“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 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?

As per the Income Tax Act, 1961, an income tax is a tax imposed by the central government on individuals and/or organizations (taxpayers) in respect of their income or profits (commonly known as taxable income).

Generally, income tax is calculated as the product of a tax rate multiplied by the amount of taxable income. Taxation rates may vary by the type or characteristics of the taxpayer and the type of income.

As per the income tax act 1961, one's income is divided into 5 categories:

  1. Income from Salary
  2. Income from House Property
  3. Income from Business Profit
  4. Income from Investments/ Capital Assets
  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 2022-23 is the year 2023 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 - It is a specified amount that is deducted from gross income before computing tax. These exemptions are found in Section 10 and Section 54. They 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;
      • 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 is applicable in respect of self-occupied or vacant property.
      • Loss under the head income from house property for the rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per existing law
    • 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, any company or person making a payment is required to deduct tax at the source if the payment exceeds certain threshold limits. TDS has to be deducted at the rates prescribed by the tax department.
  • 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

    "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.). Section 17(1) defines the term “Salary”.

    Income from House Property

    Income generated from house or land (rented or self-occupied).

    Income from Business/Profession

    Any income shown in profit and loss account after taking into account all the allowed expenditures by a taxpayer. The income also includes both positive (profit) and negative incomes.

    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 covered in the other four heads of income is taxable under income from other sources, because of this, it is known as residuary head of income.

  • Payable Tax Calculation - The final and most important step is to compute the tax payable. The amount you get after deducting all applicable deductions and TDS is the tax amount you must pay to the Income Tax Department. You do not have to pay income tax if your total income is less than ₹2,50,000. If you earn more than ₹2,50,000, you must pay income tax according to your income bracket.

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.

Tax Slab(₹) Old Tax Rates New Tax Rates
0 – 2,50,000

0%

0%

2,50,001 – 5,00,000

5%

5%

5,00,001 – 7,50,000

20%

10%

7,50,001 – 10,00,000

20%

15%

10,00,001 – 12,50,000

30%

20%

12,50,001 – 15,00,000

30%

25%

15,00,001 & above

30%

30%

These rates are effective for the tax year 2022-23, which matches to the Assessment Year (AY) 2022-23. Over and above the total amount payable, the total tax rate is subject to surcharge and health and education cess.

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 a total of 70 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?

A very easy formula to calculate the income tax is:

Basic Salary

+ HRA

+ Special Allowance

+ Transport Allowance

+ any other allowance

-----------------------------------

= Gross Income from Salary

    – Deductions

    – Professional Tax (if any)

-----------------------------------

Net Income

(Tax calculated according to the income tax slab)

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:

Components Amount (₹)

Basic Salary

1,00,000 x 12

= 12,00,000

HRA (House Rent Allowance)

45,000 x 12

= 5,40,000

Special Allowance

20,000 x 12

= 2,40,000

Leave Travel Allowance (LTA)

20,000

= 20,000

Total Annual Salary (Income)

20,00,000

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 New Tax Regime and New Tax Regime

Components Old Tax Regime New Tax Regime

Total Annual Salary

20,00,000

20,00,000

Gross Total Income

20,00,000

20,00,000

(now less all the applicable deduction, allowances, and exemptions)

Less: Standard Deduction

50,000

Less: Deductions under Section 80C

1,50,000

Less: Deductions under Section 80D

50,000

Less: House Rent Allowance (Out of 5,40,000 deduction of)

3,00,000

Less: Leave Travel Allowance (Out of 20,000 deduction of)

 

10,000

(bills must be submitted)

Total Taxable Income

14,40,000

 

Total Tax Liability (Payable)

= 2,54,280

= 3,37,500

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.

Conclusion

It is important to disclose all investments at the start of the assessment year in calculate the tax payable correctly. Knowledge of taxes, deductions, and returns is essential for creating a solid financial foundation. Wrong tax payments, presenting incorrect information, and lying are all illegal. The following are examples of income tax fraud:

  • 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.