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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 with no background in taxation. People find income tax calculation a complex subject because they are not aware of the basic terminology and the calculation related.
Lack of information is why most people avoid doing taxation. To learn on how to calculate income tax on salary, read further.
Important: e-verify your income tax return within 30 days, else your return will be considered as not filed.
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 from 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.
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 gets over. The year 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 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 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 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 too.
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 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 are available under section 80 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)
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,, home loans, etc. As per the latest tax regime, your deductions can go up to 3 lakhs per year. If you plan your investments carefully, you can save a lot of taxes. -
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 as a refund by filing the income tax return. To avoid TDS, you can show the documents in advance also.
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 5 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 lesser 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 by default. 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 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 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 7.1%. 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 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:
| 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 taxpayer is 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 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 |
How to calculate the income tax?
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 employee.
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.
Income tax on the above net income
= 3875/- 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-20 lakhs
| Gross Salary | 2,000,000 |
| Less: | |
| HRA | 200,000 |
| LTA | 40,000 |
| Reimbursements | 24,500 |
| Children education and hostel allowance | 9,600 |
| Standard Deduction | 50,000 |
| Professional Tax | 2400 |
| Taxable Salary Income | 1673,500 |
| Less: Deductions | |
| 80C (Refer 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 |
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)
- Electricity bill payment amount is more than ₹ 1 lakh
- An account in 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 exceed 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 the India’s first tax planning optimizer tool that plan your investments and save 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?
New Tax regime doesn’t include all the deduction and exemptions that the old regime contains. Although with the new tax regime the tax rates are further reduced, So it totally depends on your choice which regime will fit you the best.
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