What is the two-seventh salary tax exemption and how is it calculated?
The two-seventh salary tax exemption is one of the salary tax exemptions that we discuss in this article from the accounting website and explain its calculation method.
Tax exemptions are the salaries mentioned in paragraph 2 of the circular 211/4385/19418 dated 11/07/1383 of the Tax Affairs Organization. This circular is about the insurance premium paid by salary earners for life insurance and health insurance and is related to Article 137 of the Direct Taxes Law.
Exemption of two-sevenths of employee share insurance premium must be calculated and deducted along with other exempted items from a person’s salary and benefits to obtain taxable salary and benefits. The full text of paragraph 2 of the aforementioned circular is as follows:
“Employers of the insured persons of the Social Security Organization can only deduct two-sevenths of the insurance premiums paid by the insured wage earners, and employers of the insured persons of the Medical Services Organization and other Iranian insurance institutions can also deduct the entire share of the insurance premiums paid by the insured wage earners. calculate the due tax from their salary income and by specifying its amount in the lists of salaries submitted to the relevant tax affairs department.
In the following, we explain the calculation of salary tax exemption in the amount of two-sevenths of worker’s share insurance for a person whose salary and benefits are covered by insurance is 25,000,000 rials in two cases:
The first case – the two-seventh exemption is related to the insured person of the Social Security Organization:
In this case, the insurance premium must be calculated as follows:
A- Employer’s share insurance premium equal to 20% of salary and benefits covered by insurance:
Rial 5,000,000 = 20% x 25,000,000
B- Unemployment insurance equivalent to 3% of salary and benefits covered by insurance:
Rial 750/000 = 3% x 25/000/000
C- Employee share insurance equal to 7% of salary and benefits covered by insurance:
Rial 1,750,000 = 7% x 25,000,000
After calculating the employee’s share insurance premium, we must multiply the amount of the worker’s (employee’s) share insurance premium by two-sevenths to obtain the two-seventh salary tax exemption amount:
Rial 500,000 = 2.7 x 1.750.000
After obtaining the exemption amount of two sevenths of the insurance premium, the salaries and benefits covered by the insurance are calculated as follows:
4/500/000 = 500/000 – 20/000/000 – 25/000/000 taxable salaries and benefits
4/500/000 = 10% x 4/500/000 salary tax for one month
If the two-sevenths exemption is not taken into account, the personal income tax insurance premium would be calculated as follows:
5/000/000 = 20/000/000 – 25/000/000 taxable salaries and benefits
500,000 = 10% x 5,000,000 salary tax for one month
The second case – the exemption is related to the insured person of the Medical Services Organization and other Iranian insurance institutions:
In this case, there is no need to calculate the two-seventh insurance share and the employer must deduct the entire share of the insurance premium paid by the salary earners along with the salary tax exemptions from their salaries and benefits and calculate the tax.
Note:
1- The calculation of the two-seventh insurance exemption is only for the insured persons of the Social Security Organization.
2- Insureds of the Medical Services Organization and other Iranian insurance institutions can use the exemption up to the total insurance amount of their share.
3- The condition of using this exemption is to mention it in the salary tax list.