How to Calculate Income Tax on Salary?
Understanding how to calculate your income tax is an essential life skill that can save you time, money, and headaches. With tax season approaching, properly accounting for your income and deductions is important. In this blog, we will provide a comprehensive guide on the ins and outs of calculating your income tax on salary, including standard deductions, tax brackets, and various deductions to calculate income tax on salary. Whether you're a first-time taxpayer or simply looking to refresh your knowledge, this piece will help you quickly navigate the tax system's complexities. So let's dive in and start calculating!
What is Income From Salary?
Income from salary is a term used to describe the total compensation received by an individual from their employer, subject to taxation under the Income Tax Act. It includes basic salary, allowances, bonuses, commissions, perquisites, and any other benefits received in cash or kind. It's essential to accurately calculate income from salary as it forms the basis for determining an individual's tax liability. In addition, certain deductions and exemptions may be applicable to income from salary, which can reduce tax liability. Overall, income from salary is a crucial component of an individual's taxable income and plays a critical role in determining their overall tax liability.
Generally, income from salary comprises:
- The basic pay of an employee is as per the employment norms.
- Allowance to cope with personal expenses.
- Fees, bonuses, work commissions and more.
Income Tax Slab for Salaried Individuals
The recent Union Budget 2023 unveiled a new tax regime with lower tax slab rates for taxpayers. This move provides some respite to taxpayers by removing several deductions that existed in the previous tax regimes.
|Income range||Income tax rate|
|Up to INR.3,00,000||Not Applicable|
|INR 3,00,000 - INR 6,00,000||5 per cent on income which exceeds INR 3,00,000|
|INR 6,00,000 - INR 9,00,000||INR 15,000 + 10 per cent on income exceeding INR 6,00,000|
|INR 9,00,000 - INR 12,00,000||INR 45,000 + 15 per cent on income exceeding INR 9,00,000|
|INR 12,00,000 - INR 15,00,000||INR 90,000 + 20 per cent on income exceeding INR 12,00,000|
|More than INR 15,00,000||INR 1,50,000 + 30 per cent on income exceeding INR 15,00,000|
Deductions to Compute Income Tax on Salary
An individual needs to consider various deductions to calculate income tax on salary. These deductions help reduce the taxable income and the overall tax liability. Some of the standard deductions are House Rent Allowance (HRA), Leave Travel Allowance (LTA), Standard Deduction, Section 80C, 80CCD (1), and 80CCC, and Deductions against Loans.
House Rent Allowance (HRA)
Employees who stay in rental accommodations can file claims for deductions as house rent allowance under the old tax regime. The following considerations fall under this category as per income tax deductions:
- The employee's total house rent allowance
- Actual rent payments are less than 10% of the employee's basic pay.
- 40% of the payment is for non-metropolitan areas.
- 50% of salary for metropolitan areas
Leave Travel Allowance (LTA)
Employees can request a leave travel allowance (LTA) twice in four years, according to the expense incurred. However, employees need to present the expense bill for the same. Noteworthy is the fact that the LTA covers only domestic travel. Additionally, it doesn't pay for personal expenses like entertainment, dining out, shopping, or leisure.
The interim budget presented in 2019 amended the maximum limit for the standard deduction. The limit has now been expanded to INR 50,000.
Sections 80C | 80CCD (1) | 80CCC
Tax-saving options allow paid workers to invest and reduce income taxes on salaries up to Rs. 1.5 lakh. Investments like Employee Provident Funds (EPF), Life Insurance Premiums, Equity Linked Savings Schemes (ELSS), Pension Plans, and more are some of those covered under the sections stated above. These sections also cover a variety of additional government savings programmes.
Deductions Against Loans
The principal and the interest component paid towards the housing finance are eligible for deduction per the Income Tax Act’s section 80E. The maximum deduction limit is capped at INR 1.50 lacs. Employees can also claim deductions for the paid interest component with a maximum deduction limited to two lacs as per Section - 24 of the Income Tax Act.
Components for Calculating the Income Tax on Salary
To calculate income tax on salary through a salary tax calculator or manually, you need to be familiar with basic terminologies. Here’s what you need to go through before moving forward to how to calculate tax on salary:
The Tax Year
The financial year (also called fiscal year) prior to which income tax is to be calculated is the tax year. The fiscal year runs from 1st April through 31st March of the following year. You must therefore include the salary income for the duration starting from 1st April 2021 through 31st March 2022 when figuring your income tax on salary for 2022.
The phrase "assessment year" is quite common. However, most people need clarification. First and foremost, the assessment year is separate from the financial year, as these terms are entirely different. In actuality, an evaluation year begins following the conclusion of the prior fiscal year. The assessment year is the year when your income tax is determined for the previous fiscal year. Your assessment year will be 2022–2023, and the deadline for submitting your income tax returns will be July 2022 if you are computing your salary income tax for the fiscal year 2021–2022 instead.
Obtaining your pay breakdown is the first step in computing income tax on salary. The salary slip, or the salary statement, contains the wage breakdown. If you don’t know about your salary breakup, go to your HR and request it, or you can download the same from your office portal. You can figure out the principal elements and the fundamental structure of your compensation by carefully examining the salary slip. You will benefit from the tax breaks on your pay that are available to you, including House Rent Allowance, Dearness Allowance, and much more.
Once you get the salary breakup, the very next thing you need to do is calculate the taxable income through a salary income tax calculator or via manual computation.
Taxable income is the annual income of an individual for which the individual needs to pay the applicable taxes. In addition to the salary, it includes income from other sources too.
Here’s the list of income sources that fall under the category of taxable income:
|Income from Salary||Income received by an individual from a job, leave encashment, HRA, DA, other allowances and much more.|
|Income from Property||Earnings generated from residential or commercial properties kept for rental or leasing purposes.|
|Income from Business||Earnings secured from freelancing work, part-time jobs or other professions, including business.|
|Income from Gains||Income generated by selling out a capital asset.|
|Income from other sources||Residual income is generated from fixed deposits, pension, gifted assets, etc.|
Income tax is not about paying taxes to the government. Apart from paying tax, it also allows you to make savings through income tax deductions. Section 80 of the Income Tax Act focuses on the taxpayer’s benefits. So, you have to subtract the deduction falling under this category to determine the actual taxable income.
In simple words: Taxable Income = Gross Income – Deductions
Here, gross income is the total income amount generated from all available sources.
Additionally, to make the computation of the taxable income easier for you, get detailed knowledge of Section 80, including tax deductions and changes (if any). The deduction section lists all types of tax deductions, including mutual fund investments, life insurance policies, savings, PPF, SIPs, housing finance, etc. As per the latest changes in the tax regime, you can claim tax deductions of up to INR 2.5 lakhs. Therefore, deductions allow you to save a considerable chunk of your annual income if planned appropriately.
TDS- Tax Deducted at Source
TDS represents the tax amount that is directly deducted from the salary. To keep transparency and to maintain a hassle-free tax pattern, employers count on TDS. There is no need to worry about the deducted amount; it is refundable. If your employer deducts TDS from your salary, you have the option to file a TDS claim and get back the amount. However, you will have to present the associated documents.
How to Calculate Income Tax on Salary with Example?
To calculate income tax on salary, you need to follow the steps outlined below:
- Determine your gross salary: This includes your basic salary, HRA, LTA, bonuses, and other allowances.
- Calculate exemptions: Exemptions include HRA, LTA, and standard deduction, which can be subtracted from your gross salary to arrive at your taxable income.
- Calculate deductions: Deductions include Section 80C, 80D, and 80E deductions that can be claimed to reduce your taxable income further.
- Apply the tax slab rates: Once the taxable income is determined, the applicable tax slab rate can be applied to calculate the tax liability.
- Calculate the cess: The applicable cess rate can be applied to calculate the final tax liability.
For example, let's say your gross salary for the financial year 2022-23 is Rs. 8 lakhs. Your HRA is Rs. 1.5 lakhs, and you have claimed LTA of Rs. 50,000. You have also invested Rs. 1.2 lakhs in tax-saving schemes under Section 80C. The standard deduction applicable is Rs. 50,000.
Your taxable income would be calculated as follows:
Gross salary = Rs. 8 lakhs
HRA exemption = Rs. 1.5 lakhs
LTA exemption = Rs. 50,000
Standard deduction = Rs. 50,000
Total exemptions = Rs. 2.5 lakhs
Taxable income = Gross salary - Total exemptions
= Rs. 8 lakhs - Rs. 2.5 lakhs
= Rs. 5.5 lakhs
Assuming you fall in the 10% tax slab, your tax liability would be:
10% of Rs. 2.5 lakhs (taxable income up to Rs. 5 lakhs) = Rs. 25,000
- 20% of Rs. 50,000 (taxable income between Rs. 5 lakhs and Rs. 7.5 lakhs) = Rs. 10,000
- 4% cess = Rs. 1,400
Your total tax liability would be Rs. 36,400.
Therefore, by following the above steps, you can calculate your income tax on salary.
Calculate your Income Tax on Salary with Just a Few Clicks
A salary income tax calculator is a tool that helps you calculate your income tax liability based on your income, exemptions, and deductions. It is a convenient way to estimate your tax liability and plan your finances accordingly.
The calculator takes into account various factors, such as your gross salary, exemptions, deductions, and tax slab rates, to determine your tax liability. With the help of this tool, you can calculate your tax liability accurately without having to go through complex tax calculations manually.
Additionally, an income tax calculator can help you plan your investments and tax-saving strategies better. By inputting various investment options, you can see how they affect your tax liability and choose the best tax-saving option for your needs.
In short, an income tax calculator is a useful tool that can help you understand your tax liability, plan your finances, and make informed decisions about your investments. It saves time, simplifies the tax calculation process, and provides accurate estimates of your tax liability.incom
In conclusion, calculating income tax on salary can seem daunting at first, but it is a crucial task that every taxpayer must undertake. By understanding the various components of income tax calculations and utilizing an income tax calculator, you can accurately determine your tax liability and plan your finances accordingly. Remember to keep yourself updated with the latest tax laws and regulations to make informed decisions about your investments and savings. With the right knowledge and tools at your disposal, you can navigate the complex world of income tax calculations with ease and confidence.
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About Income Tax
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Frequently Asked Questions (FAQs)
What are the different income heads under income tax?
There are five income heads under income tax. Salary income, income from residential property, income from business or profession, income from capital gains, and income from all other sources are examples.
What is income from other sources?
Any income that doesn’t fall under the other four income heads belongs to the additional income sources category. For instance, interest earned through bank deposits, the lottery, and money acquired through inheritance will belong to other sources of income.
How can I calculate the tax deducted from my salary?
To calculate the tax deducted from your salary, first calculate the annual gross income. After having the actual gross income figure, compute the tax deductions applicable specifically to your case. Now, subtract this amount from your gross income, and the remaining amount will be your taxable income.
Is tax calculated on basic salary?
Yes, tax is calculated on the basic salary. Thus the basic pay should not exceed 40% of the overall salary. The basic salary shouldn’t be low because it will reduce other compensation components.