How To Calculate Income Tax On Salary With Example

How income tax is calculated is a serious concern for every salaried taxpayer. This is mainly because a significant portion of your salary is deducted before you receive it.

While paying income tax is compulsory, the Income Tax Act 1961 and the recent amendments allow for various tax benefits that reduce your tax liability.

It is necessary to understand how to calculate income tax on salary to best use tax benefits. Here is a simple guide to help you understand how to calculate tax on salary with an example.

How to Calculate Income Tax on Salary?

Step 1: Determine Gross Salary

The first step is to determine your gross salary. Gross salary refers to your total salary, which includes various salary components. The salary components can vary across different organisations.

Key Components of  Salary Income

Step 2: Determine Gross Total Income

Determine the gross total income by adding your other sources of income to the gross salary. Here are some of the most common sources of income other than income from salary.

Sources of Income and Categories of Income Tax

• Income from House Property
• Interest Income
• Rental Income
• Income from Business or Profession
• Income from Capital Gains
• Dividends

Step 3: Apply the Standard Deduction and Exemptions

A standard deduction of ₹50,000 (old tax regime) and ₹75,000 (new tax regime) applies.

Some of your salary components will qualify for a tax exemption. This means that the allowance or the applicable amount will be subtracted from your gross salary to determine your taxable income.

However, it depends on your choice of the tax regime.

Step 4: Apply Deductions

After allowing possible exemptions, you can further reduce your taxable income by allowing standard deductions and some of your expenses.

For example, payments made to a wide range of savings and investment plans, such as ELSS funds, life insurance, PPF, SCSS and NPS, qualify for a tax deduction under Section 80C of the Income Tax Act.

Step 5: Determine Taxable Income

Subtract the allowable exemptions and applicable deductions to calculate your taxable income.

Step 6: Apply Income Tax Rate

Income tax slabs define the different income ranges and their corresponding income tax rates. It is different for the old and new tax regimes. You need to apply the applicable income tax rate to your taxable income to calculate your income tax liability.

Now, you have the option to decide between the old and new tax regimes to determine how income tax is calculated. While the old tax regime allows various exemptions and deductions, the new tax regime offers a lower income tax rate for the various slabs.

Compare the old tax regime vs new tax regime to make a well-informed decision.

Note: Starting FY 2023-24, the new tax regime is the default option. However, you can switch to the old tax regime, if applicable, to determine how income tax is calculated and lower your tax liability.

Step 7: Apply Rebate, Cess and Surcharge if Applicable

Apply the rebate, cess and surcharge applicable to the income tax payable to determine the actual income tax amount that you are liable to pay for the financial year.

Rebate - Section 87A

• New Tax Regime- A tax rebate of up to the income tax payable or ₹25,000, whichever is lower, is applicable to taxpayers with a taxable income of up to ₹7 lakhs.
• Old Tax Regime- A tax rebate of up to the income tax payable or ₹12,500, whichever is lower, is applicable to taxpayers with a taxable income of up to ₹5 lakhs.

Cess

A cess at the rate of 4% of the income tax payable is applicable to eligible taxpayers.

Surcharge

A surcharge is an additional tax charged to taxpayers with a higher income. The surcharge rate is applied to the income tax payable.

Income Tax Slabs for the New Tax Regime and Old Tax Regime

New Tax Regime Slabs

Old Tax Regime Slabs

● For Taxpayers Under 60 Years Of Age

● For Senior Citizens

● For Super Senior Citizens

How to Calculate Income Tax on Salary with Example?

Let us consider Mr Rahul, an IT professional residing in Mumbai.

Below are the details of his salary, allowances, income from other sources and payments made towards specific savings and investment plans. In addition, he pays a monthly rent of ₹25,000.

Now, let us understand how income tax is calculated.

Step 1: Determine Gross Total Income

Step 2: Apply the Standard Deduction and Exemptions

Step 3: Apply Deductions

Let us calculate deductions applicable under Section 80C.

Now, let us determine taxable income after applicable deductions.

Step 4: Apply Income Tax Slabs

Tax Calculation as per the Old Tax Regime

Tax Calculation as per the New Regime

Step 5: Determine Total Income Tax Liability

If these calculations appear difficult to understand, you can always use an income tax calculator.

How Do You Calculate Tax On Salary with the Income Tax Calculator?

An income tax calculator is a free online tool that helps you determine how income tax is calculated according to the old and new tax regimes.

Steps to use the Income Tax Calculator

• Visit the official website for e-filing by the Income Tax Department, Government of India.
• From the “Quick Links” section on the left-hand side, click on “Income Tax Calculator”.
• Choose between the Basic and Advance Calculator. Advance Calculator is highly recommended to determine how income tax is calculated on salary.
• Provide all the necessary information, such as income and allowable deductions.
• Your total income tax amount payable will be calculated and displayed at the end of the page.

Tax Exemptions and Deductions Applicable to Salaried Taxpayers

A wide range of allowances and expenses qualify for tax exemptions and deductions. However, the maximum allowable limit is based on the specific terms and conditions.

Also, the applicability depends on the choice of tax regime. Therefore, it is important to understand each of the tax provisions before applying it to your income.

Here are some of the most common exemptions and deductions.

Tax Exemptions

• House Rent Allowance
• Leave Travel Allowance
• Other allowances, such as Food Allowance
• Exemption applicable to gifts
• Exemption applicable to Leave Encashment
• Exemption applicable to Gratuity
• Daily Allowance
• Conveyance Allowance

Tax Deductions

How to Save Income Tax?

Maximise Tax Exemption ​and Deduction Benefits- 

We have seen t​hat various expenses and payments made to savings and investment plans qualify for tax exemption and deduction benefits.

If you are interested in​​ disciplined savings and investment benefits, you can make use of those options. They will help in maximising your tax benefits while also ensuring future financial security.

Choose In​vestments Wisely- 

Understand the tax pr​​ovisions applicable to the individual investment options and make use of them wisely. For instance, Section 80C allows a deduction of up to ₹1,50,000. However, it is applicable to a wide range of savings and investment plans.​

On the other hand, Section 80​​D offers a tax deduction benefit* of up to ₹1,00,000 exclusively for health insurance premiums. While you save on tax, you will also ensure financial security by covering various unexpected medical expenses.

You can buy ​health insurance plans from Reliance General Insurance to ensure extensive and customised coverage for medical expenses at an affordable premium.

Choose the Right Tax R​​egime- 

Both the old and ​new tax regimes have their advantages and disadvantages.​

It is important to weigh the pros and cons of each of them based on your circumstances to identify the better option that will reduce your income tax liability.

Tax deductions and exemptions do not always help you reduce your income tax liability under the old tax regime.

Calculate the income tax liability or use the Income Tax Calculator to determine how income tax is calculated under both regimes to choose the better option.

Key Components of Income Tax and Terminologies that You Should Know

Frequently Asked Questions About How Tax is Calculated on Salary

1. How to calculate income tax on salary for 8 lakhs?

You can calculate income tax on salary using the steps detailed on this page or use the Income Tax Calculator.

2. What are the benefits of using the income tax calculator?
   1. Provides an accurate value.
   2. Reduces the risk of human errors.
   3. Easy to understand and convenient to use.
   4. Helps in comparing income tax under the old and new tax regime
   5. Helps in making well-informed decisions
3. What is the maximum exemption limit for income under income tax?

The maximum exemption limit under the old tax regime is,

• ₹2.5 lakhs for individuals less than 60 years of age,
• ₹3 lakhs for individuals between 60 and 80 years of age, and
• ₹5 lakhs for individuals above 80 years of age.

The maximum exemption limit under the new tax regime is ₹7 lakhs, regardless of age.

4. Old versus new tax regime, which is a better option?

The better option among the two will depend on your income, payments made towards savings and investment plans applicable to deductions and your financial goals.

You can compare the old tax regime vs new tax regime and also use the Income Tax Calculator to determine the income tax payable under both the tax regimes to choose the better option.

5. What is the gross salary?

Gross salary refers to your actual income from salary before allowing for any exemptions or deductions. It is your basic salary plus allowances and additional payments received.

6. Is income tax calculated on the gross salary?

No, income tax is determined and calculated on the net salary determined by subtracting applicable exemptions and deductions on the gross salary.

7. Can I use the income tax calculator if I have income from multiple sources?

Yes, you can use the online income tax calculator to input details of all your different sources of income to determine the income tax payable.

8. How is income tax deducted from salary?

Income tax is deducted from your salary income by your employer every month and paid to the Income Tax Department. It is referred to as the Tax Deducted at Source (TDS).

9. What should I do if the TDS exceeds my actual income tax liability?

If your TDS exceeds your actual income tax liability, you can claim a tax refund while filing your Income Tax Return (ITR).

10. What is the difference between the old and the new tax regime?

The new tax regime provides lower tax rates for the various income tax slabs and allows only a few exemptions and deductions. It is the default tax regime from FY 2023-24.

On the other hand, the old tax regime offers higher rates on the income tax slabs but allows for a wide range of exemptions and deductions.

Disclaimers:

*T&C Apply. For more details on risk factors, terms conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.

Tax benefits are subject to conditions under the Income Tax Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.