How To Calculate Income Tax On Salary?

It is very understandable that as a salaried employee, you would be frustrated whenever you hear about tax. As a result, by the majority of salaried individuals, tax is perceived as the evil of paychecks. With several jargon and constantly changing tax laws, we do not realize how much of our money is being eaten by taxes and how much we can save.

That being said, calculating income tax in India is not at all an easy task. In fact, it is intimidating and complex enough to confuse the salaried individuals. However, it is certainly a vital aspect of managing finances. The procedure involves determining the applicable tax rates and taxable salary and accounting for deductions and exemptions. In this guide today, we will share some insights on how to calculate income tax on salary with examples.

What is Taxable Income?

Basically, taxable income in India encompasses different income sources, including business income, salary, capital gains, income from house property, and other sources like gifts, dividends, and interests.

Exemptions, deductions, and rebates under the Income Tax Act 1961 assist in reducing tax liability. Entities & Individuals ought to report their taxable income and pay the income tax depending upon applicable tax regulations and slabs that the Income Tax Department of India sets.

What is Income Tax on Salary?

As per the Income Tax Act of 1961, all salaried individuals must pay a certain amount from their salary as a tax to this nation. This certain amount of tax is called income tax. The law comprises different provisions and variations with subsections that are entailing the details of deductions, tax payments, and computations. A handful of deductions under the subsections 80U and 80C are available. After subtracting all the tax-saving deductions and provisions available, the final amount is paid to the government, which is known as the income tax on salary.

The Components of Calculating Income Tax on Salary

When the conversation is about how to calculate income tax on salary with example, there are a few key components that every salaried individual should know, such as:

• Assessment year
• Tax exemption
• Salary breakup
• Financial year
• Tax deductions
• TDS or Tax Deducted at Source

How Can You Calculate the Income Tax on Salary?

Evaluating the income tax on salary in India is no walk in the park. However, it is not at all that much difficult as how people explain it to be. Here is a simplified way to calculate the tax:

• First and foremost, you need to determine the gross salary. It includes the allowances, basic salary, bonuses, or any other taxable components.
• You need to identify certain exemptions. Certain components in your salary include house rent allowance, standard deduction, or leave travel allowance, which are exemptions from tax. Subtract these exemptions from your gross salary, and you will be landed on the taxable salary.
• There should also be a strong emphasis on calculating deductions. You may claim deductions under various income tax sections, such as sections 24b, 80C, and 80D. Subtract these deductions from your taxable salary to earn your net income.
• After you have considered all the exemptions and deductions, you have now arrived at your taxable income.
• You need to apply tax rates and income slabs. India has a progressive tax system with various income slabs and corresponding tax rates.
• You are required to calculate the tax liability for every slab and add them up to determine the total income tax liability.
• Apply any applicable surcharges or rebates depending on your certain circumstances. For instance, there might be a rebate under section 87A for folks who have a taxable income of up to 7 Lakhs.
• Add the health and education cess to the total tax liability.
• As soon as you have considered all of the factors, you have arrived at your final income tax liability for the financial year.
• If you are a salaried individual, the employer will deduct a monthly TDS from your salary. This TDS is adjusted to your final tax liability. In addition to that, if your tax liability is more than 10,000 INR in a financial year, you may be required to pay advance tax in installments.
• To make sure of your compliance, file the ITR with the income tax department, reporting your tax payments, income, and deductions. For instance, if Mr Bajaj, who is a non-government employee, has a salary of 30000 per month with DA of 1000 per month, entertainment allowance of 2250 per month, and pays 3500 towards professional tax, then here is how we calculate income tax on salary:

Basic Salary	30000*12	360000
DA	1000*12	12000
EA	2250*12	27000
Gross Salary		399000
Standard deduction		(50,000)
Professional Tax		3500
Net income		345500

His taxable income is around 3,45,500, so he is on the slab of 2.5 lakhs – 5 lakhs of income tax as per the old tax regime. Therefore, he has to pay 5% of his net income as income tax + 4% cess.

Some Tax-Saving Instruments for Salaried People

The frustration of taxes and the way to calculate income tax on salary are common among salaried individuals. To give you a solution for this hassle, here are some of the popular tax-saving instruments for salaried people:

• PPF
  Also known as a public provident fund, it is a very prominent method of investment. Since its launch, PPF has been the preferred method for many salaried individuals, and it is time to consider it as well.
• Section 80 Deductions
  Under section 80 of the Income Tax Act 1961, various deductions are available, which take down the taxable income for the individuals and reduce the tax payable.
• ULIP
  Known as Unit Linked Insurance Plan, it is a hybrid and market-linked investment plan. It offers both savings and protection with a lock-in period of 5 years,

Wrapping Up

Knowing how is income tax calculated is essential for every salaried individual these days. It will help you learn more about tax deductions that will help you save a lot. Therefore, understanding the procedure of tax calculation will also assist you in lowering the tension around your finances.

Frequently Asked Questions

What are section 80 deductions?What are section 80 deductions?

Under section 80 of the Income Tax Act 1961, there are various deductions available, which take down the taxable income for the individuals and reduce the tax which is payable.

What is this tax deducted from my paycheck?

As per the Income Tax Act of 1961, all salaried individuals must pay a certain amount from their salary as a tax to this nation. This certain amount of tax is called income tax.

What is taxable income?

The taxable income in India encompasses different sources of income, which include business income, salary, capital gains, income from house property, and other sources like gifts, dividends, and interests.

Can PPF help with the tax on my salary?

Also known as a public provident fund, it is a very prominent method of investment. Ever since its launch, PPF has been the preferred method for many salaried individuals, and it is time that you consider it as well.