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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.
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.
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. |
Taxable Income = Gross Income – Deductions
(Gross income is the sum of all the incomes from all the sources)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 |
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:
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:
Section | Maximum Limit | Deductions |
---|---|---|
Section: 80C | 1,50,000 | ULIP, ELSS, NSC, the Employee share of PF, LIC Premium, Children’s tuition fees, Home loan principal repayment, 5-year deposit Scheme, purchasing of a deferred annuity, Senior citizen’s saving scheme, Pension fund set up by UTI or mutual fund, annuity plan of LIC, Subscription to Home Loan Account Scheme of the National Housing Bank, Subscription to notified bonds of NABARD, Subscription to deposit scheme of a public sector or company engaged in providing housing finance. |
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 | 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 total income/rent paid – 10% of total income (W.E.L.) | For rent paid when HRA is not received from an employer |
Section: 80E | Amount equal to the interest paid for 8 years | Interest paid on education loan |
Section: 80EE | 50,000 | Interest paid on home loans by the first time homeowners |
Section: 80CCG | 25,000/ 50% of amount invested in equity shares (w.e.l.) | Rajiv Gandhi Equity Scheme for investments in Equities |
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 maintenance of handicapped dependent |
Section: 80DDB | 40,000 or amount paid (w.e.l.) | Medical expense on self or dependent less than 60 years old |
Section: 80DDB | 1,05,000 or 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: 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 / 3,00,000 (w.e.l.) | Income received from royalty or patent |
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:
Basic Salary | 25000 * 12 | = 3,00,000 |
DA | 4500 * 12 | = 54,000 |
EA | 2250 * 12 | = 27,000 |
Gross Salary | = 3,81,000 | |
Professional Tax | 3500 | |
Net income | = 3,77,500 |
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
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:
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.
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