How To Calculate Income Tax On Salary With Example

Paying income tax is a fundamental duty of every salaried individual in India. Whether you are a new employee or a seasoned professional, understanding how income tax is calculated on your salary is essential for effective financial planning. The Indian income tax system is structured into different slabs, ensuring that individuals with higher incomes contribute more to the nation's revenue.

Every year, the government revises tax policies, exemptions, and deductions to make the system more efficient and equitable. In the Union Budget presented on 1st February 2025, several key changes were made to the new tax regime, including modifications to tax slabs, standard deductions, and applicable exemptions. These updates impact how salaried individuals calculate and pay their income tax.

The process of tax calculation involves multiple components, such as gross salary, deductions, exemptions, taxable income, and applicable tax rates. It is crucial to know which allowances (like House Rent Allowance, Leave Travel Allowance, and Special Allowance) are taxable and which can be claimed as exemptions. Additionally, taxpayers can reduce their taxable income through deductions under Section 80C, 80D, 80TTA, and other sections of the Income Tax Act.

Understanding the New Tax Regime (2025)

Income Tax Slabs for FY 2025-26 (New Regime)

Steps to Calculate Income Tax on Salary

Step 1: Calculate Gross Income

Gross salary includes all earnings before deductions. This includes:

• Basic Salary – The fixed amount paid by the employer.
• House Rent Allowance (HRA) – A component that helps with rent expenses.
• Leave Travel Allowance (LTA) – Reimburses travel expenses within India.
• Special Allowance – Covers mobile bills, food coupons, etc.
• Other Income – Any earnings from sources like interest on deposits or rental income.

Example:

Assume a salaried individual has the following salary structure:

• Basic Salary: ₹10,00,000 per year
• HRA: ₹3,00,000 per year
• Special Allowance: ₹2,00,000 per year
• LTA: ₹50,000 per year
• Rent paid: ₹2,50,000 per year

Step 1A: Determine HRA Exemption

HRA can be partially exempt from tax based on:

1. Actual rent paid - 10% of basic salary
2. HRA received from the employer
3. 50% of basic salary (metro cities) or 40% (non-metro cities)

Example Calculation:

• Rent paid - 10% of basic salary = ₹2,50,000 - ₹1,00,000 = ₹1,50,000
• HRA received = ₹3,00,000
• 50% of basic salary (metro city) = ₹5,00,000
• The lowest value (₹1,50,000) is exempt from tax. The remaining ₹1,50,000 is added to taxable income.

Step 2: Apply Standard Deduction

For FY 2025-26, the standard deduction is:

• ₹50,000 (Old Regime)
• ₹75,000 (New Regime)

So, the taxable income is now adjusted based on these deductions.

Step 3: Deduct Eligible Tax-Saving Investments

Under Section 80C, salaried employees can claim deductions for investments in:

• Employees' Provident Fund (EPF)
• Public Provident Fund (PPF)
• National Pension Scheme (NPS)
• Life Insurance Premiums
• Equity Linked Savings Scheme (ELSS)
• Tax-saving Fixed Deposits

The upper limit for deductions under Section 80C is ₹1.5 lakh.

Other deductions:

• Section 80D: ₹25,000 for health insurance (₹50,000 for senior citizens)
• Section 80TTA: ₹10,000 deduction on savings account interest
• Section 80CCD(1B): ₹50,000 for NPS contributions
• Section 80G: Donations to charitable organisations

Example Deductions:

• ₹1.5 lakh (ELSS + EPF)
• ₹50,000 (NPS contribution)
• ₹20,000 (Medical insurance)
• Total deductions = ₹2.2 lakh

Step 4: Calculate Taxable Income

After deducting exemptions and investments, the taxable income is determined.

• Gross Salary: ₹15,50,000
• HRA Exemption: -₹1,50,000
• Standard Deduction: -₹75,000
• 80C, 80D, and Other Deductions: -₹2,20,000

Net Taxable Income = ₹11,05,000

Step 5: Apply Tax Slabs

Using the new tax slabs:

Income Tax Calculator by CreditMantri

The Income Tax Calculator by CreditMantri is a simple and efficient tool designed to help you estimate your tax liability based on your income and deductions. By entering details such as salary, business income, rental income, and other earnings, you can quickly calculate your taxable income.

The calculator considers factors like rent received, interest paid on home loans, and tax deductions to provide an accurate assessment. Whether you’re a salaried individual, self-employed professional, or property owner, this tool helps you plan your taxes effectively and optimise your savings.

How to Reduce Your Tax Liability?

1. Invest in Tax-Saving Instruments

• ELSS, PPF, EPF, NPS, ULIP

2. Claim HRA Benefits

• Rent receipts are mandatory for exemption

3. Opt for Health Insurance

• Section 80D allows deductions for medical insurance

4. Use NPS Contributions

• Section 80CCD(1B) provides an additional ₹50,000 deduction

5. Claim Education Loan Benefits

• Under Section 80E, interest on loans is fully deductible

Sources of Income in India

As per the Income Tax Department of India, every individual’s income is classified into five broad sources. Any earnings you generate must be categorised under one of these sources for income tax purposes. These five sources are:

1. Income from Salary

If you earn a salary from an employer, it falls under this category. Your taxable salary includes:

• Basic salary
• Allowances (HRA, DA, TA, special allowances)
• Bonus and incentives
• Perquisites (such as rent-free accommodation or car allowance)

To calculate your taxable salary income, follow these steps:

1. Collect all your salary slips and Form 16 (issued by your employer).
2. Add up all earnings like salary, allowances, and bonuses.
3. Deduct exemptions such as House Rent Allowance (HRA) and transport allowance (₹19,200 per year).
4. The remaining amount is your net taxable salary income.

2. Income from Capital Gains

Capital gains refer to the profits earned from selling assets like property, shares, or mutual funds. They are categorised as:

• Long-term capital gains (LTCG) – If an asset is held for more than a specific period before selling.
• Short-term capital gains (STCG) – If an asset is sold within a short period.

Steps to compute capital gains:

1. Calculate total sales proceeds from asset sales.
2. Subtract the cost of acquisition and any expenses related to the sale.
3. Apply indexation benefits (if applicable) for long-term gains.
4. Deduct eligible exemptions (like Section 54 for property sales).

3. Income from House Property

This refers to any rental income received from owning a property. Even if you have one self-occupied house, it is considered for tax calculations.

1. Determine the Gross Annual Value (GAV):
• If rented, GAV is the higher of expected rental value and actual rent received.
• If self-occupied, GAV is zero.
2. Deduct municipal taxes paid during the year.
3. Compute Net Annual Value (NAV) = GAV – Municipal Taxes.
4. Apply a 30% standard deduction on NAV.
5. Deduct home loan interest (if applicable).

4. Income from Business or Profession

Self-employed individuals, freelancers, and business owners fall under this category. Income is computed after deducting business-related expenses, including:

• Rent and utility costs
• Salaries paid to employees
• Depreciation of assets
• Professional fees

Income is taxed as per the applicable slab rate after deductions. Businesses also have the option of opting for presumptive taxation schemes under Sections 44AD, 44ADA, or 44AE.

5. Income from Other Sources

Any income that doesn’t fit into the above categories falls here, including:

• Interest earned from savings accounts, fixed deposits, and bonds
• Dividends from shares and mutual funds
• Gifts above the exempted limit
• Pension (if not categorised under salary income)
• Winnings from lotteries or gambling (taxed at 30% flat rate)

Disclaimer: All the steps, income tax rates, slabs, and other information specified above are sourced when this page was written and are subject to change. For exact information, refer to the Income Tax Department’s website or contact them.

Frequently Asked Questions (FAQs)

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