The monthly salary received by an employee has to be mentioned in the ITR and its taxability is quite straightforward. However, there arises a question as to whether the bonuses and incentives received from the employer deserve to be mentioned when the taxes are filed. If so, how is the taxability of the amount calculated? This article aims to answer this question.
Tax on Bonus: Festivals are awaited by most of them for a number of reasons. In the case of salaried employees, it is for the bonus that the employers give them when festivals are around the corner. An employee’s salary consists of various components like the net salary, gross salary, bonus, incentives, etc. The bonus is given to the employees as a token of appreciation for their outstanding performance in the given year, when the employer wants to share the profit the organisation has made in the respective year, or simply as a token of celebration during festivals. Being an additional source of income, often questions pertaining to the tax ability of such incentives arise.
Further, salaried taxpayers need to report any income other than salary like a bonus from the employer, prize, lottery, etc in their Income Tax Return (ITR). Many salaried taxpayers are usually unsure of filling in the details pertaining to their bonuses received while filing the ITR. Fortunately, or unfortunately, all kinds of incentives that are target-lined, performance-linked, rating-linked, and anything of the like are completely taxable.
The employer usually deducts the tax at source (TDS) as per the slabs stipulated in Assessee in Income Tax for all the incentives given to the employees. The same needs to be mentioned in the employees’ Form 16. These can in turn be mentioned in the ITR under the category ‘income from salary’.
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When and How is Tax on Bonus Details in ITR is Calculated?
Bonus is generally taxable in the year it is declared, although the employee may receive it the following year. Say, for instance, if the employer gives a bonus of ₹10,000 on 18th March 2022, but the employee received it on 20th April 2022, it is treated as though the employee received it in the financial year 2021-22. The same will be reflected in the ITR of the employee in the respective financial year itself. However, the tax treatment will be different if the employer does not disclose the bonus amount in a particular financial year. In this case, the same will be taxed in the financial year in which the employee receives it.
How Employers Deduct TDS on Salary, Including Bonus
Employers employ a systematic process to deduct Tax Deducted at Source (TDS) from employees’ salaries, accounting for bonuses as well. When a bonus is declared, it is integrated into the employee’s salary. Subsequently, the employer recalculates the employee’s tax liability, considering the additional bonus income. The TDS deduction rate is adjusted accordingly, factoring in this augmented income due to the bonus.
This ensures that the taxation process aligns with the increased earnings resulting from the bonus. Employers carefully adhere to tax regulations and guidelines stipulated by the government to accurately calculate the TDS (Tax on bonus), considering the total income, including bonuses. By doing so, they ensure that the appropriate amount of tax is deducted and deposited with the government on behalf of the employee. This practice guarantees compliance with tax laws and facilitates a seamless taxation process for both employers and employees.
| Example | TDS before bonus declaration | TDS after bonus declaration |
| Gross salary – ₹ 10 lakhs | Gross salary – ₹ 10 lakhs | Total gross salary – ₹ 11 lakhs |
| Less: tax-free allowances and perquisites – ₹ 2 lakhs | Add: Bonus – ₹ 1 lakh | Less: tax-free allowances and perquisites – ₹ 2 lakhs |
| Net salary – ₹ 8 lakhs | Total gross salary – ₹ 11 lakhs | Net salary – ₹ 9 lakhs |
| Less: Standard deduction – ₹ 50,000 | Less: tax-free allowances and perquisites – ₹ 2 lakhs | Less: Standard deduction – ₹ 50,000 |
| Less: Section 80C deductions – ₹ 1.5 lakhs | Net salary – ₹ 9 lakhs | Less: Section 80C deductions – ₹ 1.5 lakhs |
| Taxable salary – ₹ 6 lakhs | Taxable salary – ₹ 7 lakhs | Taxable salary – ₹ 7 lakhs |
| Tax payable – 12500 + 20% of 1 lakh = ₹ 32,500 | Tax payable – 12500 + 20% of 2 lakhs = ₹ 52,500 | Tax payable – 12500 + 20% of 2 lakhs = ₹ 52,500 |
| TDS deducted per month = 32500/12 = ₹ 2708 | TDS deducted per month = 52500/12 = ₹ 4375 | TDS deducted per month = 52500/12 = ₹ 4375 |
What Are the Ways to Save Tax on Bonus?
Receiving a bonus is undoubtedly a cause for celebration, but it’s essential to recognise that it can also lead to increased tax liabilities. However, there are effective strategies to minimise the tax impact on your bonus. Here are several ways to achieve tax savings on your bonus:
Life Insurance Premiums:
Investing in a life insurance policy and paying premiums enables you to claim a deduction of up to ₹ 1,50,000 under Section 80C of the Income Tax Act.
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Health Insurance Premiums:
Premiums paid for health insurance are deductible up to ₹ 25,000 under Section 80D. For policies covering senior citizens (above 60 years), the deductible limit is extended to ₹ 50,000.
Public Provident Fund (PPF):
Any investment made in the PPF account during the year qualifies for a deduction under Section 80C, capped at ₹ 1,50,000.
Equity-Linked Savings Scheme (ELSS):
Investments in ELSS, an equity-linked savings scheme, entitle you to a deduction of up to ₹ 1,50,000 under Section 80C of the IT Act.
Charitable Donations:
Donations made to charitable causes offer substantial deductions. You can claim a 100% deduction for the donated amount and a 50% deduction for donations to charitable institutions or NGOs.
By strategically utilising these tax-saving options, you can effectively reduce the tax burden imposed by your bonus, allowing you to make the most of your hard-earned additional income while contributing to important aspects of your financial security and societal welfare.
Deducting TDS on Bonus
Once the bonus is announced, it gets added to the employee’s salary, and thereafter the tax is calculated. Depending on the tax thus calculated, the TDS is deducted on excise duty. It has to be noted that, the TDS is relatively higher when applied after the bonus is added to the salary. The following illustration could explain this better.
| TDS Calculation Before Bonus Declaration | TDS Calculation After Bonus Declaration |
| Gross Salary – ₹1,500,000 | Gross Salary – ₹1,500,000 |
| Deduct: Allowances and Perks – ₹200000 | Add Bonus = ₹ 100000 |
| Net Salary: ₹1300000 | Total Gross Salary = ₹1600000 |
| Deduct: Standard Deduction – ₹50,000 | Deduct: Allowances and Perks – ₹200000 |
| Deduct: Section 80 C Deductions- ₹150000 | Net Salary: ₹1,400,000 |
| Taxable Salary: ₹1100000 | Deduct: Standard 80U Deduction – ₹50,000 |
| Tax payable: 112,500 + 30% above ₹ 10,00,000 = 112,500+ 30% of 100000 = ₹115833 | Deduct: Section 80 C Deductions- ₹150000 |
| Tax per month = 115833/12 = ₹ 9653 | Taxable Salary: ₹1200000 |
| Tax payable : ₹ 1,12,500 + 30% of 200000 =₹172500 | |
| Tax per month = 172500/12 = 14375 |
Also, it has to be understood that, adding the bonus to the salary might increase the net taxable income and therefore it might fall in the next tax slab. In such cases, the employer would deduct the TDS in proportion to the increased slab rate and not the previous slab rate. Also, if the employer announces the bonus in the middle of the financial year, the TDS for the months after that would increase.
The TDS will be calculated on the increased salary from the month after the bonus was declared. In a nutshell, the bonus is simply added to the salary, and thereafter the tax is calculated. Once the tax-ability of the bonus is figured out, it has to be mentioned in the ITR without fail.
FAQs
To claim tax on bonus, declare it in your annual tax return (ITR) under the head 'Income from Salary.' Your employer will deduct applicable TDS on the bonus, and you can adjust it while filing your return.
Yes, bonuses are considered part of your income and are subject to income tax in the year they are received.
Bonuses are treated as additional income and are taxed based on the applicable income tax slab rates.
Salaried employees typically file ITR 1 if they have income from salary, one house property, and other sources. ITR 2 is for those with multiple properties or business income.
In ITR 1, under the section 'Income from House Property,' you can claim deductions under Section 24 for home loan interest.
Yes, you can claim deductions under both Section 80C for investments and Section 24 for home loan interest, as they pertain to different categories of deductions.
Enter deductions under Section 24b for home loan interest in the schedule for 'Income from House Property' in the appropriate section of your ITR form.
Section 24 offers exemptions on income from house property in your ITR, specifically pertaining to deductions for home loan interest.
Section 24B provides deductions for home loan interest, while 80EEA offers additional deductions on home loan interest for affordable housing.
Both sections provide deductions on home loan interest, but 80EEA focuses on affordable housing, while 80EE was for first-time homebuyers. How do I claim tax on bonus?
Is bonus included in income tax?
How do you treat bonuses in income tax?
Is ITR 1 or ITR 2 for salaried employees?
How do I claim deduction under Section 24 in ITR 1?
Can I claim both 80C and Section 24?
Where do I enter Section 24b in ITR?
What is Section 24 exemption in ITR?
What is the difference between 24B and 80EEA?
What is the difference between 80EE and 80EEA?
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