How to Calculate Income Tax on Salary with Example

• 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!

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.

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:

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.

Now that we have covered the steps to calculate income tax on salary , here’s an example to help you understand the calculations better.

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