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How to Calculate Income Tax on Salary with Examples?

Updated on: 20 May, 2024 04:53 PM

Calculating income tax in India can be complex and intimidating, especially for salaried individuals. However, it's a crucial aspect of managing personal finances. The process involves determining taxable salary, applicable tax rates, and accounting for exemptions and deductions. Understanding this process empowers individuals to plan their finances efficiently and stay compliant with tax laws.

Tax2win has introduced the Income Tax Calculator after looking at the hardships faced by people that help you easily estimate your tax refund or tax payable to the government. Tax2win income tax calculator calculates taxes on the basis of the latest provisions of the Income Tax Act and rules issued by the Income Tax Department.

In this guide, we will provide a step-by-step explanation of how to calculate income tax on salary, along with an example to illustrate the process.

What is income tax on salary?

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


How to calculate the income tax on salary?

Calculating income tax on salary in India involves several steps. Here's a simplified overview of the process:

  • Determine Gross Salary: Start by calculating your gross salary. This includes your basic salary, allowances, bonuses, and any other taxable components.
  • Identify Exemptions: Certain components of your salary may be exempt from income tax. Common exemptions include House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Standard Deduction. Subtract these exemptions from your gross salary to arrive at your taxable salary.
  • Calculate Deductions: You can claim deductions under various sections of the Income Tax Act, such as Section 80C (for investments like Provident Fund, PPF, or life insurance), Section 80D (for health insurance premiums), and Section 24b (for home loan interest). Subtract these deductions from your taxable salary to arrive at your net taxable income.
  • Determine Taxable Income: After considering exemptions and deductions, you have your taxable income.
  • Apply Income Slabs and Tax Rates: Slabs and Tax Rates: India has a progressive tax system with different income slabs and corresponding tax rates. Calculate the tax applicable to each slab based on your taxable income.
  • Calculate Tax Liability: Calculate the tax liability for each slab and add them up to determine your total income tax liability.
  • Consider Rebates and Surcharge: Apply any applicable rebates or surcharges based on your specific circumstances. For instance, there may be a rebate under Section 87A for individuals with a taxable income up to Rs. 7 lakh.
  • Calculate Health and Education Cess: Add the Health and Education Cess (currently 4%) to your total tax liability.
  • Final Tax Liability: After considering all factors, you arrive at your final income tax liability for the financial year.
  • TDS and Advance Tax: If you are a salaried individual, your employer deducts Tax Deducted at Source (TDS) from your salary every month. This TDS is adjusted against your final tax liability. Additionally, if your tax liability is more than Rs. 10,000 for the financial year, you may need to pay Advance Tax in installments.
  • File Income Tax Return: To ensure compliance, file your Income Tax Return (ITR) with the Income Tax Department, reporting your income, deductions, and tax payments.

Calculation of the income tax is very easy. The formula is for the old tax regime:

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

Example

If Mr. Bajaj (non-government employee) 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:

Basic Salary 25000 * 12 = 3,00,000
DA 4500 * 12 = 54,000
EA 2250 * 12 = 27,000
Gross Salary = 3,81,000
Standard deduction (50,000)
Professional Tax (3500)
Net income 3,27,500

*Entertainment allowance exemption not available in case of non- government employees.

As his taxable income is Rs. 3,27,500 he falls in the slab of 2.5 lakhs – 5 lakhs of income tax as per the old tax regime. Thus he has to pay 5% of his net income as income tax + 4% cess.

Example

Income tax on the above net income

=4030/- but rebate u/s 87A is allowed upto Rs 12,500/- for income less than Rs 5 lakhs therefore no tax on income of Rs 3,27,500/-

Tax calculation for various income sources

Further, check out the calculations below for different income groups to reduce the maximum amounts on your taxes:-

Tax saving calculation for yearly income-10 lakhs

Gross Salary 10,00,000
Less: Exemptions
HRA 1,50,000
LTA 50,000
Reimbursements 32,000
Children’s education and hostel allowance 8,500
Standard Deduction 50,000
Professional Tax 2400
Taxable Salary Income 7,07,100
Less: Deductions
80C 1,50,000
80D 30,000
80E 27,500
Net Taxable Income 4,99,600
Tax on the above income 12,480
Rebate u/s 87A (Individual with an annual taxable income of up to Rs 5 lakhs is eligible for an income tax rebate of Rs12,500.) -12,480
Additionally, you are eligible to claim these:-
Interest on home loan deduction u/s 24b 2,00,000
Home loan 80EEA 1,50,000
Investments in National Pension Scheme (NPS) u/s 80CCD(1B) 50,000

Tax saving calculation for yearly income-10 lakhs

Gross Salary 2,000,000
Less:
HRA 200,000
LTA 40,000
Reimbursements 24,500
Children's education and hostel allowance 9,600
Standard Deduction 50,000
Professional Tax 2400
Taxable Salary Income 1673,500
Less: Deductions
80C (Refer to Note below) 150,000
80D 50,000
80E 22,000
Net Taxable Income 14,51,500
Tax on the above income 2,57,868
Rebate u/s 87A Not applicable
Total Tax 2,57,868
Apart from this, you can also claim these tax deductions if eligible:
Interest on home loan EMIs under Section 24b -2,00,000
Principal amount of the home loan under section 80EEA -1,50,000
National Pension Scheme (NPS) investments u/s 80CCD(1B) -50,000

Tax saving calculation for yearly income-50 lakhs

Gross Salary 5000000
Less: Exemptions
HRA 320000
LTA 80,000
Reimbursements 52,000
Children education and hostel allowance 9,600
Standard Deduction 50,000
Professional Tax 2400
Taxable Salary Income 44,86,000
Less: Deductions
80C (Refer Note below) 1,50,000
80D 50,000
80E 22,000
Net Taxable Income 42,64,000
Tax on the above income 11,35,368
Rebate u/s 87A Not applicable
Total Tax 11,35,368
Individuals can also claim these deductions:
Interest on home loan deduction u/s 24b -2,00,000
Home loan 80EEA -1,50,000
Investments in National Pension Scheme (NPS) u/s 80CCD(1B) -50,000

Calculating income tax on salary can indeed be a complex process for a salaried individual, especially if they are filing for the first time. But worry not; with Tax2win as a salaried individual, it is very easy and quick to file the ITR. Our Income Tax Calculator tool computes your income tax liability based on the inputs provided, such as salary details, deductions, etc. The income tax calculator will display the calculated income tax liability, including the total tax payable and any tax refunds you may be eligible for.


What are the components of salary to take care of while calculating the income tax?

While calculating income tax, a few basic terminologies should be kept in mind. Here’s a list:

  • tax year The tax year is the previous financial year for which the income tax is calculated. The financial year starts on April 1 and ends on March 31 of the next year. So if you are calculating your income tax in 2023, you need to take your salary income from April 1, 2022, to March 31, 2023.
  • 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. An assessment year starts after the previous financial year is over. The year in which 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 2022-23, then your assessment year will be 2023-24, and the due date for filing your ITR without any penalty will be 31st July 2023.
  • Salary breakup The first step towards calculating your income tax on salary would be to get a hold of your salary breakup. The salary breakdown is available on the salary slip or salary statement. If you don’t have those, go to your HR and ask for them. By closely examining the slip or the statement, you will understand the major components and the basic structure of your salary. The tax exemptions on salary available to you, like HRA (House Rent Allowance), LTC Leave travel concession, 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.
    Income Source Description
    Income from Salary All income you receive from your job like salary, leave encashment, allowances, and so on.
    Income from House Property Income from house or land (rented or self-occupied)
    Income from Business/Profession Earnings from business or profession
    Income from Capital 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 about paying money to the government. It is also about all the savings you get to do because of the income tax deductions. These deductions are available under chapter VIA of the Income Tax Act and 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)
    To calculate 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, home loans, health insurance, pension schemes, etc.
    Want to save more tax? Talk to our tax experts at Tax Advisory Service to manage your taxes. Our certified chartered accountants will help you maximize your deduction so you can keep more of what you earn. Book Consultation Today!
  • TDS TDS or Tax Deducted at Source means the tax is deducted directly from your salary. To maintain 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 as a refund by filing the income tax return. To avoid TDS, you can also show the documents in advance.
    As per the announcement in the Budget 2023-24, in non-PAN cases, the TDS rate has been reduced from 30% to 20% on the taxable portion of EPF withdrawals. (No TDS is deducted if withdrawal is made after five years.)
  • The payable tax calculation The last and final step is to calculate the tax payable. After you deduct all the applicable deductions and TDS, the amount you get is the tax amount you need to pay to the Indian government. If your total income is less than 2.5 lakhs, then you do not need to pay any income tax under the old tax regime. Budget 2023-24 makes the new tax regime a default regime. According to the new tax regime, a tax rebate of up to 3 lakhs is applicable. 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) as per the old regime is as follows:-
    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

    The tax rates for FY 2023-24, as per the new tax regime is, as follows:-
    Tax Slab Tax Rate
    Upto Rs 3,00,000 Nil
    Rs. 3,00,001-6,00,000 5%
    Rs. 6,00,001-9,00,000 10%
    Rs. 9,00,001-12,00,000 15%
    Rs. 12,00,01-15,00,000 20%
    Above Rs. 15,00,000 30%

How to save Income tax for a salaried individual?

To reduce taxes, it is highly important to understand the salary structure:-

  • Taxable Salary Income = Salary (-) Exemptions (Exempt allowances + Standard deduction +Professional Tax)
  • Net taxable income= Taxable Salary Income (-) Deductions under chapter VIA

Every citizen wants to increase their income and, at the same time, pay less tax. There are some ways to do this. These tax-saving methods save money for your future and also save a significant amount on 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 on market changes, and that is why there is no fixed return rate on ELSS. However, these returns from ELSS are completely tax-free, which is the major driving force behind people's choice to invest 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 7.1%. The maximum limit for investing in PPF is 1.5 lakhs, while the minimum limit is INR 500 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 plans and market-linked investments. With a lock-in period of 5 years, it offers both protection and savings. The lock-in period can be extended up to 15 and even 20 years. There are nine fund options in ULIP, 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 of 1961, many deductions are available, which bring down the taxable income for an individual and thus reduce the tax payable.

These deductions are:

Section Maximum Limit Deductions
Section: 80C 1,50,000 ULIP, ELSS, NSC(National Saving Certificate), the Employee share of PF, LIC Premium, Children’s tuition fees, Home loan principal repayment, 5-year tax saving FD, purchasing of a deferred annuity, Senior citizen’s saving scheme (SCSS), Sukanya Samriddhi Yojana (SSY), Pension fund set up by UTI or mutual fund, annuity plan of LIC, Subscription to Home Loan Account
Section: 80CCC NA
Section: 80CCC NA On the amount deposited in the annuity plan of LIC or any other insurance plan for a pension fund.
Section: 80CCD(1) - 1,50,000 -10% of salary (in case the taxpayer is an employee)
-20% of gross total income (in case of self-employed)
Least of the above
Employee’s contribution to NPS account
80CCD(2) 10% salary Employer’s contribution to NPS
Section: 80CCD(1b) 50,000 Any other contribution to NPS by employee
80TTA(1) 10,000 Income from interest earned on savings account
80TTB 50,000 Interest received from banks, post office, etc. but applicable only to senior citizens
Section: 80GG 5000 per month / 25% of adjusted total income
rent paid – 10% of adjusted total income (W.E.L.)
For rent paid when HRA is not received from an employer
Section: 80E Amount equal to the interest paid every year (for a maximum 8 years) Interest paid on education loan
Section: 80EE 50,000 Interest paid on home loans by the first time homeowners subject to specified conditions
Section: 80D 25,000 Medical insurance of self, spouse and children
Section: 80D 50,000 Medical insurance of parents over 60 years or uninsured parents over 80 years of age.
80DD 75,000 Medical treatment of handicapped dependent
Section: 80DD 75,000 (40%-80% disability), ` 1,25,000 (more than 80%) Payment made to specific scheme taken for the maintenance of handicapped dependent
Section: 80DDB 40,000 or the amount paid (w.e.l.) Medical expense on self or dependent less than 60 years old
Section: 80DDB 1,00,000 or the amount paid (w.e.l.) Medical expense on self or dependent more than 60 years old
Section: 80U 1,25,000 (severe disability), ` 75,000 (less severe disability) Self-suffering from physical disability including blindness and mental instability
Section 80 G NA various donations specified in u/s 80G are eligible for deduction up to either 100% or 50% with or without restriction
Section: 80GGB Contributed amount (Not in cash) Contribution made to political parties by companies
Section: 80GGC Contributed amount (Not in cash) Contribution made to political parties by individuals
Section: 80RRB Income received / Rs 3,00,000 (w.e.l.) Income received from royalty or patent

Calculating salary income and filing it correctly in the ITR can be tedious, especially for laymen. But don’t worry; tax filing is now extremely easy with Tax2win. If you are also among those who find taxes complicated, get assistance from an online CA to help smoothen the ITR filing process. Book eCA Now!


Frequently Asked Questions

Q- How is income tax on salary calculated?

Income tax on salary is calculated based on the income earned and the applicable tax rates. The tax rates are determined by the government and are based on income slabs. The income tax calculation is done based on the following formula: Taxable Income = Gross Salary - Deductions; Income Tax = (Taxable Income x Applicable Tax Rate) - Tax Rebate.


Q- What is gross salary?

Gross salary is the total salary earned by an individual before any deductions or taxes are applied. It includes basic salary, allowances, bonuses, and other benefits.


Q- What are deductions from salary?

Deductions from salary are amounts that are subtracted from an individual's gross salary before income tax is calculated. These include contributions to provident fund, health insurance, and other deductions as per the applicable laws.


Q- What is the eligibility criteria to file income tax?

If your gross total income exceeds the limit of the exemption limit, then you are liable to pay the income tax.

  • For residents under age 60 - ₹ 2.5 lakhs(old regime), ₹3 lakhs (new regime post-budget 2023)
  • For senior citizens (between 60 and 80 years) - ₹ 3 lakhs
  • For super-senior citizens (80 years and above) - ₹ 5 lakhs

Additionally, if you have the following you must file an ITR:

  • More than ₹ 2 lakh was spent on international travel
  • More than ₹ 1 crore was deposited in a current account(s)
  • The electricity bill payment amount is more than ₹ 1 lakh
  • An account in a foreign country that receives income/ has assets/ has signing authority
  • The gross total income, before claiming relevant capital gains exemptions, must be more than the exemption limit
  • Total business sales/turnover/gross receipts during the financial year exceed Rs 60 lakhs.
  • Total professional gross receipts exceeded Rs 10 lakh during the financial year.
  • Aggregate TDS and TCS during the financial year is Rs 25,000 or more (In the case of senior citizens, an increased limit of Rs 50,000 shall be applicable)
  • Total deposits in one or more savings bank accounts are Rs 50 lakh or more during the financial year.

Q- How Tax Planning Optimizer tool helps salaried employees save taxes?

To boost your in-hand salary, you can use India’s first tax planning optimizer tool that plans your investments and saves more money using recommendations provided by the tool. For instance, if you are still determining the most suitable tax regime, it will suggest the most tax-effective tax regime based on your income and investments. This tool will also analyze the additional deductions you can further avail to obtain tax relief and get a higher in-hand salary.


Q- Which regime is best to choose for a salaried individual?

The new tax regime doesn’t include all the deductions and exemptions that the old regime contained. However, with the new tax regime, the tax rates are further reduced, So it totally depends on your choice which regime will suit you the best.


Q- How is income tax deducted from salary?

Each month, your employer withholds a segment of your salary and forwards it to the income tax department in your stead. Your employer calculates the TDS deduction from your salary monthly, factoring in your annual salary and investments in tax-saving products.


Q- Is tax calculated on CTC or fixed salary?

Gross Salary constitutes the taxable amount, whereas CTC includes non-taxable elements like provident fund and gratuity. While Gross Salary is pivotal in income tax calculations, CTC does not factor into any tax assessments.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.