How to Calculate Income Tax on Salary with Example

“Nothing is certain in life except for death and taxes.”

— Benjamin Franklin

Income tax is seen by many as a necessary evil. The constantly changing tax laws and terms like tax exemption, tax saving, tax deduction, tax rebate, etc., make taxes difficult to understand. In most cases, we do not realise how much money we are taxed on and how much money we can save.

In this blog, we will show you how you can calculate your income tax as well as introduce the best tax saving options - so that the next time, you can do your own maths and take enough measures to save as much tax as possible.

Before continuing, let us first understand what income tax means and components for calculating income tax.

What is Income Tax?

According to the Income Tax Act, 1961, An income tax is a tax central government charges on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax is collected by the Government of India and is undoubtedly the most important source of revenue for the Indian Government. The Government utilize the taxes in order to meet its objectives which includes fulfilling the development & defence needs of the country, creating of new employment opportunities, building infrastructure and so on.

Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates may vary by type or characteristics of the taxpayer and the type of income.

As per the income tax act 1961, assessee income is divided into 5 categories:

1. Income from Salary
2. Income from House Property
3. Income from Profits and Gains of Profession or Busines
4. Income from Capital Gain
5. Income from Other Sources

Components for Calculating Income Tax

A few key components should be remembered when calculating income taxes. Here's a list of these key components:

• Financial Year (FY) -The year in which money is earned is referred to as the financial year. It is the time period from April 1st of this year to March 31st of the next year. You must prepare all of your investment proofs and gather all of your documentation throughout this time.
  • For example - FY 2022-23 is period between 1st April 2022 to 31st March 2023
• Assessment Year (AY) - A year in which your income from a particular financial year will be assessed is called an assessment year.
  • For example - AY 2023-24 is the year when your income from 1st April 2022 to 31st March 2023 will be calculated.
• Tax Deductions - They allows you to reduce your total taxable income as per the Section 80 under the Chapter VI-A of Income Tax Act.
  • For example - As per tax provisions under Section 80C of Chapter VIA you can claim tax deduction of up to ₹ 1,50,000 on premiums paid for life insurance policies, other investments prescribed under Chapter VI. This is one of the most-opted ways of saving tax.
• Tax Exemption - Exemption means exclusion, i.e. if certain income is exempt from tax then it will not contribute to the total income of a person. The exempted income is not considered as a part of total income, the whole amount is an exemption for the taxpayer. Some of the exemptions are as follows:
  • Salary Income Exemptions, Allowances and Deductions
    • Leave travel concession as contained in clause (5) of section 10;
    • House rent allowance as contained in clause (13A) of section 10;
    • Some of the allowance as contained in clause (14) of section 10;
    • Death-cum-retirement gratuity received by Government servants [Section 10(10)(i)]
    • Standard deduction, the deduction for entertainment allowance and employment/ professional tax as contained in section 16;
  • Rental Income from House Property Deductions
    • Interest paid on home loan under section 24. Deduction against interest on home loan is applicable in respect of self-occupied or vacant property.
    •  In any assessment year, if there is a loss under the head “Income from house property”, such loss will first be set-off against income from any other head to the extent of ₹2,00,000 during the same year. The unabsorbed loss will be carriedforward to the following assessment year and this carry forward loss can not be set -off from any other head except income under the head “Income from house property”.Such loss shall be carry forwad for 8 years.
  • Deduction From Business or Profession Income
    • Expense incurred in relation to running such business or profession
    • Depreciation on assets, and additional depreciation on such assets.
    • Deduction for donation for or expenditure on scientific research
    • Rent, Rates, Taxes, Repairs, and Insurance of building
    • Any bonus or commission paid to the employees
    • A contribution made to the employees recognized provident fund or approved superannuation fund or approved gratuity fund.
• TDS - TDS stands for tax deducted at source. As per the Income Tax Act, a person (deductor) who is required to make a payment of a specific nature to another person (deductee) must deduct tax at source and send it to the Central Government's account. tax is required to be deducted at source by the payer at the rate as prescribed under the Income Tax Act, 1961. TDS will be deducted at the time of accrual or payment of such income to the payee, whichever is earlier. However, if you are an "individual" or a "Hindu Undivided Family" (HUF), whose total revenue from the business or professional carried on by him does not exceed one crore rupees in case of business, or fifty lakh rupees in case of profession during the Financial Year immediately proceeding the current financial year, no TDS is required to be deducted at source.
• Salary Breakup - Understanding your salary breakup is the first step toward calculating the income tax on your salary. The salary breakdown can be found on the pay slip or salary statement.

  You may understand the main components and basic structure of your compensation by closely studying the slip or statement..

• Taxable Income = Total Income (Sum of all Your Earnings) – Eligible Deductions

  
  You must determine your taxable income after you have the breakdown of your salary. The term "taxable income" refers to any sources of income other than your salary on which you must pay taxes.

  Income Source	Description
  Income from Salary	An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary. "Salary" for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).
  Income from House Property	Any amount of money that is received by the landlord from tenant for using the property is called rental income. Here, property refers to any building including house, office building, warehouse etc. and any land attached to the building like compound, garage, car parking space etc. Different types of house property (like rental or self-occupied property) are taxed differently.
  Income from Business/Profession	Any income shown in profit and loss account after taking into account all the allowed expenditures by an assessee. The income also includes both positive (profit) and negative incomes. Here is a list of the income chargeable under the head: Profits earned by the assessee during the assessment year Profits on income by an organization Profits on sale of a certain license Cash received by an individual on export under a government scheme Profit, salary or bonus received as a result of a partnership in a firm Benefits received in a business
  Income from Capital Gains	Any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head 'Capital Gains'. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.
  Income from other Sources	Any income that is not eligible for tax under any other head of income and cannot be excluded from the total income is taxed as residual income under the head "Income from Other Sources". The following three conditions must be satisfied according to Section 56 of the Income Tax Act for an income to qualify as income from other sources. Income is generated. Any other provision of the Income Tax Act does not exempt such income. Income from such sources cannot be claimed as salary, house property income, profits and gains from business or profession, or capital gains.

• Payable Tax Calculation - The final and most important step is to compute the tax payable. After adjusting the advance tax and tax deducted at source, the assessee would arrive at the amount of net tax payable or refundable. Such amount should be rounded off to the nearest multiple of 10 as per section 288B. The assessee has to pay the amount of tax payable (called self-assessment tax) on or before the due date of filing of the return. Similarly, if any refund is due, assessee will get the same after filing the return of income.

For an individual taxpayer under the age of 60, the following are the applicable tax rates/ tax slabs under the old tax regime and new tax regime. Any one of these two tax regimes can be opted by the taxpayer.

These rates are effective for the financial year 2023-24, which matches to the Assessment Year (AY) 2024-25. Over and above the total amount payable, the total tax rate is subject to surcharge and health and education cess at the rate of 4%.

Furthermore, taxpayers who choose concessional rates under the New Tax regime will be required to forego some tax exemptions and deductions available under the old tax regime. There are many deductions and exemptions that are no longer available under the new tax regime. It is best to review the list beforehand.

How to Calculate Income Tax under Salary Head?

Calculation of Income from salary

A very easy formula to calculate the income tax is:

For Example:

Mr Shah has a basic salary of ₹ 1,00,000 per month

House Rent Allowance (HRA) of ₹ 45,000 per month

Special allowance of ₹ 20,000 per month

Leave Travel Allowance (LTA) of ₹ 20,000 per Annum

His taxable income would be calculated as follows:

As his taxable income is ₹ 20,00,000,he falls in the slab of above Rs 15 lakh of income tax.

Now let us calculate his Total Taxable Income under both Old Tax Regime and New Tax Regime

Under the old tax structure, one may save a lot of money by making different tax-saving investments and/or costs, as shown in the example above.

Here's one such WIN-WIN option for YOU:

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Disclaimer⁴

The rebate under Section (u/s) 87A helps a resident taxpayer to reduce their income tax liability. The only condition to avail the benefit is:

“Your total taxable income shall not exceed the threshold limit.” Meaning - Only taxpayers falling under the specified threshold limit can claim the benefit of rebate under Section 87A.

The amount of rebate under Section 87A for FY 2023-24 (AY 2024-25) has been kept unchanged under the old tax regime . A resident taxpayer having taxable income up to Rs 5,00,000 will get a tax rebate of Rs 12,500 or equal to the amount of tax payable (whichever is lower).

In new regime, The above said limit has been increased from ₹5,00,000 to ₹7,00,000 .A resident taxpayer having taxable income up to Rs 7,00,000 will get a tax rebate of Rs 25,000 or equal to the amount of tax payable (whichever is lower).

Conclusion

It is important to disclose all investments at the start of the assessment year to calculate the tax payable correctly. Knowledge of taxes, deductions, and returns is essential for creating a solid financial foundation. Wrong tax payments, submitting incorrect information may lead your income tax return to scrutiny by income tax department.

• On purpose, avoiding filing the IT return
• Purposely letting the tax payments fail
• Intentionally not reporting total income
• Tax returns that have been faked
• False claims

Tax fraud can result in legal penalties such as severe fines and jail. Everyone wishes to live a luxurious life but believes it is difficult due to the fact that a large portion of their salary is spent on taxes. Knowing how to do accurate calculations and deductions aids in proper money investment and tax savings, allowing you to live the lavish life you've always wanted. It also prevents from committing tax fraud.