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Key Highlights
- Income tax is levied as per the Income Tax Act on your taxable income, which is derived by reducing exemptions, deductions, and rebates.
- Before you calculate income tax on salary, you should know that you can opt for the old tax regime or the new tax regime. Both regimes have different tax slabs.
- Once you calculate income tax on salary in India under both regimes, you will realise that the new regime has lower tax rates but limited deductions/exemptions.
Every financial year, income tax is deducted from your salary income. While the income tax calculation process may seem complicated at first, it is straightforward with well-defined steps.
This blog explains how you can calculate income tax on salary through an example to help you understand the calculation better.Let's begin!
What Is Income Tax and Taxable Income?
Before learning how to calculate income tax on salary in India, let’s understand what is income tax and taxable income.Income tax is a tax levied on:
- Individual
- HUF (Hindu Undivided Family)
- Company
- Cooperative society
- Trust.
The income tax is levied as per the Income Tax Act on taxable income, which is derived by deducting tax exemptions, deductions, and rebates from the total income.
How to Calculate Income Tax on Salary?
To calculate income tax on salary, your tax liability depends on your income, deductions, exemptions and applicable tax slabs. You have the option to calculate and pay tax under the old or new tax regime.The tax slabs and income tax rates differ under both these regimes. When compared, the new regime has lower tax rates but limited deductions and exemptions.Let’s find out how you can calculate income tax on salary in India.
Step 1: Determine Your Gross Income
To calculate income tax on salary in India, start by calculating your gross income. Here's how you can determine your gross income:
- Determine Your Gross Salary . It comprises HRA (House Rent Allowance), LTA (Leave Travel Allowance), and special allowances (mobile reimbursements, food coupons, etc.) among others.
- Reduce exemptions from the gross salary amount , such as HRA and LTA, and ensure that the necessary supporting documents are available.
- In the case of exempted HRA calculation , the exempted amount is the least or minimum value of the following:
- Actual HRA received, or
- Actual rent paid minus 10% of salary, or
- 50% of salary in case of metro cities/40% of salary in case of non-metro cities
(Metro cities include Mumbai, Delhi, Kolkata, and Chennai) Note: Salary refers to the sum of basic salary, DA (Dearness Allowance), and any other commissions as applicable.
- Next, remove the standard deduction of ₹50,000to arrive at the net salary amount.
Note : In the case of the new regime, the standard deduction is ₹75,000.
- Finally, add your income from other sources, such as rental income, interest earnings, capital gains, etc. to determine your gross total income.
Step 2: Remove Applicable Deductions and Rebate Under Section 87A
Your net taxable income is derived by simply deducting the applicable deductions from your gross total income. Here are a few points for your consideration:
- Claim deductions under section 80C up to ₹1.50 lakh . Some examples of investments eligible for deductions include:
- PPF (Public Provident Fund)
- ELSS (Equity-Linked Savings Scheme)
Additionally, you can deduct the applicable NPS (National Pension Scheme) amount.
- Likewise, other applicable deductions help you reduce your taxable income. Here is where your financial consultant can guide you better.
- Also, as stated above, the deductions are limited in the case of the new tax regime. Speak to your financial consultant to understand this better.
- If you have opted for the old tax regime and your taxable income is up to ₹5,00,000, you can claim a rebate of up to ₹12,500 under section 87A.
- In the case of the new tax regime, you can claim a rebate of up to ₹25,000, where your taxable income is up to ₹7,00,000.
Step 3: Calculate Your Taxes Basis Your Income Tax Slab
Once you know your net taxable income, you can calculate income tax on salary in India based on your income tax slab. Here are the tax slabs for your reference:
| FY 2024-25 (AY 2025-26) | |||
| Individuals (Resident or Non-Resident) below 60 years of age | |||
| Old Tax Regime | New Tax Regime | ||
| Income | Rate | Income | Rate |
| Up to ₹250,000 | Nil | Up to ₹300,000 | Nil |
| ₹250,001 - ₹500,000 | 5% | ₹300,001 - ₹700,000 | 5% |
| ₹500,001 - ₹1,000,000 | 20% | ₹700,001 - ₹1,000,000 | 10% |
| Above ₹1,000,000 | 30% | ₹1,000,001 - ₹1,200,000 | 15% |
| ₹1,200,001 - ₹1,500,000 | 20% | ||
| Above ₹1,500,000 | 30% | ||
Note: You need to add a health and education cess at 4% to the income tax liability. Also, you need to add a surcharge if your income exceeds a certain limit.
| FY 2024-25 (AY 2025-26) | |||
| Surcharge | |||
| Old Tax Regime | New Tax Regime | ||
| Income | Rate | Income | Rate |
| Up to ₹50 Lakh | Nil | Up to ₹50 Lakh | Nil |
| Above ₹50 lakh and up to ₹1 crore | 10% | Above ₹50 lakh and up to ₹1 crore | 10% |
| Above ₹1 crore and up to ₹2 crore | 15% | Above ₹1 crore and up to ₹2 crore | 15% |
| Above ₹2 crore and up to ₹5 crore | 25% | Above ₹2 crore | 25% |
| Above ₹5 crore | 37% | ||
Example of How to Calculate Income Tax on Salary
Now that we have covered the steps to calculate income tax on salary , here’s an example to help you understand the calculations better.
| Old Tax Regime - Example | ||
| Particulars | Amount in ₹ | Amount in ₹ |
| Taxable Income from Salary (After Applicable Deductions and Exemptions) | 1,600,000 | |
| Add: Taxable Income from Other Sources | 100,000 | |
| Gross Total Income | 1,700,000 | |
| Less: Deduction under section 80C - PPF, ELSS, etc. | 150,000 | |
| Less: Deductions under section 80 CCD(1b) - NPS | 50,000 | |
| Less: Deductions under section 80D - Medical Insurance Premium | 25,000 | 225,000 |
| Net Taxable Income | 1,475,000 | |
| Tax up to ₹250,000 @Nil | - | |
| Tax above ₹250,000 and up to ₹500,000 @5% | 12,500 | |
| Tax above ₹500,000 and up to ₹1,000,000 @20% | 100,000 | |
| Tax above ₹1,000,000 @30% | 142,500 | 255,000 |
| Add: Education and Health Cess @4% | 10,200 | |
| Add: Surcharge (Not Applicable in this case) | - | |
| Total Tax Payable | 265,200 | |
| New Tax Regime - Example | ||
| Particulars | Amount in ₹ | Amount in ₹ |
| Taxable Income from Salary (After Applicable Deductions and Exemptions) | 1,575,000 | |
| Add: Taxable Income from Other Sources | 150,000 | |
| Gross Total Income | 1,725,000 | |
| Less: Deductions under section 80CCD (2) - Employer Contribution to NPS | 100,000 | |
| Net Taxable Income | 1,625,000 | |
| Tax up to ₹3,00,000 @ Nil | - | |
| Tax above ₹300,000 and up to ₹700,000 @5% | 20,000 | |
| Tax above ₹700,000 and up to ₹1,000,000 @10% | 30,000 | |
| Tax above ₹1,000,000 and up to ₹1,200,000 @15% | 30,000 | |
| Tax above ₹1,200,000 and up to ₹1,500,000 @20% | 60,000 | |
| Tax above ₹1,500,000 @30% | 37,500 | 177,500 |
| Add: Education and Health Cess @4% | 7,100 | |
| Add: Surcharge (Not Applicable in this case) | - | |
| Total Tax Payable | 184,600 | |
Calculate Income Tax on Salary to Optimise Tax Planning
Once you are able to calculate income tax on salary in India, you can get a better understanding of your tax liability. You'll be able to plan your strategies and maximise your tax savings.You can also consider getting assistance on tax planning from Aditya Birla Capital to save tax and build wealth over the long term. Also Read: Difference between CTC vs Gross Salary vs In-hand Salary
FAQS - FREQUENTLY ASKED QUESTIONS
Which tax regime is best for calculating income tax on salary?
To calculate income tax on salary, you can opt for either the old or the new tax regime.
Does the tax regime impact tax calculation?
You can calculate income tax on salary using the new tax regime. The tax rates are lower in the new regime but it has limited deductions and exemptions.
How to determine my gross salary to calculate income tax on salary?
To calculate income tax on salary you need to start with your gross salary. It comprises HRA, LTA, special allowance (for example, mobile reimbursements and food coupons), etc.
What is the standard deduction amount before I calculate income tax on salary?
Before you calculate income tax on salary, you may note the standard deduction amount to be ₹50,000 for the old tax regime and ₹75,000 for the new tax regime.
I will calculate income tax on salary as per the old tax regime. What are some examples of deduction under section 80C?
You can calculate income tax on salary as per the old tax regime and reduce deductions under section 80C. PPF and ELSS are examples of deductions under this section.
I am confused about the eligible deductions and the tax regime. What should I do?
If you want to calculate income tax on salary in India and are confused about the eligible deductions and tax regime, you may seek the guidance of a tax expert.
I want to calculate income tax on salary in India. How can I confirm if the tax amount is correct?
Once you calculate income tax on salary in India, you can verify your calculations with the tax calculator on the official website of the Income Tax Department.
Why is it important to calculate income tax on salary in India?
It is important to calculate income tax on salary in India to understand your tax liabilities and optimise your tax savings.
What factors should I consider to calculate income tax on salary in India?
To calculate income tax on salary in India, make sure you select the right tax regime, consider all applicable deductions, and calculate your tax figures accurately.
What are the common mistakes to avoid to calculate income tax on salary in India?
To calculate income tax on salary in India, avoid rough estimates and use precise figures to determine your correct tax liability.
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.
