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As a matter of fact, the total number of Income Tax returns filed in the financial year 2023 was 104.91% more than what was filed in the financial year 2014.
Let’s face it: income tax often feels like a complex task for many of us. With tax laws constantly changing and confusing terms like rebate, tax exemption limit and deduction thrown around, it is no wonder we often feel lost. But there’s no need to panic. In this blog, we’ll help you calculate income tax on your salary in just a few minutes. It will surely come in handy when processing income tax returns in India.
What is Income Tax?
While most of us know that it is the tax we pay to the government, what we need to note is that the current income tax slabs when we calculate income tax are determined based on an individual’s income and age.
Income Tax Calculation: How Do You Do It?
Typically, tax calculation involves multiplying the applicable tax rate by the taxable income. We will breakdown the process to calculate income tax into five easy steps.
Step 1: Calculate Your Gross Income
Start by jotting down your annual gross salary, including all salary components like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and any other special allowances such as food coupons and mobile bill reimbursements.
Deduct exemptions for components like HRA and LTA. Remember, HRA can only be claimed if you live in a rented house and can provide valid rent receipts as proof. If you own the house or live with your parents, HRA is fully taxable. Calculate HRA exemption based on the lowest of the following amounts:
- HRA received from employer
- Subtract 10 percent of your basic monthly salary from the actual rent paid
- 50% of basic salary for metro city dwellers, or 40% for non-metro city residents
Use online HRA calculators for easier calculation. Subtract the standard deduction of Rs.50,000 (available to all salaried individuals) to find your net salary. Add income from other sources like income from rent, interest from deposits, capital gains etc. The resulting amount is your total gross income.
Step 2: Determine Your Net Taxable Income by Deducting Expenses
Tax deductions offer opportunities to lower your taxable income by saving, investing, or even spending on specific items.
Start by subtracting the Standard Deduction of Rs. 50,000, available to everyone without any specific investments or expenses. Then, deduct eligible investments and expenses under Section 80:
Under Section 80C, you can claim up to Rs. 1.5 lakh deduction for various investments like PPF, EPF, premiums for term insurance, and home loan principal repayments.
Additional deduction of Rs. 50,000 is available for investments in NPS under Section 80CCD(1B), separate from the 80C limit.
Premiums paid for health insurance policies for your family and parents can be claimed under Section 80D.
For home loans, the interest portion of the EMI paid during the financial year is deductible up to Rs. 2 lakh under Section 24, beyond the deduction available on the principal amount under Section 80C.
Step 3: Determining Your Net Taxable Income
To calculate your total income, consider all eligible tax deductions and subtract the same from your gross taxable income. Now, on this amount you have to pay the tax as per the applicable tax slab.
For individual taxpayers under 60 years old, the income tax slab rates are as follows:
Up to Rs.2,50,000: Nil
Rs.2,50,000 – Rs.5,00,000: 5%
Rs.5,00,000 – Rs.10,00,000: 20%
Above Rs.10,00,000: 30%
Tax rates vary for senior citizens: those over 60 with up to Rs.3 lakh net income have nil tax, while for those over 80 with up to Rs.5 lakh net income also have nil tax. Ultimately, your age and net income determine your applicable tax slab rates.
Step 4: Calculate Your Income Tax
Now, you will calculate taxes based on your net taxable income.
For the initial Rs. 2.5 lakh of taxable income, no tax is payable.
For the next Rs. 2.5 lakh, it is 5%, which equals Rs.12,500.
The subsequent 5 lakhs incur a 20% tax, totalling Rs. 1,00,000.
Any portion of taxable income exceeding Rs. 10 lakhs is taxed at 30% on the entire amount.
Step 5: Summarize Your Net Tax
Tax Rebate under Sec 87A: If your total taxable income after deductions remains below Rs. 5 lakh, you are eligible for a rebate under Sec 87A of Rs. 12,500.
If your taxable income exceeds Rs. 5 lakh, add a 4% health and education cess to your tax amount to determine your final payment.
For individuals in the very high-income bracket, between Rs. 50 lakh and Rs. 1 crore, a 10% surcharge applies. For incomes between Rs. 1 and Rs. 2 crore, the surcharge is 20%.
Here’s an example to help you understand better:
Meira is employed at a Bangalore-based company with an annual gross salary of Rs. 20 lakh. After factoring in all exemptions such as HRA and standard deductions, her net salary amounts to Rs. 16.5 lakh.
During the previous year, she earned Rs. 15,000 as interest income on bank account. Additionally, her contribution to EPF and total investment in ELSS together came to Rs. 2 lakh. She also invested Rs 25,000 in NPS and has a health insurance policy for herself and dependant parents, with an annual premium of Rs. 20,000.
Income Tax Calculation
Gross Salary: Rs. 20 lakh
HRA and LTA: – Rs. 3 lakh
Standard deduction: – Rs. 60,000
Net salary: Rs. 16.4 lakh
Income from other sources: Rs. 15,000
Gross taxable income: Rs. 16,35,000
Deduction under Section 80C (ELSS + EPF): – Rs. 2,00,000
Deduction under Section 80CCD(1B) for NPS: – Rs. 25,000
Deduction under Section 80D for health insurance premium: – Rs. 20,000
Deduction under Section 80TTA for interest on bank account: – Rs. 15,000
TOTAL INCOME: Rs. 13,75,000
Now, let’s look at how much tax Meira will have to pay:
Tax Rate | Amount
Up to Rs. 2.5 lakh: 0
5% on Rs. 2.5 lakh (Rs. 5 lakh – Rs. 2.5 lakh): Rs.12,500
20% on Rs. 8.75 lakhs (Rs. 13.75 lakh – Rs. 5 lakh): Rs.1,75,000
Wrapping Up
Calculating your income tax is hardly rocket science! Now that you’ve read all the five steps, it will get easier for you to calculate your income tax based on tax deductions and tax slab rates. In the comment section, let us know if you need more information!
