How To Calculate Income Tax On Salary

As stated earlier, not every individual, who gets a salary, is liable to pay tax. Individuals can claim rebates and deductions under various sections of the Income Tax Act, that frees them from any tax liability. Hence, it is prudent to tax your liability at the beginning of every financial year, based on your projected salary for the coming year, to help you invest accordingly and reduce your tax liability.

How do I calculate my tax liability based on my salary?

“What is my Taxable Income?” is a common question that most salaried individuals ask at the beginning of every financial year. The answer can be found when you learn which components of your salary are taxable and which are not. In order to know that, you should have a look at your Monthly Salary Slip and find out the various components your salary is made of.

Here are some common components of your salary: 

• Basic
• HRA
• Dearness Allowance (or just ‘Allowances’ in some cases)
• LTA (Leave Travel Allowance)
• Bonuses
• Perks & Incentives
• Special Allowances (Meal Cards, Driver Salary, Fuel Allowance, Phone Bills, etc.,)
• Deductions (PF, Share Purchase Plan, Professional Tax, etc.,)

Your Net Taxable Income = Your Gross Annual Income – Deductions + Exemptions under relevant sections of the IT Act

Now, in order to calculate your Net Taxable Income, you need to learn the available rebates and deductions under the IT Act, 1961.

Deductions and Rebates on Income from Salary

• Standard Deduction – First and foremost, you can deduct an amount of Rs.50,000 as standard deductions from your total salary before going to any other deductions. In the financial year 2018-19, the government came up with this standard deduction concept to do away with transport allowance of Rs. 19200 and medical reimbursement of Rs. 15,000 per annum. This was done to remove the hassle of producing bills and claiming reimbursements.
• HRA – House Rent Allowance is an important part of deductions. Salaried people, who live in rented homes, may claim the House Rent Allowance (HRA) to lower their taxes – partly or entirely. The allowance is for expenses incurred on rented housing. If you don’t live in a rented house, you will be taxed fully on this component. The HRA deduction will be the lowest of the following amounts:
• Actual HRA received
• 50% of [basic salary + DA] for those living in metro cities or (40% for non-metros)
• Actual rent paid less 10% of basic salary + DA

• Deduct other non-taxable components. These non-taxable components are based on your company. You need to check your salary slip to find out the non-taxable components included in your salary. Here is a list of most common non-taxable components available for salaried individuals:
• Employees Provident Fund (EPF)
• Leave Travel Allowance (LTA)
• Food Coupons/ Meal Cards
• Car Maintenance Allowance
• Children Education Allowance
• Hostel Expenditure Allowance
• Phone Bill Expenditure
• Fuel Bill Reimbursements
• Gift Voucher (Up to Rs.5000)

• Then you deduct the various investments you have made in the year that will give you rebates under various sections of the IT Act, 1961. Some of the sections under which you can claim deductions are 80C, 80D, 80TTA, 80CCC, 80G, etc.

Income Tax Slab Rates

Once you have deducted the relevant rebates and exemptions, you arrive at the Net Taxable Income. You can check the below Tax Slab table to find the applicable tax rate.

Surcharge on Income Tax Amount

Surcharge is the amount levied on your income tax amount at following rates if total income of an assessee exceeds specified limits:

FAQs

End Note

The Income Tax Act, 1961 lists a number of rebates and exemptions for salaried individuals to give them a comprehensive tax regime. The individuals can take advantage of many of these exemptions that allow them to save a considerable amount of money from their income.