How to Calculate Income Tax on Salary with Examples?

What is income tax?

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.

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How to Calculate 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. Nowadays, the IT department has started cracking down on fake rent receipts. Therefore, while claiming HRA, make sure you furnish genuine rent receipts. You can also use HRA calculator to get exact calculations. These exemptions are available under old tax regime only.
• 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. These deductions are available only under the old tax regime.
• Determine Taxable Income: After considering exemptions and deductions, you have your taxable income.
• Apply Income 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: Consider 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. Deduct the amount of Advance tax already paid (if any) from your final tax liability to arrive at the payable/outstanding tax liability.
• 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.

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What are the Sources of Income?

There are different sources of income given as follows -

• Wages, salaries, and tips
• Rental Income
• Capital Gains
• Investments
• Business Income
• Retirement Income
• Interest and dividends
• Social Security and other benefits
• Miscellaneous income

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Major Components of Salary

Here are the key components of a typical salary package:

Basic Salary

It serves as the base amount upon which other components, such as provident fund, gratuity, and pension, are calculated. Typically fixed in nature, the basic salary forms a critical part of the overall pay structure.

House Rent Allowance (HRA)

HRA helps employees manage housing or living expenses. It also offers tax benefits, as a portion or the entirety of this allowance may be tax-exempt, subject to certain conditions based on the employee's salary and place of residence.

Dearness Allowance (DA)

DA offsets the impact of inflation by covering the increased cost of living. It is commonly provided to public sector employees and is periodically revised in line with inflation rates.

Conveyance Allowance

This allowance reimburses employees for travel expenses incurred while commuting between their home and workplace. It is tax-exempt up to a specific limit under the Income Tax Act.

Medical Allowance

Employees receive this allowance to cover medical expenses. It is tax-exempt if claimed with supporting medical bills; otherwise, it is taxable.

Leave Travel Allowance (LTA)

LTA reimburses travel expenses incurred during holidays taken within India. It is eligible for tax exemption under specific conditions outlined in the Income Tax Act.

Bonus

A bonus is typically performance-based pay aimed at boosting employee motivation and productivity. It may be a fixed amount or linked to individual, team, or company performance.

Provident Fund (PF)

PF involves contributions from both the employer and employee, calculated as a fixed percentage of the basic salary. It accumulates as a retirement fund, which employees can access upon retirement or under specific circumstances.

Special Allowance

This allowance includes miscellaneous components that do not fall into other defined categories. It is fully taxable.

Performance Incentives

Performance incentives reward employees for exceptional work and are tied to individual, team, or organizational goals. The amount may vary across pay periods depending on performance metrics.

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How to Calculate Income tax on Salary with example in New Regime post Budget 2024?

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How to Calculate Income tax on Salary with example in Old Regime?

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

Tax saving calculation for yearly income-10 lakhs

Tax saving calculation for yearly income-50 lakhs

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What are the components of salary in 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 2024-25, then your assessment year will be 2025-26, and the due date for filing your ITR without any penalty will be 31st July 2024.

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.

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.
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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:-

The tax rates as per the new tax regime is, as follows:-

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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:

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