How to Calculate Income Tax on Salary
Accurate calculation of tax is important. It will prevent one from underestimating or overestimating their tax liability and will save them from additional payments, penalties and refund claims. If one has to be able to calculate the tax with precision then the first step is to understand all the components that must be taken into consideration and at what stage they can be used.
Components of income tax to keep in mind while calculating
- Tax year
A financial year (FY) or tax year is the period between 1st April to 31st March in which a taxpayer earns his or her income. This income earned is subject to payment of taxes in the assessment.
- Assessment year
The assessment year starts just after the financial year and it too starts from 1st April and ends on 31st March.
For example – say the Financial Year in consideration is 1st April 2020- 31st March 2021, then the assessment year will be 1st April 2021- 31st March 2022.
- Salary breakup
Salary refers to the periodic payment that an employer pays to his or her employee in exchange for the work done or the services provided. A salary might be paid on an hourly, daily, weekly or monthly basis.
The components of salary are:
- Basic salary: which usually amounts to 40%-50% of the total salary paid by the employer. This amount is determined based on the employee’s skills, qualifications, position in the organisation etc. It is the fixed component of the CTC (Cost to Company) package.
- House rent allowance: refers to that part of the salary offered to those employees that reside in rented accommodation. It is partially or fully exempted from taxes as per Section 10(13A) of the Income Tax Act.
- Leave travel allowance: is claimed for the travel expenses incurred by the employee. This amount is given by the employer on submission of adequate proof. A salaried employee can claim the leave travel allowance exemption under Section 10(5) of the Income Tax Act.
- Special allowance: as given by the employer is fully taxable under the Act.
- Bonus: is a performance incentive offered by the employer to the employee. It is fully taxable under the Act.
- Employee contribution to provident fund (EPF): to which both the employee and the employer contribute to (at the rate of 12%), is available for exemption under Section 80C of the Act.
- Professional tax: as levied by the state can be for a maximum amount of INR 2,500.
- Taxable income
Taxable income is the portion of your gross income that is actually subject to taxation. It is also known as adjusted gross income or adjusted income minus deductions or exemptions. It includes wages, salary, bonuses, tips, unearned income, and investment income.
The taxpayer has to forego the following exemptions and deductions while availing the new regime-
- Standard deductions of up to INR 50,000 under Section 16 of the Act.
- Deductions of up to a maximum of INR 1,50,000 under Section 80C of the Act.
- Deduction of up to a maximum of INR 2,00,000 under Section 24 of the Act for interest on loan.
- Entertainment allowance and professional tax deduction for Government employees under Section 16(ii).
- Leave travel allowance (LTA).
- House rent allowance (HRA).
- Medical insurance premium of a maximum of INR 25,000 and INR 50,000 for parents and senior citizens under Section 80D.
- Savings bank interest of a maximum of INR 10,000 under Section 80TTA.
- Interest income (for senior citizens) under INR 50,000 under Section 80TTB.
- Interest on education loan -deduction for 8 consecutive years under Section 80E.
- Treatment of self or dependent for specified disease for a maximum of INR 40,000 (with a maximum of INR 1,00,000 for senior citizens) and treatment of disability of self or dependant for a maximum of INR 75,000 to INR 1,25,000 depending on disability under Section 80D and under Section 80 DDB.
- Donations to specified entities.
Tax deducted at source is income tax that is reduced from the money that is paid to the concerned person at the time of making such a payment. The recipient of income receives the net amount after reducing TDS. A person making specified payments as per the Income Tax Act are required to deduct TDS at the time of making such specified payment.
Calculating the income tax on salary
Income tax on salary can be calculated with ease if one understands the process that is involved. To get a better understanding of this read the steps given below -
- Calculate all the exemptions that you will be availing: The exemptions that one can avail are numerous – Leave Travel Allowance, House Rent Allowance, Food Coupons and Vouchers, Mobile and Internet Reimbursement etc.
- Calculate all the deductions that can be claimed: Two deductions that a salaried individual will get by default is standard deduction and Employee Provident Fund. The other deductions that can be availed are Child’s tuition fees, Life Insurance premium payments, Equity Linked Saving Scheme, investment in NPS etc.
On doing this, combine the totals under these two headings and deduct it from the salary to know what the taxable income would be.
This can be better understood with the help of an example. Siri earns INR 9 lakh as her annual salary. She is claiming a few deductions and exemptions. Have a look at her income tax returns –
Old Tax Regime (INR)
New Tax Regime (INR)
a) Annual Income
b) Standard Deduction
c) EPF Contribution (Section 80C)
e) Total (Deduction & Exemption)
Net Taxable Income (a-e)
It is interesting to note that the tax benefit as per the new regime is INR 14,040
Shivaleelavati also earns INR 9 lakh annually and claims all the major deductions and exemptions. Her income tax returns can be calculated as follows -
Old Tax Regime (INR.)
New Tax Regime (INR)
a) Annual Income
b) Standard Deduction
c) Section 80C
e) Leave Travel Allowance
f) Meal Coupons
g) mobile reimbursements
h) medical insurance deduction
i) Total (Deduction & Exemption)
Net Taxable Income (a-i)
The tax benefit as per the old regime is INR 3, 640.
Please note: the amounts have been calculated using the income tax department’s tax calculator available on their e-filing portal (incometaxindiaefiling.gov.in). One can use the same to arrive at tentative figures that must be paid as tax under the new and the old regime.
It is extremely important that one invests some time and effort into understanding the nuances and fine differences between the alternate taxation regimes. Use the help of online websites, detailed information available on the government’s official website and the input of experts to comprehend how the system works and use the one that offers you the most benefits.