How to Calculate Income Tax

Taxable income can be calculated by totaling the income received from various sources and subtracting any deductions or exemptions available. It is important to further calculate the tax liability of individuals, which they must pay to the Central government. 

Presently, individuals can choose whether they want to follow the new tax regime or the old one to calculate Income Tax. The details of how to calculate taxable income are provided below. 

What Is Taxable Income?

It is the amount individuals or organisations make every year upon which the Central government of India charges a tax percentage. However, how much tax will be levied depends on whether the assessee is an individual, HUF, company, Body of Individuals, local authority, or a firm. 

Also, while calculating, one has to apply the right slab rate for the income earned. The different types of income can be a commission, wages, salaries, tips, bonuses, and others.

Different Sources of Income Considered for Calculation of Taxable Income

The Income Tax Department, for the sake of easy understanding, breaks down sources of income under five heads:

1. Income from Salary: It includes income earned in the face of salary or pension.
2. Income from Business or Profession: This head includes profit made by businesses, self-employed entrepreneurs, freelancers or contractors. In addition, it also counts the income of professionals who use their skill to earn money. For example, it includes chartered accountants, insurance agents, lawyers, doctors, tuition teachers, etc. 
3. Income from Capital Gains: This is the profit earned from selling a capital asset like shares, mutual funds, house property, etc. 
4. Income from House Property: It includes income earned by renting a house property.
5. Income from Other Sources: Other sources include income such as interest on bank saving accounts, winning the lottery, and fixed deposits.

Income Tax Slabs & Rates under Old Regime for AY 2022-23

In the old tax regime, the government only dedicated three slab rates to different income brackets. Additionally, certain deductions and exemptions are only available in the old regime. Details are as below to avoid confusion:

The deductions and exemptions under the old regime are as follows –

• Leave Travel Allowance
• Conveyance Allowance
• House Rent Allowance
• Relocation Allowance
• Daily expenses in the course of employment
• Children Education Allowance
• Helper Allowance
• Professional Tax
• Standard Deduction on salary
• Other Special Allowance available u/s 10(14)
• Interest on housing loan u/s 24
• Deductions under chapter VI-A (80C, 80D, 80E and other) except Section CCD (2)
• Standard deduction of ₹ 50,000

Income Tax Slabs & Rates under New Regime for AY 2022-23

The following are the details of the Income Tax slab 2022-23, applicable rates, deductions and exemptions available:

The deductions and exemptions available under new regime are:

• Conveyance Allowance to cover expenses of traveling to work.
• Transport Allowance available to specially-abled people.
• Deductions that are available for employing new workers u/s 80JJAA.
• Investment made in NPS or National Pension Scheme u/s 80CCD (2).
• Depreciation considered under Section 32, excluding additional depreciation.
• Allowance for traveling on transfer or employment.

How to Calculate Income Tax?

The Government of India provides an online Income Tax calculator, which individuals can use. However, if one wants to calculate Income Tax manually, the sequence is as follows:

Step 1: Calculate Gross Total Income

Gross total income comes by adding income from all the five heads mentioned above. 

Step 2: Consider All Exemptions and Deductions

Now write down the exemptions, deductions and allowances applicable to the regime you are following. 

Step 3: Calculate Net Taxable Income

Net taxable income is the amount you get after deducting these exemptions, deductions and allowances from gross income. This is also the amount on which you calculate tax payable. 

Step 4: Calculate Tax Payable

Consider the different Income Tax slabs and rates to find the tax payable. Next, deduct the tax already paid in the financial year by considering TDS, self-assessment tax, and advance tax. This will bring out your net tax payable.

Example: How to Calculate Income Tax

It is the calculation of the tax liability of a salaried individual Mr. X living in Delhi:

• Basic Salary: ₹ 70,000 per month
• HRA: ₹ 20,000 per month
• Special Allowance: ₹ 15,000 per month
• Leave Travel Allowance: ₹ 30,000
• Rent Paid by Mr X: ₹ 40,000
• Actual Leave Travel Expense: ₹ 15,000

1. Calculation of gross total income from salary:

Mr. X has made the following investments to save tax:

• PPF Investment: ₹ 60,000
• LIC Premium: ₹ 9,000
• ELSS Purchase: ₹ 20,000
• Medical Insurance: ₹ 15,000

He also receives interest income from the fixed deposit and saving account of ₹ 15,000 and ₹ 8000, respectively. Moreover, the EPF deducted by the employer of Mr. X is ₹ 1,00,800 (12% of Salary). So deductions available are:

Calculation of Deductions

Calculation of gross taxable income under old regime:

Calculation of gross taxable income under new regime:

Calculation of total tax under old regime:

Calculation of total tax under new regime:

Final Word

To sum up, the Government of India requires every individual, HUF companies, Body of Individuals and other entities to pay tax on the income earned above the exempt limit. The details regarding how to calculate taxable income, tax liability and the applicable tax rate under the new and old regimes are mentioned above. 

Now you, as an assessee, can make a detailed comparison to avoid paying extra tax.

Frequently Asked Questions