How to Calculate Income Tax on Salary with Examples

Calculating Income Tax in India is a complicated process. Most often, even the mention of income tax intimidates people, especially salaried ones who have no background in taxation. But income tax calculation does not have to be so difficult. Without the necessary information, it is obvious you will end up either paying more tax or lesser than you are supposed to. This is why you should know the basic terminology and how to calculate the proper income tax amount you are supposed to pay.
Lack of information is why most people avoid doing taxation. This is a big problem. Read on to know how to calculate and manage your income tax on salary better.

What is income tax?

According to the Income Tax Act, 1961, every salaried person needs to pay an amount from their salary as tax to the country. This amount of tax is called the income tax. The law consists of a lot of amendments and variations with subsections describing the details of tax payments, deductions, and computations. A lot of deductions from subsections 80C to 80U are available. The final amount after subtracting all the available tax-saving provisions and deductions is given to the government as the income tax on salary.

Components for calculating the income tax

• The tax year The tax year is the previous financial year for which the income tax is calculated. The financial year starts from April 1 and ends on March 31 of the next year. So if you are calculating your income tax in 2022, you need to take your salary income from April 1, 2021, to March 31, 2022.
• Assessment year Assessment year is a very popular term but it confuses most people. The assessment year is not the same as the financial year. It is totally different. In fact, an assessment year starts after the previous financial year gets over. The year during which your income tax is calculated for the previous financial year is called the assessment year. So if you are calculating your salary income tax for the financial year 2021-22, then your assessment year will be 2022-23 and the last date for filing your ITR will be July 2022.
• Salary breakup The first step towards calculating your income tax on salary would be to get hold of your salary breakup. The salary breakup is available from the salary slip or salary statement. If you don’t have those, go to your HR and ask for it. By taking a close look at the slip or the statement, you will understand the major components and the basic structure of your salary. The tax deductions on salary available to you like HRA (House Rent Allowance), DA (Dearness Allowance), etc. will be helpful for you while calculating the tax.
• Taxable income Once you have the breakup of your salary, you need to calculate your taxable income. Taxable income is the income on which you need to pay tax which includes all other incomes apart from your salary too.

  Income Source	Description
  Income from Salary	All income you receive from your job like salary, leave encashment, allowances and so on.
  Income from Property	Income from house or land (rented or self-occupied)
  Income from Business/Profession	Earnings from part-time job or profession
  Income from Gains	Earnings from the sale of a capital asset
  Income from other sources	Residual income like earnings from the fixed deposit, gifts, pension, etc.

• Deductions Income tax is not just you paying money to the government. It is also about all the savings you get to do because of the income tax deductions. These deductions available under section 80 of the Income Tax law are subtracted to get to the taxable income.

  Taxable Income = Gross Income – Deductions

  (Gross income is the sum of all the incomes from all the sources)
  For calculating the taxable income, you need to have detailed knowledge about Section 80, the best friend of taxpayers. This section includes all types of deductions like investments made on mutual funds, life insurance policies, interest on savings, PPF, NSC, SIPs, mutual funds returns, home loans, etc. As per the latest tax regime, your deductions can go up to 2.5 lakhs per year. If you plan your investments carefully, you can save a lot of your annual income.
• TDS TDS or Tax Deducted at Source means the tax is deducted directly from your salary. For maintaining a hassle-free tax pattern, most employers use TDS. Don’t worry, you get a refund on this, so if there is a chance that more TDS has been deducted, it can be claimed back To avoid TDS you can show the documents in advance also.
• The payable tax calculation The last and final step is to calculate the payable tax. After you deduct all the applicable deductions and TDS, the amount that you get is the tax amount you need to pay to the Indian government. If your total income is lesser than 2.5 lakhs, then you do not need to pay any income tax. Beyond this limit, you are liable to pay income tax according to your salary slab.

  The tax rate for a salaried individual under 60 years

  Income Slab	Tax Rate
  Up to  2.5 lakhs	None
  2.5 lakhs – 5 lakhs	10% of exceeding amount
  5 lakhs – 10 lakhs	20% of the exceeding amount
  Above 10 lakhs	30% of the exceeding amount

Income tax savings

Every citizen wants to increase the income and at the same time pay lesser tax. There are some ways to do this. These tax savings methods save money for your future and also saves a significant amount on the income tax. Some of the most popular tax savings instruments are:

• ELSS Equity Linked Savings Schemes are equity mutual funds with distinctive features. ELCC qualify below section 80C and are exempted up to 1.5 lakhs. They have a 3-year lock-in period and are offered by almost every mutual fund company. The returns are based upon the market changes and that is why there is no fixed return rate on ELSS. But these returns from ELSS are completely tax-free which is the major driving force for people to choose investment in ELSS.
• PPF Public Provident Fund (PPF) is also a very popular method of investment. Since its launch, PPF has been the preferred method of investment and tax savings for millions of salaried individuals. Being a government scheme, it enjoys a lot of trust from people. PPF gives interest at a fixed rate which currently is 7.9%. The maximum limit for investing in PPF is 1.5 lakhs while the minimum limit is INR500 annually. PPF has a lock-in period of 15 years which can be extended in the block of 5 years. PPF is the best option for people who do not like volatility in their investments and want to invest in safe options.
• ULIP ULIP or Unit Linked Insurance Plan is a hybrid of insurance plan and market-linked investments. With a lock-in period of 5 years, it offers both protection as well as savings. The lock-in period can be extended up to 15 and even 20 years. There are 9 fund options in ULIP between which an investor can switch at any time and the returns on them are completely tax-free.

Deductions under section 80

Under section 80 of the Income Tax Act, 1961, many deductions are available which bring down the taxable income for an individual and thus reduce the tax payable.

These deductions are as under:

Calculating the income tax

Calculating the income tax is actually very easy. The formula is:

  Basic salary
  + HRA
  + Special Allowance 
  + Transport Allowance 
  + any other allowance
  --------------------------------------
  Gross income from salary 
  (-) Deductions
  --------------------------------------
  Net income 
  (Tax calculated according to the income tax slab)
  

Example
If Mr Bajaj has a salary of Rs. 25,000 per month with DA of Rs. 4500 per month, entertainment allowance of Rs. 2250 per month and pays Rs. 3500 towards professional tax, then his taxable income would be calculated as follows:

As his taxable income is Rs. 3,77,500, he falls in the slab of 2.5 lakhs – 5 lakhs of income tax. Thus he has to pay 10% of his net income as income tax.
Income tax on the above net income = 10% of 3,77,500
= 37,750

To conclude

It is essential to declare all the investments at the beginning of the assessment year so that the tax to be paid can be calculated properly. For building a proper wealth foundation, knowledge of tax, its deductions and returns are important. Wrong tax payments, providing wrong formation and falsehood are considered a legal offence. Income tax fraud includes the following scenarios:

• Avoid submitting the IT return on purpose
• Letting the tax dues fail wilfully
• Not reporting total income intentionally
• Falsification of tax returns
• False claims

Legal actions like heavy penalties and imprisonment can be resulted in doing such tax fraud.
Every person wishes to lead a luxurious life but thinks that it is impossible because a major chunk of their income goes to tax payments. Knowing about proper calculations and deductions helps in proper money investment and tax-saving which helps in achieving the luxurious life everyone dreams of. It also saves from committing tax fraud.