Income tax is one of the primary forms of revenue generation that the government uses to fund various public services. Employed individuals have to pay tax on their earnings, which are calculated based on the slab they fall under. Calculating income tax can be a complex process, especially for those who are unfamiliar with the Indian taxation system. In this article, we will provide a comprehensive guide to help individuals calculate their income tax accurately.
How to calculate income tax on salary?
Calculating income tax on your salary involves several steps, from identifying your full earnings to applying tax rates, deductions, and exemptions. Here’s a clear, step-by-step approach:
Step 1: Find your gross salary
Start by identifying your gross salary, which is the total amount you earn before any deductions. This figure includes fixed and variable pay elements. Common components are:
- Basic salary: Fixed pay forming the base for other allowances.
- Dearness allowance: Paid as a percentage of basic pay to offset inflation.
- House Rent Allowance (HRA): Helps meet rent expenses.
- Conveyance allowance: Covers travel costs between home and workplace.
- Leave Travel Allowance (LTA): Supports travel costs for holidays.
- Medical allowance: For healthcare-related expenses.
- Provident Fund: Contributions for retirement savings.
Step 2: Add other sources of income
Combine your salary with other earnings such as interest, rental income, capital gains, business/professional income, or dividends. This gives you your gross total income.
Step 3: Apply standard deduction and exemptions
Deduct the standard amount (Rs. 50,000 under the old regime, Rs. 75,000 under the new). Also, subtract eligible exemptions such as HRA or LTA, depending on your chosen tax regime.
Step 4: Claim deductions
Reduce your taxable income further by claiming deductions under sections like 80C for investments in ELSS, PPF, NPS, or life insurance.
Step 5: Calculate taxable income
Your taxable income is your gross total income minus exemptions and deductions.
Step 6: Apply tax rates
Use the relevant tax slabs for your regime (old or new) to work out the tax due.
Step 7: Include Rebate, Cess, and Surcharge
Finally, apply any applicable rebate, cess, or surcharge to determine your total tax liability.
From FY 2023–24, the new regime is the default, but you can opt for the old regime if it offers more savings. Compare both to choose wisely.
When planning your tax savings, consider how homeownership can provide significant deductions. Home loan interest payments qualify for deductions under Section 24(b), while principal repayments fall under Section 80C. If you are considering buying a home to maximise your tax benefits, check your eligibility for a home loan from Bajaj Finserv today. You may already be eligible, find out by entering your mobile number and OTP.
Rebate - Section 87A
Under the new tax regime, individuals earning up to Rs. 7,00,000 annually can claim a rebate of the actual income tax payable or Rs. 25,000, whichever is lower.
Under the old tax regime, taxpayers with an income up to Rs. 5,00,000 can claim a rebate of the actual tax payable or Rs. 12,500, whichever is lower.
Cess
A cess of 4% is added to the total income tax payable. This is applicable to all eligible taxpayers, regardless of their income bracket. It is calculated on the tax amount after considering rebates and surcharges. The collected cess is generally allocated for specific government initiatives such as health or education.
Surcharge
A surcharge is an extra tax applicable to individuals with higher income levels. It is charged on the total income tax payable, not on income directly. The surcharge percentage varies based on the income slab, and both the old and new tax regimes have specific rates for higher-income categories.
Surcharge rates applicable to the old and new tax regime
Taxable income range |
Old tax regime |
New tax regime |
Less than Rs. 50,00,000 |
NA |
NA |
Rs. 50,00,000 – Rs. 1 crore |
10% |
10% |
Rs. 1 crore – Rs. 2 crores |
15% |
15% |
Rs. 2 crores – Rs. 5 crores |
25% |
25% |
Above Rs. 5 crores |
37% |
25% |
These rates are applied to the total income tax payable after exemptions and deductions. The lower surcharge rate in the new regime for incomes above Rs. 5 crores is a notable difference.
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