While you might be paying income tax every year, do you really know how is it calculated? After all, it is a significant portion of your salary, and it is essential to know whether you are paying it correctly. So, how is the income tax calculated on an individual's salary?

The tax amount depends on the tax slab you fall under and your total taxable income. Once you know the total tax amount, TDS, TCS or Advance Tax that you have already paid can be deducted from this tax amount to know your tax liability.

Let us have a quick look at how to calculate income tax on salary-

1. Knowing Your Tax Slab

There are multiple tax slabs for salaried employees up to 60 years, between 60 to 80 years, and above 80 years.

For instance, if you are a salaried employee under 60 years, the slab breakup is as follows-
  • Taxable salary up to Rs. 2.5 Lacs (L) in a Year - NIL
  • Taxable salary between Rs. 2.5-5.0L in a Year - 5%
  • Taxable salary between Rs. 5.0-10.0L in a Year - 20%
  • Taxable salary above Rs. 10.0L in a Year - 30%

Additional cess of 4% will also be added over and above the tax slab rate.

2. Calculate Your Taxable Income

The next step of how to calculate income tax in India is knowing your taxable income. Your total salary is calculated by adding your basic salary, house rent allowance (HRA), transport allowance, special allowance, and any other type of allowance you might be receiving from your employer.

3. Account for Deductions and TDS

The 3rd step would be to account for deductions that you are eligible for. While there are many sections under which you are eligible to claim deductions, some of the most important ones are
  • 80C - Investments
  • 80CCC - Insurance Premiums
  • 80CCD - Pension Contributions
  • 80GG - House Rent
  • 80TTA - Interest on Savings Account
  • Others - such as 80E, 80EE, etc.

3. Calculate Income Tax

Once you know your tax slab and the total taxable income, simply divide the tax rate by 100 and multiply the same with your taxable income to know your total income tax liability. To make the calculation easier, you can use an income tax calculator too.

It is essential to know that if you fall under the Rs. 2.5 to 5L tax slab, you are not required to pay any tax on up to Rs. 2.5L as this amount is exempt from tax payment. So, the 5% tax will apply to the amount above Rs. 2.5L and not on the total income. This rule applies to all the tax slabs.

Calculating income tax is not as complicated as one would imagine. Now that you know how to calculate income tax, try the manual calculation or use an online calculator to know your exact tax liability.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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