Income tax is a direct tax that is levied on an individual's income or earnings, which is paid to the government by the taxpayers. The tax collected by the government is used for the development of the country, and that is why it is essential to pay income tax. Income tax is based on an individual's earnings and is calculated every financial year.
Calculating income tax on salary can be overwhelming, especially if you are a beginner. However, it is vital to have a basic understanding of the process as it helps in financial planning and budgeting.
Here are a few key terms that are used in the calculation of income tax.
- Assessment year: The year in which the Income Tax ReturnReturn is to be filed is called the assessment year.
- Financial year: The year in which the income is earned is called the financial year.
- Gross salary: The total income earned by an individual during a financial year is called gross salary.
- Income tax rate: The percentage of tax that is levied on an individual's income is called the income tax rate.
- Tax deductions: The deductions that are allowed under the Income Tax Act, which reduce the tax liability of an individual.
Steps on how to calculate income tax on salary
Step 1: Determine gross salary
The first step is to determine your gross salary. Your salary includes your basic pay, dearness allowance, house rent allowance, transport allowance and any other allowance you receive. You can find your gross salary in your salary slip or in your employment contract.
Step 2: Deductions under various sections
Under various sections deductions can be claimed related to investments, insurance premiums, interest earned on savings account, interest paid on education loans, and donations.
Step 3: Determine taxable income
Once you have calculated all the deductions, subtract them from your gross salary to determine your taxable income. This taxable income is the amount that is liable to be taxed. The tax liability is based on the income tax slab rate set by the government.
When it comes to Home Loan, you can get tax deductions on the principal repayment under section 80C. Knowing how to calculate income tax on salary may seem complicated, but with some understanding, it becomes more manageable. It is crucial to plan your finances well and make use of the deductions provided by the Income Tax Act to lower your tax burden. Do not forget to file your Income Tax Return on time, as it is a mandatory requirement.
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How to calculate income tax on salary with an example
To calculate income tax on salary, first, determine your taxable income by subtracting applicable deductions from your gross salary. Then, use the income tax slab rates to compute the tax liability. For instance, if your annual salary after deductions is Rs. 8,00,000, falling under the 20% tax slab, your tax liability would be Rs. 1,12,500 (20% of Rs. 5,62,500 + Rs. 12,500). Deduct applicable rebates and TDS to arrive at the final tax payable. It's crucial to stay updated with the latest tax laws and consult a tax advisor for accurate calculations.
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