Guide on How to Calculate Income Tax on Salary: Learn with Example

While the Indian Government’s website offers an online calculator where people can calculate tax online, it is important to know how to calculate it on your own. It helps understand what part of a salary is taxable and what is exempt. Also, the assessee can claim the deduction allowed under the Income Tax Act to reduce the taxable income further.

Details of how to calculate income tax on salary, considerations taken under it, and applicable tax slab are mentioned below. It applies to all employees, i.e., individuals working as a salaried employee in a corporation or organization.

What Is Income from Salary?

Income from salary is the compensation employees receive in return for the service provided. However, the income tax department counts it as ‘income from salary’ only if the relationship between payer and receiver is that of an employer and employee. Typically, it includes basic salary, allowance, commission, bonus, and fees. Further classification is mentioned below.

What Components of Salary Form Part of Tax Calculation?

The following components form part of the salary required during the computation of income from salary. While some are exempt, others are taxable under the Income Tax Act 1961:

House Rent Allowance (HRA)

House Rent Allowance (HRA) is a part of the salary employers provide to employees to compensate for their expenses incurred against rent accommodation. 

Leave Travel Allowance (LTA)

Leave Travel Allowance (LTA) is the amount employers provide to their employees to make up for their expenses incurred in travelling while on leave.

Special Allowance

It is the amount employers pay to employees for various reasons but mainly to compensate for expenses incurred while performing work duty.

Terms to Know While Calculating Income Tax

Below are a few basic terminologies individuals use while calculating income tax:

Tax Year

Tax year or financial year is the year for which the assessee is calculating tax. This period starts on April 1 and ends next year on March 31. So, while calculating income tax on salary, one needs to take the total salary earned during this period.

Assessment Year

The assessment year is different from the financial year. It is the year that comes after the financial year. This means it is the year in which taxpayers calculate their taxes. So, if you need to calculate the tax for the financial year 2020-21, its assessment year will be 2021-22. 

Salary Breakup

Salary breakup is another important component you must know about to calculate the right income tax on salary. Employees can find it in detail in their salary slips and contains information on HRA, DA, PF, etc.

Taxable Income

Taxable income is the amount on which an individual needs to pay tax. It does not only include income from salary but many other mediums like income from property, income from gain, income from other sources, and income from business or profession.

Deductions

The deduction is an expense that can be subtracted from your taxable income to reduce the tax liability. Deductions are mainly available under Section 80 to promote savings and other specific expenditures among individuals.

Income Tax Slab Under New Regime 

To calculate tax, individuals need to follow a tax slab structure set by the income tax department of India. For example, the rate of tax applicable on different salary slabs under the new regime is as follows:

Income Tax SlabTax Rate
Up to ₹ 2.5 LakhNil
₹ 2.5 Lakh to ₹ 5 Lakh5% above ₹ 5 Lakh
₹ 5 Lakh to ₹ 7.5 Lakh₹ 12,500 + 10% above ₹ 5,00,000
₹ 7.5 Lakh to ₹ 10 Lakh₹ 37,500 + 15% above ₹ 7,50,000
₹ 10 Lakh to ₹ 12.50 Lakh₹ 75,000 + 20% above ₹ 10,00,000
₹ 12.50 Lakh to ₹ 15 Lakh₹ 1,25,000 + 25% above ₹ 12,50,000
More than ₹ 15 Lakh₹ 1,87,500 + 30% above ₹ 15,00,000

Exemptions and Deductions Available Under Section 80

While there is an advantage of reduced tax rates under the new tax regime, taxpayers will have to forgo certain deductions previously available in the existing tax regime. The exemptions and deductions now available under the new tax regime are:

  • Conveyance allowance to compensate for expenses incurred for travel to work
  • Transport allowance provided to specially-abled people
  • Deductions available under Section 80CCD(2) for investment in Notified Pension Scheme
  • Deductions available under Section 80JJA for employment of a new employee
  • Any allowance provided for travelling on transfer or for employment

How to Calculate Income Tax on Salary?

Income from salary is the sum-total of basic salary, house rent allowance, special allowance, transport allowance and other allowance. The process to calculate tax on this salary income is explained with an example below. However, you can also use the income tax calculator 2022-23 online for the same.

Here we are calculating income tax on Neha’s salary for the FY 2022-23. The details required for calculation are as below:

  • Basic Salary: ₹ 1 lakh per month
  • HRA: ₹ 40,000 per month
  • Special Allowance: ₹ 20,000 per month
  • Leave Travel Allowance: ₹ 20,000 in a year
  • Investment in Notified Pension Scheme: ₹ 10,000
ParticularsAmount in ₹
Basic Salary12,00,000
HRA4,80,000
Special Allowance2,40,000
Leave Travel Allowance20,000
Gross Total Income from Salary19,40,000
Deductions:
Investment in NPS u/s 80 CCD (2)(10,000)
Taxable Income19,30,000

Under the new tax regime, she will fall under the tax slab of 15 lakh and above. 

So taxes payable will be 1,87,500 + 30% above ₹ 15,00,000. So it is   1,87,500 + 1,29,000 = 3,16,500. On top of that, we have to add a 4% sess on the income tax amount. So, the total tax liability of Neha will be ₹ 3,29,160. 

Here we have taken an example to calculate taxes on your salary. If you have any source of income other than salary, then you need to disclose it and add that income in the calculation of the gross taxable income.

Final Word

For proper tax calculation, taxpayers must correctly declare income from all sources, investments made, and expenses paid. Also, one can find the process of how calculating income tax on salary fixed under the Income Tax Act above. It is important to follow the correct process because assessees can attract penalties and imprisonment if they are found hiding income and evading taxes.

Frequently Asked Questions

What exemptions and deductions are not allowed under the new tax regime?

Except for deduction u/s 80CCD (2) which will be applicable for New Tax Regime as well, almost all other exemptions and deductions including Section 80C are not allowed in the new tax regime.

Does every individual need to file an income tax return?

No. If an individual’s income falls below the basic exemption limit, he or she is not required to file an income tax return. Moreover, those whose incomes are below 2.5 Lakh but need to claim income tax rebate can only claim it by filing ITR. For others, it is mandatory to file ITR.

What happens if you do not file your income tax return?

If you do not file your income tax return within the last filing date, the IT department will send you a notice and charge interest until you pay the tax amount. Also, you will not receive any refund for filing a belated return. Moreover, it should be within the specified period.

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