy specific things, which have been decided upon by the government or other regulatory organizations. You can also create various groups in Frappe HR that can be exempted. For India, 80G, 80C, B0CC, and others are some examples.

In order to configure the Employee Tax Exemption Category, go to Human Resources > Payroll Setup > Employee Tax Exemption Category > New Employee Tax Exemption Category

Category of Tax Exemption for Employees
Subcategory for Employee Tax Exemption
Multiple heads may be there under each category for which the exemptions are granted. In India, for example, Life Insurance Premium may be a subcategory under 80C.

You can set up Employee Tax Exemption Sub Category by navigating to, > Human resources > Payroll Setup > Employee Tax Exemption Sub Category > New Employee Tax Sub Exemption CategoryEmployee Tax Exemption Sub Category

HRA Exemption - Regional, India

For FY 2018-19, in India, exemption of House Rent Allowance (HRA) from taxable income is the lower of: The amount actually granted by the employer as the HRA. Actual rent paid minus 10% of basic salary. * 50% of basic salary, if the employee resides in a metro city (40% in case of a non-metro city).

As part of the Declaration of Employee Tax Exemption, the employees will also complete HRA Exemption. The exemption which is HRA eligible will be calculated by Frappe HR and exempted while calculating the taxable earnings. Note: Basic and HRA salary component must be set in Company for HRA exemption to function

Options in Payroll Entry and Salary Slip

Frappe HR automates payroll processing by processing payroll in bulk through Payroll Entry.
Exclude Tax For Unclaimed Employee Benefits: Flexible benefits (Salary Components which are Is Flexible Benefit) would not be covered in the taxable income of the employee. But the sum obtained for these components will be added to the taxable earnings of the employee if she does not file Employee Benefit Claim while determining tax during the final payroll of the Payroll Period. If you want to deduct tax for benefits prior to the final payroll, select this option and Frappe HR will recompute the tax and insert the tax for all untaxed benefits when it generates the Salary Slip.

Deduct Tax For Unsubmitted Tax Exemption Proof: This choice enables deducting taxes for the incomes which were exempted under earlier payrolls as announced in Employee Tax Exemption Declaration but the Employee did not submit adequate evidence through Employee Tax Exemption Proof Submission. It is to be understood that if this choice is selected Frappe HR will not take into account the Employee Tax Exemption Declaration submitted by employees and will only consider Employee Tax Exemption Proof Submission instead while determining exemption from employees' yearly earnings.

Note: If needed, it is still possible to process payroll for individual employees, by manually creating a new Salary Slip and both these options are provided under the Salary Slip Income Tax Slab Income Tax Slab assists you in specifying Tax slabs that can be used for the period so that you can easily work with amended laws. You can attach more than one tax slab for the payroll period based on taxation rules. Keep in mind that you can use Employee document fields in the Condition field to impose tax slabs on employees' attributes

Salary Component

In order to support automatic tax deduction against Tax slabs defined in Income Tax Slab, you need to define a Salary Component of Deduction type with Variable Based On Taxable Salary option selected. This check box supports auto calculation of Income Tax taking into account tax slabs and declaration made by an employee. The tax will be calculated once a year on the remaining taxable salary and split it equally in 12 months.

Important Note: If you set condition and formula for this Deduction component, the condition and formula will be used for calculation of the Salary Component and the Tax Slabs set in Income Tax Slab will be overlooked.

But you can still apply Deduct Tax For Unsubmitted Tax Exemption Proof option in Payroll Entry / Salary Slip to deduct tax on the basis of Tax Slabs setup in Income Tax Slab, excluding Employee Tax Exemption Proof Submission which will prioritize the Tax Slab based tax deduction.
This is especially useful if you must deduct a constant sum as a deduction in every payroll instead of Frappe HR automatically doing the calculations for the deductions depending on the estimated yearly salary of the employee after exemption as the employee has declared through Employee Tax Exemption Declaration.
At the fiscal year close, you can still apply Deduct Tax For Unsubmitted Tax Exemption Proof to deduct the employee's outstanding tax liability for the entire period.