How to calculate Income Tax on your Salary
What is Income tax?
Income Tax is the tax levied on an individual’s income by the government. The tax slabs are decided based on one’s income and age. The amount which is taxed is known as taxable income. Taxable income is the income of an individual minus the tax exemptions, deductions, and rebates.
Steps of calculating income tax
Step 1: Calculate your gross income
First, write down the annual gross salary you get. This particular component includes House Rent Allowances (HRA), Leave Travel Allowance (LTA), and special allowances, like food coupons and mobile reimbursements, etc.
HRA can be claimed only if you live in a rented house and the receipts can be submitted as proof. If you have your own house or live with your parents then HRA is fully taxable. Also, HRA has some tax exemptions as follows:
HRA received from an employer
Actual rent paid less than 10 percent of basic monthly salary
50 percent of basic salary if the taxpayer is living in a metro city.
40 percent of basic salary if the taxpayer is living in a non-metro city.
Next, after this, you need to add income that you might have received from other sources. This could be rental income, interest earned from deposits, capital gains you might have received, etc. The amount you arrive at is your gross
Step 2: Arrive at your net taxable income by removing deductions
Tax deductions will help you in reducing the taxable income further by investing, saving, or spending on certain items.
Under section 80C, which is the biggest pool for a deduction, you can claim up to Rs. 1.5 lakh deduction for various investments and expenditures. If you’re investing money in NPS, you can claim another Rs. 50,000 deduction under Section 80CCD(1B), which is over and above the Rs. 1.5 lakh limit under Section 80C. Apart from this if you have paid the premium for the health insurance policy of your family then you can claim that amount as a deduction under Section 80D. In the case of a home loan, the interest portion for the EMI paid for the financial year can be claimed as a deduction, up to a maximum of RS. 2 lakh, under section 24. Again this is over and above the deduction on the principal amount under Section 80C.
Step 3: Arriving at your net taxable income
By subtracting all the eligible deductions from the gross taxable income, you will find out your total income on which you will have to pay tax basis on your tax slab.
Tax rates are applicable on the basis of age and income, therefore the slab rate is different for different citizens.
Step 4: Calculate your taxes
Now, one pays tax on his/her net taxable income.
For the first Rs. 2.5 lakh of your taxable income you pay zero tax
For the next Rs. 2.5 lakhs you pay 5% i.e. Rs 12,500
For the next 5 lakhs you pay 20% i.e. Rs 1,00,000
For your taxable income part which exceeds Rs. 10 lakhs you pay 30% on entire amount
Step 5: Consolidate your net tax
Rebate under Sec 87A: Tax rebate is a form of tax incentive provided by the government to individuals who earn an income below a specified limit. For example, if your total taxable income after deductions doesn’t exceed Rs. 5 lakh you can claim a rebate under sec 87A of Rs. 12,500.
Now if your taxable income is more than Rs. 5 lakh, you can add the health and education cess of 4 percent of your tax amount to see the final amount you will pay. For people who are in the high-earning bracket i.e., between Rs. 50 lakh and Rs. 1 crore, they need to pay a surcharge of 10 percent. And, for income between Rs. 1 and Rs. 2 crores the surcharge amount further increases and stands at 20 percent.
