How Do I Calculate My Income Tax in India When I’m New to Salary Components

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People new to a job find it exciting to get their first salary. The trouble begins when they are not able to comprehend the different salary components in India. Owing to this confusion, salaried people often find it hard to calculate their income tax. 

So, how is tax calculated on taxable income in India? To understand this tax calculation, you must be aware of the important salary components in India, and be aware of the various options to grab tax deductions as well.

This post aims to help you calculate tax on your monthly salary in India, so stay tuned and learn the secrets of tax calculation and tax return filing.

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Different Salary Components in a Pay Slip

Let us begin with the main salary components in India that a salaried person gets to see on a pay slip:

  1. Basic Salary: The first and foremost salary component in your pay slip will be the basic salary. It is the total amount of money that the employer agrees to pay the employee excluding extra compensation or pay for overtime.
  2. House Rent Allowance (HRA): House Rent Allowance or HRA is a major part of a salaried person’s salary that is provided by the employer to the employee towards rented accommodation. One can seek income tax deduction based on the total HRA mentioned in the salary slip as per these criteria:  
    • Approx. 50% of the basic salary and Dearness Allowance (DA) in metropolitan cities
    • Approx. 40% of the basic salary and DA in non-metropolitan cities
    • Rent paid subtracted from approx. 10% of the basic salary, DA
  3. Dearness Allowance (DA): Dearness Allowance is provided to the employees by the employer to help them combat any ill effects of inflation. Remember, that DA is completely taxable and it is prevalent in Government jobs and only in a few private sector jobs.
  4. Employee Provident Fund (EPF): As per the EPF Act, the employer, as well as the employee, need to contribute approx. 12% of the basic salary to the Employees Provident Fund per month. These funds are eligible for tax deductions under income tax regulations.
  5. Leave and Travel Allowance (LTA): Leave and Travel Allowance, also known as LTA is a type of tax-saving medium in your salary. Through LTA, a salaried person can seek tax deductions for a tour with family within India. The actual expenses incurred can be claimed for exemption by providing the original bills. Remember, that LTA exemption is available for two such trips with family within four years.
  6. Cost to Company (CTC): Cost to Company or the CTC is the total amount paid by the employer to an employee. It could be paid directly or indirectly. CTC includes all the above-mentioned salary components in India. It is not the actual amount taken home by the employee.

To calculate the CTC, you can use this simple formula:

CTC= Gross Salary + Gratuity + PF

*Gross salary is the total amount after adding the basic salary, overtime pays, and allowance without any tax deductions. 

An Example of Payslip with salary components in India

Salary Components Total Amounts
Basic Salary Rs. 4,00,000
HRA Rs. 1,00,000
DA Rs. 40,000
Medical Insurance Rs. 7,500
Conveyance Allowance Rs. 1,500
PF  Rs. 48,000
Total CTC Rs. 5,97,000
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Understanding Tax Deduction on Salary (TDS)

As a thumb rule, the employer deducts a TDS from the employee’s salary to pay to the Income Tax Department of India. This TDS deduction is done based on the investment declared by the employee at the beginning of the financial year.

Ensure getting the TDS certificate from your employer in June or July every month because this certificate, also known as Form No.16 states the tax deducted and paid to the income tax department. All salaried people need to submit Form No. 16 while filing their tax returns.

1. Standard Deductions

According to the Budget 2023, a salaried employee can seek a maximum standard deduction of Rs. 50,000. This deduction can be availed without showing any documents or bills. But this will be permitted, only if that person opts for the new tax regime.

2. Tax Deductions on Investments for Salaried Individuals

The best way to get tax deductions for salaried people in India comes in the form of term life insurance and similar investment plans. Salaried people can also invest in a ULIP plan, PPF, or similar investments to save taxes under Section 80C up to the investment of Rs. 1,50,000.

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How is Income Tax Calculated on Salary in India

So, coming back to our main query, how is tax calculated on taxable income in India? Follow these steps to calculate tax in Indiafor salaries people:

  1. Collect all your salary pay slips and Form 16 for the current financial year
  2. Include any performance bonus received during the same year
  3. Deduct the allowances and exemptions from your gross salary
  4. Note your net salary
  5. After calculating the net salary, check the tax slabs applicable to your salary
  6. File your tax return

New Income Tax Regime Under Section 115 BAC for General Public below 60 Years of Age

Net Income Income Tax Rate as per the New Regime
Up to Rs. 2.5 lakhs No tax
Rs. 2.5 lakhs – Rs. 5 lakhs 5% of total income exceeding Rs. 2.5 lakhs
Rs. 5 lakhs – Rs. 7.5 lakhs 10% of total income exceeding Rs. 5 lakhs + Rs. 12,500
Rs. 7.5 lakhs – Rs. 10 lakhs 15% of total income exceeding Rs. 7.5 lakhs + Rs. 37,500
Rs. 10 lakhs – Rs. 12.5 lakhs 20% of total income exceeding Rs. 10 lakhs + Rs. 75,000
Rs. 12.5 lakhs – Rs. 15 lakhs 25% of total income exceeding Rs. 12.5 lakhs + Rs. 1,25,000
Over Rs. 15 lakhs 30% of total income exceeding Rs. 15 lakhs + Rs. 1,87,500

New Income Tax Regime Under Section 115 BAC for Senior Citizens 60 Years and Above

Net Income Income Tax Rate as per the New Regime
Up to Rs. 2.5 lakhs No tax
Rs. 2.5 lakhs – Rs. 5 lakhs 5% of total income exceeding Rs. 2.5 lakhs
Rs. 5 lakhs – Rs. 7.5 lakhs 10% of total income exceeding Rs. 5 lakhs + Rs. 12,500
Rs. 7.5 lakhs – Rs. 10 lakhs 15% of total income exceeding Rs. 7.5 lakhs + Rs. 37,500
Rs. 10 lakhs – Rs. 12.5 lakhs 20% of total income exceeding Rs. 10 lakhs + Rs. 75,000
Rs. 12.5 lakhs – Rs. 15 lakhs 25% of total income exceeding Rs. 12.5 lakhs + Rs. 1,25,000
Over Rs. 15 lakhs 30% of total income exceeding Rs. 15 lakhs + Rs. 1,87,500

New Income Tax Slabs for Salaried People in FY 2023-24

Net Income Income Tax Rate as per the New Regime
Up to Rs. 3 lakhs No tax
Rs. 3 lakhs – Rs. 6 lakhs 5% of total income exceeding Rs. 3 lakhs
Rs. 6 lakhs – Rs. 9 lakhs 10% of total income exceeding Rs. 6 lakhs + Rs. 15,000
Rs. 9 lakhs – Rs. 12 lakhs 15% of total income exceeding Rs. 9 lakhs + Rs. 45,000
Rs. 12 lakhs – Rs. 15 lakhs 20% of total income exceeding Rs. 12 lakhs + Rs. 75,000
Over Rs. 15 lakhs 30% of total income exceeding Rs. 15 lakhs + Rs. 1,50,000

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To Sum Up

We assume you just learned how to calculate income tax on monthly salary in IndiaIn case, you still find difficulty in calculating your income tax or filing the tax return, then speak to an insurance specialist.

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FAQs: How Do I Calculate My Income Tax When I'm New to Salary Components

What is a salary slip?  

Every salaried person gets an employee salary slip. It is a document that states the different salary components of an employee. Each employee gets a salary slip each month after getting the salary. 

How is a gross salary different from a net salary?  

The total amount of salary including the basic salary, allowances, and benefits before any deductions is known as the gross salary. Whereas, the net salary is the total amount of money taken home by the employee after the deductions. 

What is the tax rebate for FY 2023-24?  

As per the new income tax regime, the tax rebate for a salaried person in India for FY 2023-24 is Rs. 25,000 for an income up to Rs. 7,00,000.

How to save income tax for a salaried person?  

The following investment options can help you save income tax on your salary:
PPF
ULIP
ELSS
Tax Saving FD
Term Life Insurance Plan

Other Investment Products

Mar 31, 2023
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