6 min read
Updated on Apr 27, 2023
Words like tax savings, tax exemptions, tax rebate and, tax deductions are commonly heard while filing for income tax returns. Though most people are well-versed with these words, not everyone knows how they work in actually saving them money. Let us discuss, in this post, how to calculate income tax on salary with an example so that you can save enough on tax the next time you pay tax.
Income tax is a tax or duty levied by the government on the income of an individual. An ‘individual’ in this context can be a person, trust, cooperative societies as well as Hindu Undivided Family (HUF). Tax on one’s income is deducted in terms of the age and income of the individual.
When we talk about taxable income, it is the total income of an individual that remains after deducting the taxes and rebates etc. These deductions are important variables because based on them the income tax that you pay on your salary is determined. However, many people find these calculations somewhat complicated. So, let’s take a look at how to calculate income tax on salary to understand it in simple easy steps.
Tax is calculated by a simple multiplication of tax rates with your taxable income. The process requires a person to go step wise starting from calculating your gross salary first. From the gross salary you must calculate various exemptions and deductions. What you will receive is the tax payable amount, which is obtained by deducting tax already paid.
As discussed above, the first step is to compute your annual gross income including each constituent of your salary. These include the HRA or House Rent Allowance, LTA or Leave Travel Allowance, along with other special allowances received on food, mobile compensations etc.
Once you get the gross salary, consider the various exceptions offered on the various components of your salary. HRA and LTA may offer major tax saving options.
HRA, however, can be claimed in case the taxpayer lives in a rented accommodation. You have to submit proof of valid rent receipts for the same. While submitting the rent receipt to claim the HRA benefit, you have to attach a revenue stamp (signed by your landlord).
However, if you have a house of your own or if you are living in your parental house, your HRA will be taxable entirely.
Further, HRA tax exemption is considered lowest of the below amounts:
HRA offered by your employer
Original rent amount is 10% less than basic monthly salary
In case, taxpayer lives in metro city the HRA is 50% of the basic salary
If the taxpayer lives in a non-metro city, the HRA is 40% of the basic salary
These calculations seem very tricky if done with the help of pen and paper. However, the availability of online HRA calculators makes it easy for taxpayers to calculate HRA with ease these days. Once you get the amount using the online tool, deduct INR 50, 000, the standard deduction that every salaried person is entitled to. The amount that is remaining is the net salary amount.
Now, you can add money earned from any other source, such as rental property, deposits, or capital gains etc. This will give you your total gross income.
In the second step, you can consider the tax saving options to further lower your taxable income. These deductions are available in the form of investments done under various sections of income tax.
There are many options available under Section 80C which can be availed to claim over INR 1.5 lakh on deductions. Some such options include, ELSS Mutual Funds, EPF, PPF, Sukanya Smriddhi Yojana, and term insurance premiums etc. Also, if you have a home loan, that can also be considered. Your EPF also comes into this category.
Once you deduct all the eligible exemptions in your case from the gross salary, you get the total income amount which is taxable based on your tax slab as seen in the table below.
|Income tax range||Income tax rate||Tax slab before rebate|
|Up to ₹ 2,50,000||Nil||Nil|
|₹ 2,50,000 – ₹ 5,00,000||5%||INR 12, 500|
|₹ 5,00,000 – ₹ 10,00,000||20%||INR 1 lakh|
|Above ₹ 10,00,000||30%||INR 2,62,500 (for net income INR 15 lakh and above)|
In the case of senior citizens, the slab rates mentioned above are different. If you are 60 years and above, you pay nil tax on net income of up to INR 3 lakh. For super senior citizens above the age of 80 years can have nil tax on income up to INR 5 lakh.
As already discussed, a person pays tax on his/her net taxable income.
As mentioned in the table above,
Further rebate is available under Sec 87A, which is a type of tax incentive offered by the government to people who earn an Income below a particular limit. If the total taxable income of an individual doesn’t go beyond INR 5 lakh even after deduction, they can ask for a rebate of INR 12,500 from the government under Sec 87A.
Further, one can also add 4% education and health cess if the taxable income is beyond INR 5 lakh. On the other hand, very high earning individuals who come within the income bracket of INR 50 lakh to INR 1 crore have to pay a 10% surcharge too, which goes to 20% in case the income is between INR 1 to INR 2 crore.
To Sum Up
As seen in the post above, tax deductions aid people in saving a lot of money. By using the various tax deduction avenues, you can achieve the required deduction amount and reduce your stress related to your finances as well.
Further, for tax deductions on INR 10 lakh and above, you can read our post on how to calculate income tax on salary above 10 lakhs.
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No, the income tax calculator does not compute the TDS or Tax Deducted at Source. However, it calculates your tax liability for the assessment year.
All taxpayers or people who are eligible to pay their income tax can use this calculator.
The formula to calculate TDS is Average Income Tax Rate = Income Tax Payable (computed with slab rates)/ Estimated income for the financial year.
Your tax is calculated on your net salary. Your net salary is the difference between the gross salary and the other deductions and exemptions.
No, you do not have to pay anything for using the tax calculator facility. It is available free online.
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