How to Calculate Income Tax on Salary?
How to Calculate Income Tax on Salary?
Income tax is a topic that many people find confusing and intimidating. With so many different rules and regulations to consider, it can be difficult to know where to begin. However, calculating income tax on salary is an important task that every working individual needs to be familiar with.
Whether you are a salaried employee or a self-employed individual, understanding how to calculate income tax on salary can help you manage your finances more effectively and ensure you are paying the right amount.
This post will explore the factors determining your income tax liability, such as your salary, deductions, and exemptions. It will also help you understand the income tax calculation format. We will also discuss the different tax slabs and rates that apply to different income levels and the various forms and documents you need to file when submitting your tax returns.
By the end of this page, you will better understand how to calculate your income tax on salary and be better equipped to navigate the world of taxation. We will also discuss some tax-saving instruments like medical insurance plans and include income tax computation format along with a tax calculation example later in the article.
So, sit back and let’s dive deep into calculating income tax on salary.
What is Income Tax?
The Indian Income Tax is a way for the government to collect revenue from the income earned by individuals, businesses, and other entities in the country. In other words, it is a tax levied on the income of individuals and entities operating within India.
The income tax system in India is governed by the Income Tax Act, which lays down the rules and regulations for calculating and paying income tax. Every year, individuals and businesses must file their income tax returns detailing their income and tax liabilities for the previous financial year. But everyone must have a proper understanding of not only the new tax slab but also the tax calculation of the old regime vs tax calculation as per the new tax regime.
The tax system in India is progressive, which means that those who earn higher incomes pay a higher percentage of their income as tax. The tax rates and slabs are revised every year in the Union Budget.
To better understand tax calculation as per the new regime, individuals need to consider their taxable income, which includes their salary, rental income, capital gains, and other sources of income. Deductions and exemptions are also available to reduce tax liability, such as contributions to charitable organisations, investments in specified schemes, and medical expenses.
Filing tax returns and paying taxes on time is a legal obligation for all eligible individuals and businesses. Failure to comply with tax laws can result in penalties and legal consequences.
Thus, understanding and complying with the Indian Income Tax is essential for individuals and businesses in India.
5 Categories Under Which Income Tax is Assessed Per the Income Tax Act 1961
Here are 5 categories under which income tax is assessed per the Income Tax Act 1961:
Income from Salaries: This includes income received as a salary, wages, pensions, or annuities.
Income from Business or Profession: This includes income earned by individuals or entities engaged in a trade, profession, or business.
Income from Capital Gains: This includes income earned from selling a capital asset, such as property or stocks.
Income from House Property: This category includes income earned by individuals who own one or more properties and earn rental income from them.
Income from Other Sources: This category includes income not covered by the previous four categories, such as interest earned on savings accounts, dividends received from investments, or income from lotteries or gambling.
Essential Components for Calculating Income Tax in India
Calculating income tax in India requires a proper understanding of the various components involved. Here is a detailed description of each component and examples to illustrate their application:
Gross Total Income
Gross total income is the sum of all the income earned by an individual or entity during a financial year. This includes income from salaries, profits from business or profession, capital gains, house property, and other sources.
Exemptions and Deductions
Exemptions and deductions are amounts excluded from taxable income. Exemptions are typically provided by law, while deductions are expenses that can be claimed against the income to reduce the taxable income.
[Note: there are now many exemptions that are no more available with the new tax regime. So, you need to redo your tax calculation old regime to understand your taxable income under the new regime better.]
Taxable income is the income that is subject to income tax. It is calculated by subtracting the total exemptions and deductions from the gross total income.
Tax slabs are income brackets determining the tax rate applied to the taxable income. The tax slabs are revised annually in the Union Budget, and the rates may vary depending on the age and income of the individual.
Income Tax Calculation
The actual calculation of the tax liability involves applying the appropriate tax rate to the taxable income. Once the tax liability is determined, any advance tax paid or tax deducted at source (TDS) is deducted, and the balance tax is payable.
Calculating income tax in India involves several components that need to be understood and applied correctly. It is important to verify the eligibility criteria for exemptions and deductions and to ensure that the tax slabs are applied correctly to avoid penalties or fines.
[Note: Please seek professional advice in case of any doubts or uncertainty regarding income tax filing.]
What Tax Exemptions You Can Get While Filing Income Tax as a Salaried Individual?
As a salaried individual in India, you can claim several tax exemptions while filing your income tax returns. These exemptions can help you reduce tax liability and increase your take-home salary. Below are some common tax exemptions available to salaried individuals:
The standard deduction is a fixed amount deducted from your salary income before calculating taxes. This deduction was introduced in 2018 and is available to all salaried individuals. The standard deduction for the financial year 2022-23 is ₹50,000.
Example: If your total salary for the year is ₹7,50,000, you can claim a standard deduction of ₹50,000. This means that you will be taxed only on the remaining ₹7,00,000.
Leave Travel Allowance (LTA)
LTA is a tax exemption given to salaried employees for the expenses incurred on travel within India. This exemption is available for two trips in a block of four years. The current block for LTA is 2018-2021. The exemption is limited to the expenses incurred on travel, including airfare, train fare, and taxi fare.
Example: Suppose you have taken two trips with your family during the block period and spent ₹50,000 on travel expenses. You can claim an exemption of ₹50,000 under LTA.
House Rent Allowance (HRA)
HRA is an allowance given to employees to meet their rental expenses. The amount of HRA exemption depends on the actual rent paid, HRA received, and the city in which you reside. The HRA exemption is calculated as the minimum of the following three:
Actual HRA received
Rent paid minus 10% of salary
50% of salary (for those living in metro cities) or 40% of salary (for those living in non-metro cities)
Example: Suppose you pay a rent of ₹20,000 per month, and your monthly salary is ₹80,000. You receive an HRA of ₹30,000 per month. The HRA exemption will be the minimum of the following three:
Actual HRA received = ₹30,000
Rent paid minus 10% of salary = ₹20,000 - (10% of ₹80,000) = ₹12,000
50% of salary (for metro cities) = 50% of ₹80,000 = ₹40,000
Therefore, the HRA exemption will be ₹12,000.
Medical reimbursement is an exemption given to employees for medical expenses they or their family members incur. The exemption is limited to ₹15,000 per year.
Example: Suppose you have incurred medical expenses of ₹20,000 during the year for yourself and your family members. You can claim an exemption of ₹15,000 under medical reimbursement, and the balance ₹5,000 will be taxed as per the applicable tax rate.
Under the new tax system, a leave encashment exemption is allowed.
The exemption threshold for leave encashment was raised eight times for non-government employees in Budget 2023, from ₹3 lakhs to ₹25 lakhs.
Therefore, under Section 10(10AA), leave encashment up to ₹25 lakhs at the time of retirement is tax-free.
[Note: By understanding how to calculate income tax on salary and using the above tax exemptions, you can optimise your tax planning and reduce your tax liability. You can also take help from a qualified tax professional to ensure that all applicable exemptions are claimed accurately.]
5 Ways to Save Paying More Taxes Legally
As responsible citizens, we must pay taxes on time, but we are also entitled to explore legal ways to save on our taxes. The Indian government offers various tax-saving schemes and options that help individuals and businesses save taxes legally. Here are five ways to save paying more taxes legally in India:
Invest in Tax-Saving Schemes
One of the best ways to save on taxes in India is to invest in tax-saving schemes such as Public Provident Fund (PPF), National Pension System (NPS), Equity-Linked Savings Scheme (ELSS), and Tax-Saving Fixed Deposits. Under Section 80C of the Income Tax Act, an individual can claim a tax deduction of up to ₹1.5 lakhs by investing in these tax-saving schemes.
For instance, if you invest ₹1.5 lakhs in PPF, you can claim a deduction of ₹1.5 lakhs from your taxable income, and you will not have to pay any tax on this amount.
Claim Deductions Under Section 80D
Section 80D of the Income Tax Act provides a deduction for health insurance premiums paid. This is one of the biggest benefits of health insurance purchase. An individual can claim a deduction of up to ₹25,000 on the medical insurance plan premiums paid for self, spouse, and children. In case an individual has parents who are senior citizens, they can claim an additional deduction of up to ₹50,000 on the premiums paid for their parent’s medical insurance.
For instance, if you buy health insurance online and pay a premium of ₹20,000 for your family, you can claim a deduction of ₹20,000 from your taxable income.
Make Donations to Charitable Organisations
Donating to charitable organisations can also help in saving taxes. Under Section 80G of the Income Tax Act, an individual can claim a deduction of up to 50% of the amount donated to charitable organisations. However, it is important to note that not all charitable organisations are eligible for tax deductions.
For instance, if you donate ₹10,000 to an eligible charitable organisation, you can claim a deduction of ₹5,000 from your taxable income.
Taking a home loan can also help in saving taxes. Under Section 24 of the Income Tax Act, an individual can claim a deduction of up to ₹2 lakhs on the interest paid on a home loan. Additionally, under Section 80EEA, an individual can claim an additional deduction of up to ₹1.5 lakhs on the interest paid on a home loan taken for the purchase of an affordable house.
For instance, if you pay an interest of ₹2.5 lakhs on your home loan, you can claim a deduction of ₹2 lakhs from your taxable income under Section 24, and an additional deduction of ₹1.5 lakhs under Section 80EEA.
Renting Out a Property
If you own a property that is not in use, you can consider renting it out to save taxes. The rent received from the property can be claimed as income, and expenses related to maintaining the property can be claimed as deductions. Additionally, under Section 24, an individual can claim a deduction of up to 30% of the rent received as a standard deduction.
For instance, if you rent out a property for ₹20,000 per month, you can claim a standard deduction of ₹72,000 per annum (30% of the rent received) from your taxable income.
Income Tax Calculation as Per New Regime
The income tax slab refers to the different tax rates applicable to individuals based on their annual income. The income tax slab is revised every year during the Union Budget by the Indian government.
As of the financial year 2022-23, the following income tax calculation format is applicable for individuals as per the new tax regime set by the Budget 2023:
|Tax Slabs||New Tax Regime||New Tax Regime|
|(Before Budget 2023 - Until 31st March 2023)||(After Budget 2023 - From 1st April 2023)|
|₹0 - ₹2,50,000||-||-|
|₹2,50,000 - ₹3,00,000||5%||-|
|₹3,00,000 - ₹5,00,000||5%||5%|
|₹5,00,000 - ₹6,00,000||10%||5%|
|₹6,00,000 - ₹7,50,000||10%||10%|
|₹7,50,000 - ₹9,00,000||15%||10%|
|₹9,00,000 - ₹10,00,000||15%||15%|
|₹10,00,000 - ₹12,00,000||20%||15%|
|₹12,00,000 - ₹12,50,000||20%||20%|
|₹12,50,000 - ₹15,00,000||25%||20%|
How to Calculate Income Tax on Salary with Example as Per New Regime?
Transportation Allowance, Special Allowance, House Rent Allowance (HRA), and Basic Salary are all included in your salary. In the previous tax regime, certain pay components such as leave travel allowance, phone bill allowance, and a portion of the HRA were tax-exempt. The new regime, on the other hand, does not offer these exemptions.
So, if you were thinking about how to calculate income tax as per the new regime — here’s an easy example.
Mr. Ravi receives a salary of ₹1,00,000 every month. He pays a rent of ₹40,000. He receives an HRA of ₹50,000 per month, a special allowance of ₹21,000 per month and a Leave Travel Allowance (LTA) of ₹20,000 per year.
Refer to the table below with a tax calculation example to better understand how to calculate income tax on salary for Mr. Ravi:
|Components||Amount||Eligible Deductions||Taxable Amount under the old tax regime||Taxable Amount under the new tax regime|
|Basic Pay (annual)||₹12,00,000||₹12,00,000||₹12,00,000|
|LTA||₹20,000||₹12,000 (travel invoices should be submitted)||₹8,000||₹20,000|
How is Tax Calculated Online with a Tax Calculator?
An online income tax calculator is a tool that helps individuals estimate their income tax liability based on their income, deductions, and tax exemptions. The income tax calculator is available on the Income Tax Department website and other financial websites. The income tax calculator is designed with a simplified income tax computation format that helps taxpayers plan their finances accordingly.
Here's a step-by-step guide on how to use an online income tax calculator:
Determine your taxable income: Start by calculating your taxable income, which is your total income from all sources minus deductions and exemptions.
Gather the required details: To calculate your income tax, you will need details such as your gross salary, deductions like Provident Fund (PF), National Pension System (NPS), and other tax-saving investments such as Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), Life Insurance Premium, and other eligible investments.
Visit an online income tax calculator: You can use the income tax calculator tool on the website of the IT Department, or any other third-party website that offers a tax calculator tool.
Enter your details: Enter the required details, such as your gross salary, deductions, exemptions, and other relevant information.
Verify the results: Once you have entered all the required details, the calculator will provide you with an estimate of your income tax liability. Verify the results to ensure that all the details entered are correct.
Plan your finances: Once you know your estimated tax liability, you can plan your finances accordingly and take steps to reduce your tax liability by investing in tax-saving instruments.
[Note: The estimate about an income tax calculator is for informational purposes only and is not a substitute for professional tax advice. It is always recommended to consult a tax professional for accurate and up-to-date tax advice.]
A Few Important Tax-related Definitions That You Should Be Aware Of
If you still need to look up online for certain tax-related phrases, you are not alone! To make it easier, here are some of the most important Indian tax-related terms (explained!) that everyone should be aware of:**
Taxable income: Taxable income refers to the amount of income that is subject to tax after all deductions and exemptions have been accounted for.
Income tax return: An income tax return is a form that individuals and businesses file with the Income Tax Department to report their income and tax liability for a given financial year.
Tax deduction at source (TDS): TDS is a mechanism the government uses to collect tax at the source of income. It is deducted by the payer of the income and deposited with the government on behalf of the recipient.
Advance tax: Advance tax is a system of paying income tax in instalments throughout the year rather than paying the entire tax liability at the end of the year. It applies to individuals with an estimated tax liability of ₹10,000 or more for the financial year.
Tax credit: A tax credit is an amount that is deducted from the total tax liability of an individual or business. It is typically given for tax payments made in advance, investments in eligible tax-saving instruments, and other specified expenses.
Tax exemption: A tax exemption is a provision that allows individuals or businesses to exclude certain types of income from their taxable income. For example, long-term capital gains on property sales are exempt from income tax.
Tax audit: A tax audit is an inspection of an individual or business's financial records to ensure compliance with tax laws and regulations.
Goods and Services Tax (GST): It is a unified tax levied on the supply of goods and services in India. It replaced indirect taxes such as excise duty, service tax, and value-added tax (VAT).
Tax evasion: It refers to the deliberate failure to pay taxes or underreporting of income to avoid paying the full amount of taxes owed.
Assessment Year (AY): It is the year following the Financial Year (FY) for which income tax returns are filed. It is the year in which the previous year's income is assessed, and the tax liability is determined based on the applicable tax laws and rates.
Financial Year (FY): It is a 12-month period starting from April 1st and ending on March 31st of the following year. It is the period during which income is earned and taxes are levied for the Assessment Year (AY) that follows. All financial transactions, including tax payments and filing of income tax returns, are based on the Financial Year.
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What is income tax on salary, and how is it calculated in India?
What is income tax on salary, and how is it calculated in India?
Income tax on salary is the tax that individuals must pay on their income through employment or salary. The income tax is calculated based on the individual's income tax slab rates, which vary based on their income level. The income tax calculation on salary in India considers various deductions, such as standard deduction, professional tax, and other tax-saving investments under various sections of the Income Tax Act.
What are the income tax slab rates for calculating income tax on salary in India?
The income tax slab rates for calculating income tax on salary in India are as follows:
There is no tax for individuals with an income of up to ₹3 lakhs.
For individuals with an income between ₹3 lakhs and ₹6, the tax rate is 5%.
For individuals with an income between ₹6 lakhs and ₹9 lakhs, the tax rate is 10%.
For individuals with an income between ₹9 lakhs and ₹12 lakhs, the tax rate is 15%.
For individuals with an income between ₹12 lakhs and ₹15 lakhs, the tax rate is 20%.
For individuals with an income above ₹15 lakhs, the tax rate is 30%.
What are the deductions available for calculating income tax on salary in India under the new regime?
There are various deductions available for calculating income tax on salary in India. Some of the most common deductions include: Standard deduction for salaried people up to ₹50,000 Standard deduction on such pension: ₹15,000 or 1/3rd of pension, whichever is lower. Interest on Home Loan (24B) on Let-out property Employer's contribution to NPS (National Pension Scheme) All contributions to Agniveer Corpus Fund (section 80CCH)
What is Form 16, and why is it important for income tax calculation on salary in India?
Form 16 is a certificate issued by an employer to their employee at the end of the Financial Year (FY). It contains details of the employee's salary, allowances, tax deducted at source (TDS), and other relevant information. Form 16 is important for income tax calculation on salary in India as it provides a comprehensive summary of the employee's income, which can be used to calculate their tax liability and file their income tax returns.
How can I calculate my income tax on my salary online?
You can calculate your income tax on salary in India using an online income tax calculator available on the Income Tax Department and other financial websites. To calculate your income tax, you will need details such as your gross salary, deductions like Provident Fund (PF), National Pension System (NPS), and other tax-saving investments such as Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), Life Insurance Premium, and other eligible investments. Once you have entered all the required details, the calculator will estimate your income tax liability.