5 Easy Steps on How to Calculate Income Tax on Your Salary

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.

What is income tax? What portion of your income is taxable?

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.

How to Calculate Income Tax on Salary? 

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.

5 Steps on how to Calculate Income Tax Percentage on Salary:

1. Estimate gross income

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.

2. Considering your deductions to arrive at your net taxable 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.

3. Get your net taxable income 

 

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.

4. Calculate Taxes

As already discussed, a person pays tax on his/her net taxable income.

As mentioned in the table above,

• A taxpayer pays zero tax for the first INR 2.5 lakh of their taxable income
• In case of the next INR 2.5 lakhs, taxpayers pay 5% of their taxable income i.e., INR 12,500
• If the taxable income is INR 5 lakhs, the taxpayer pays 20% i.e., INR 1,00,000 as tax. And in case of income exceeding INR 10 lakhs, the taxpayer pays 30% on the income

5. Consolidate net tax

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.