Employers often award bonuses to their employees in certain situations. This bonus is given to employees in addition to their existing salaries. A bonus is paid if the employer is very happy with a particular employee’s performance in the year when the company has a profitable year and wants to distribute a share of the profits to employees or on certain festive occasions. The bonus amount one receives is also taxable under the Income Tax Act. So let us understand how Income Tax on bonuses works.
What type of bonuses are taxable?
Bonus received for the following reasons are taxable:
– Performance linked bonus
– Bonus for meeting sales target
– Bonus for achieving higher employee rating
– Bonus for incentive schemes from employer
For all of the above bonuses, the amount is added to your salary income, and the income tax is calculated accordingly.
When is the bonus taxed?
The timing of taxation of your bonus may vary depending on certain conditions. If your bonus is declared and paid in a given financial year, then it is taxed in the same financial year. However, if a bonus is declared in a given year but is paid in the next financial year, then it is taxed in the same year it was declared. For example, if your employer announces a bonus of Rs. 50,000 on 15th March 2021, but the payment is done on 5th April 2021, then the bonus will be taxable for the year 2020-21.
On the other hand, if a bonus is announced but the amount of bonus is not specified, then the bonus would be taxable in the financial year it is paid.
TDS On Bonus and Salary
When an employer pays you a bonus, that bonus is added to your salary. Hence, your income tax and TDS calculation happen on your total salary income that includes the bonus as well. Naturally, this can affect the slab rate you belong to and your tax liability may change accordingly. If you were slotted in a particular tax slab, after your bonus you may move to a higher tax slab, resulting in higher TDS.
Thus, if a particular amount is deducted as TDS on your salary, chances are that the TDs deduction will increase the year you receive a bonus.
Income Tax Liability
Similarly, your total income tax liability will also increase when you receive a bonus. When you get a bonus, then that is added to your net salary. This in turn may move you to a higher slab rate, increasing your tax liability.
To calculate your income tax, you can easily use an income tax calculator which is available on almost all finance and banking websites.
Thus, you can calculate income tax on bonuses received in a given financial year. Do remember that a bonus is also fully taxable and will be added to your salary income. During IT filing, a bonus is included under the ‘Income from salary’ head.