Income from Salary: How to Calculate Income Tax on Salary (FY 2023–24)
Paying your income tax can be quite a confusing process. Terms like tax bracket, tax return, and rebate can all be overwhelming. Here we are to make things simpler for you.
In this blog, we’ll explore how to calculate income tax on salary, what it is exactly, and more.
What is income tax?
The tax levied on an individual’s income is referred to as income tax. “Individuals” can include a person or entities like Hindu undivided family, companies, trusts, and cooperative societies.
The amount of tax a person pays is decided based on the tax slabs.
Taxable income is an individual’s income minus exemptions, deductions, and rebates. It is crucial as it is used to determine income tax on salary. Calculating taxable income involves a lot of complicated problems and requires many adjustments.
How to Calculate Income Tax on Salary?
To calculate tax, the applicable tax rate is multiplied by the taxable income. It may sound simple enough, but there are several steps to it, like calculating gross salary, accounting for deductions and exemptions, calculating tax payable and deducting tax paid, etc.
Here are the steps to calculate income tax on salary:
Step 1: Calculate your gross income
First, take your annual gross salary, including all components of your salary like house rent allowance, leave travel allowance, and special allowances like food coupons.
Next, remove the exemptions provided in the components of your salary. The biggest exemptions you usually get are house rent allowances and leave travel allowances.
Remember, you can claim HRA only if you live in a rented house and can submit valid rent receipts as proof. If you have your own accommodation or live with your parents, then HRA is fully taxable.
Your HRA tax exemption is taken as the lowest of the following amounts:
- HRA received from an employer
- Actual rent paid less than 10% of the basic monthly salary
- 50% of the basic salary in case the taxpayer is living in a metro city
- 40% of the basic salary if the taxpayer is living in a non-metropolitan city
The good news is that you no longer need to use a pen and paper to calculate your HRA exemption amount. You can use several online HRA calculators to find out your exempt and taxable HRA details. After this account for the standard deduction of Rs 50,000 to arrive at the net salary amount
Next, add income from other sources like rental income, interest earned from deposits, capital gains, etc. The final amount you arrive at is your total gross income.
Step 2: Arrive at your Net Taxable Income
Tax deductions enable you to reduce your taxable income and tax burden by investing, saving, or spending on certain items.
The first and most common deduction is the standard deduction of Rs50,000, which can be availed of by everyone without having to make investments or expenditures.
Next, account for investments and expenses eligible under Section 80.
Section 80C is the biggest pool for deductions, and under it, you can claim deductions up to Rs. 1.5 lakh on various investments and expenses. Investments in PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana, and premiums paid for term insurance are some of the most popular ways to claim this deduction.
If you have a home loan, the principal paid back during the year can be deducted under this section. Also, your EPF, which is a part of your salary, falls into this category too.
If you are investing in the National Pension Scheme, you can claim another Rs 50,000 deduction under Section 80CCD(1B), which is over and above the Rs 1.5 lakh limit under Section 80C.
If you have also paid premiums towards the health insurance policy of your family and your parents, under Section 80D, you can claim that amount as a deduction.
In the case of a home loan, a maximum of Rs 2 lakh can be claimed as a deduction on the interest portion of the EMI paid for the financial year under Section 24.
Step 3: Arriving at Your Net Taxable Income
After deducting all your eligible deductions from your gross taxable income, you will arrive at your total income, on which you are liable to pay tax based on your respective tax slab.
Tax slab
Net income range | Income-Tax rate | Your tax outgo before rebate under Section 87A |
Up to ₹ 2,50,000 | Nil | Nil |
₹ 2,50,000–₹ 5,00,000 | 5% | ₹ 12,500 |
₹ 5,00,000–₹ 10,00,000 | 20% | ₹ 1 lakh |
Above ₹ 10,00,000 | 30% | ₹ 2,62,500 on net income of ₹ 15 lakh |
This slab rate is different for senior citizens. For those who are over 60 years old and have up to Rs 3 lakh in net income, the tax rate is nil. And for very senior citizens, who are over 80 years old and have up to Rs 5 lakh in net income, the tax rate is nil. The applicable tax rates depend on your net income and age.
Step 4: Calculate Your Taxes
Taxpayers must pay tax on their net taxable income.
- For the first Rs. 2.5 lakh of your taxable income, no tax is levied.
- For the next Rs. 2.5 lakhs, you have to pay 5% of Rs. 12,500.
- For the next 5 lakhs, you pay 20%—Rs 1,00,000
- For your taxable income part, which exceeds Rs. 10 lakh, you pay 30% of the entire amount.
Step 5: Consolidate your net tax
A tax rebate is an incentive provided by the government to individuals earning an income below a specified limit. If your total taxable income doesn’t exceed Rs 5 lakh after all deductions, you can claim a rebate under Sec. 87A of Rs 12,500.
If your taxable income is more than Rs 5 lakh, you can add a health and education cess of 4 percent to your tax amount to see the final amount you will pay.
People in the very high-income bracket, i.e., between Rs 50 lakh and Rs 1 crore, have to pay a surcharge of 10 percent. And, for income between Rs 1 and Rs 2 crore, the surcharge is 20 percent.
Example
Prakash works at a Mumbai-based MNC, and his annual gross salary is Rs 15 lakh. After subtracting all exemptions from his salary, his net salary is Rs 12.5 lakh.
Last year, he earned Rs 10,000 as interest income from his bank account. And his total investment in ELSS Mutual Funds and contribution to EPF combined come to Rs 1.5 lakh. He has even invested in the National Pension Scheme (Rs 20,000) and has health insurance for himself and his wife, for which he pays a Rs a Rs 15,000 premium every year.
Gross Salary | ₹ 15 lakh |
HRA and LTA | ₹ 2.5 lakh |
Standard deduction | ₹ 50,000 |
Net salary | ₹ 12 lakh |
Income from other sources | ₹ 10,000 |
Gross taxable income | ₹ 12,10,000 |
Deduction under Section 80C (ELSS + EPF) | ₹ 15,000 |
Deduction under Section 80CCD (1B) for NPS | ₹ 50,000 |
Deduction under Section 80D for health insurance premium | ₹ 15,000 |
Deduction under Section 80TTA for interest on a bank account | ₹ 10,000 |
TOTAL INCOME | ₹ 9,85,000 |
Now let’s see how much income tax on salary he has to pay this year.
Tax rate | Amount |
Up to ₹ 2.5 lakh | 0 |
5% on ₹ 2.5 lakh (₹ 5 lakh – ₹ 2.5 lakh) | ₹ 12,500 |
20% on ₹ 4.85 lakhs (₹ 9.85 lakh – ₹ 5 lakh) | ₹ 97,000 |
Understanding how to calculate income tax is crucial for every taxpayer. By following the steps outlined in this blog, you can accurately determine your taxable income, deductions, and your, your tax liability.
Remember to apply all eligible exemptions, deductions, and rebates to save on your tax. Consulting with a tax professional can provide valuable insights and guidance for effective tax planning.
