How to Calculate Your Income Tax on Salary ?

The financial year ends on the 31st of March. Every earning citizen has to pay tax on their income and file its returns every year.

As a taxpayer, you might have often got confused with many tax laws that are frequently revised. To understand the terminologies like tax exemption, tax rebate, tax deduction, tax-saving etc. and to understand as to how to Calculate Your Income Tax on salary, rather which part of our income is taxable, and which is not.

In this blog, we shall explain the method of calculating your salaried income tax by yourself and take proactive steps to save as much tax as possible.

What is Income Tax ?

Let us first understand what income tax is all about. Income tax is a direct tax enforced by the Central Government on the income earned by an individual. This revenue earned by the Government through this tax collection is used for the public benefit for building public infrastructure, various general welfare projects etc.

What is Taxable Income ?

Taxable income is the amount earned by an individual minus the tax exemptions, deductions and rebates. Though it may look complicated, it is just simple arithmetic as we proceed further. It may be noted that the tax is calculated are dependent on the individual’s income and age.

How to Calculate Your Gross Income – How to Calculate Your Income Tax on Salary ?

To begin with, note down your total annual salary you get, including all allowances such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), special allowances, like food coupons and mobile reimbursements etc.

Exemptions

Then, list out the exemptions provided to you on your salaries, such as HRA, LTA and Travel Allowance.

One crucial point to be noted while Calculating Your Income Tax on salary is that HRA is exempted only if you live in a rented house. If you live with your parents or in your accommodation, then the HRA is fully taxable.

Exemption towards HRA is to be calculated on the lowest of the HRA amount received from your employer:

  • Actual rent paid less than 10 per cent of your basic monthly salary
  • 50 per cent of basic salary if the taxpayer is living in a metro city
  • 40 per cent of basic salary if the taxpayer is living in a non-metro city

Income from Other Sources

Next, you have to add income that you have received from other sources such as rental income, interest earned from deposits, capital gains you might have received etc. This amount is your total gross income.

Deductions

We now calculate your net taxable income by reducing the deductions applicable to you if you have invested, saved, or spent on certain items.

Standard Deduction

All can avail of a Standard Deduction of Rs 50,000 without investing or spending on any defined products.

Section 80

You can claim a deduction on the investments and expenses under Section 80.

Under Section 80C, you can claim up to Rs 1.5 lac deduction for assets in

  • Public Provident Fund (PPF),
  • Equity Linked Saving Scheme (ELSS) of Mutual Funds,
  • Employees Provident Fund (EPF),
  • Sukanya Smriddhi Yojana (SSY), i.e. financial security for your girl child,
  • Premium paid for term Life Insurance,

Section 80 CCD (1B)

Suppose you are investing in the National Pension Scheme (NPS). You can claim an additional Rs 50,000 deduction under Section 80 CCD (1B), which is over and above the Rs 1.5 lac limit under Section 80C.

Section 80 D

The premiums amount paid by you towards the health insurance policy of your family and your parents is also eligible for deduction under Section 80D.

Section 24

The interest portion of a home loan paid as EMI can be claimed as a deduction, limited to Rs 2 lacs, under Section 24. This is in addition to the conclusion mentioned as the principal amount under Section 80C.

Net taxable income

Finally, we arrive at calculating your net taxable income on your salary.

By deducting all the eligible exemptions from your gross taxable income, you calculate your total payment on the amount you must pay your income tax, depending on your tax slab.

Tax Slab For Individual Taxpayers Who are of the Age of Less Than 60 Years

 

Income Tax Slab Tax Rates As Per New Regime
₹0 – ₹2,50,000 Nil
₹2,50,001 to ₹ 5,00,000 5%
₹5,00,001 to ₹ 7,50,000 ₹12500 + 10% of sum income higher than

₹5,00,000

₹7,50,001 to ₹ 10,00,000 ₹37500 + 15% of sum income higher than

₹7,50,000

₹10,00,001 to ₹12,50,000 ₹75000 + 20% of sum income higher than

₹10,00,000

₹12,50,001 to ₹15,00,000 ₹125000 + 25% of sum income higher than

₹12,50,000

Above ₹ 15,00,000 ₹187500 + 30% of sum income higher than

₹15,00,000

 Senior Citizens and Very Senior Citizens

  • The tax slab rate for those over 60-years-old is said to be senior citizens. The tax rate is nil for net income up to Rs 3 lacs.
  • For very senior citizens, who are over 80-years-old, the net income up to Rs 5 lacs the tax rate is nil.

Rebate Under Sec 87A

Tax incentive in the form of tax rebate is provided under section 87A by the government to individuals earning a salary income below a specified limit.

  • In case your total taxable income after deductions doesn’t exceed Rs 5 lac, you can claim a rebate under Sec 87A of Rs 12,500.

Surcharge

For people in the income bracket

  • Between Rs 50 lac and Rs 1 crore, a surcharge of 10 per cent
  • Between Rs 1 and Rs 2 crore, the surcharge is 20 per cent is applicable

Net income tax calculation on salary

Let’s Now Work on an Example –

Suresh works with a marketing company in New Delhi; his annual gross salary is Rs 15 lac. After reducing eligible exemptions from his salary (including HRA and standard deductions), his net salary is Rs 12.5 lac.

The previous year, he received Rs 10,000 as interest income for his fixed deposit from the bank. His total investment in Equity Linked Saving Scheme (ELSS Mutual Funds) and contribution to Employee Provident Funds (EPF) amounted to Rs 1.5 lac.

He has invested in National Pension Scheme (NPS) an amount of Rs 50,000 and purchased a health insurance policy for himself and his wife, for that he pays 15,000 premiums annually.

Income Tax Calculation AY 2020-21
Gross Salary ₹ 15 lac
HRA and LTA – ₹ 2.5 lac
Standard deduction – ₹ 50,000
Net salary ₹ 12 lac
Income from other sources ₹ 10,000
Gross taxable income ₹ 12,10,000
Deduction under Section 80C (ELSS + EPF) – ₹ 1,50,000
Deduction under Section 80CCD(1B) for NPS – ₹ 50,000
Deduction under Section 80D for health insurance premium – ₹ 15,000
Deduction under Section 80TTA for interest on bank account – ₹ 10,000
TOTAL INCOME ₹ 9,85,000
Now let’s see how much money he has to pay as taxes this year  
Tax rate Amount
Up to ₹ 2.5 lac 0
5% on ₹ 2.5 lac (₹ 5 lac  less ₹ 2.5 lac) ₹ 12,500
20% on ₹ 4.85 lacs (₹ 9.85 lac less ₹ 5 lac) ₹ 97,000

 Conclusion

Now you know how easy it is to calculate your Income Tax on salary in simple steps. You must have also observed that tax deductions help you save a lot of amount on tax and help you reduce stress about income tax.

Also Read : Best Investment Plan for 5 Years in Post Office

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