How to calculate taxable income on salary in India

How do I calculate taxable income?

Taxable income is the portion of an individual’s earnings that is subject to income tax after applying eligible deductions and exemptions. It includes salary, business profits, capital gains, rental income, and income from other sources. Calculating taxable income helps in determining the total tax liability and ensuring compliance with income tax laws. Understanding taxable income calculation is essential for accurate tax filing and financial planning. Individuals must also consider tax-saving options such as deductions under various sections of the Income Tax Act to reduce their overall tax burden while ensuring transparency in financial transactions.

Steps to calculate taxable income

Calculating taxable income involves multiple steps, from identifying total earnings to subtracting applicable deductions. The correct approach ensures proper tax assessment and prevents overpayment or penalties. The following steps outline the process, including TDS deductions where applicable:

1. Identify total income – Include all sources such as salary, rental income, business profits, capital gains, and interest earnings.
2. Consider salary components – Exclude exempt components like house rent allowance (HRA), leave travel allowance (LTA), and special allowances if applicable.
3. Include other taxable incomes – Add interest from fixed deposits, dividends, rental income, and any gifts received above exemption limits.
4. Subtract exemptions under Section 10 – Apply exemptions like HRA, gratuity, and agricultural income that do not form part of taxable income.
5. Deduct standard deduction – Salaried employees can claim a standard deduction of Rs. 50,000 from their salary income.
6. Apply deductions under Section 80C – Reduce taxable income by investing in PPF, EPF, life insurance, or tuition fees, up to Rs. 1.5 lakh.
7. Consider other deductions – Sections like 80D (medical insurance), 80E (education loan), and 80G (donations) help reduce taxable income.
8. Compute gross taxable income – Deduct all eligible exemptions and deductions from the total earnings.
9. Apply the correct tax slab – Based on the individual’s age and tax regime (old or new), apply the relevant tax rate.
10. Consider TDS adjustments – Deduct TDS from the taxable amount before determining the final tax payable.

Tax slab for who are under 60 years of age (Old tax regime)

The old tax regime offers deductions under various sections while calculating taxable income. The tax rates are structured as per the following table:

Income slab (Rs. )	Tax rate
Up to 2,50,000	No tax
2,50,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%

Individuals opting for the old tax regime can claim deductions under Sections 80C, 80D, 80E, and other tax-saving provisions. The basic exemption limit remains Rs. 2.5 lakh for those below 60 years of age, and rebates under Section 87A may apply for income up to Rs. 5 lakh.

New income tax slabs for individuals in FY 2024-2025

The new tax regime introduced simplified tax rates but does not allow most deductions and exemptions. The tax slabs for FY 2024-25 are as follows:

Income slab (Rs. )	Tax rate
Up to 3,00,000	No tax
3,00,001 – 6,00,000	5%
6,00,001 – 9,00,000	10%
9,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
Above 15,00,000	30%

The new tax regime provides a higher basic exemption limit but removes deductions under Sections 80C, 80D, and other exemptions. Taxpayers must evaluate whether the old or new regime benefits them more before choosing an option.

Calculating tax deductions

Tax deductions play a vital role in reducing taxable income. The Income Tax Act allows various deductions under different sections, helping individuals optimise their tax liabilities. Below are key deductions available:

• Section 80C – Investments in PPF, EPF, NSC, life insurance, ELSS, and home loan principal repayment (Limit: Rs. 1.5 lakh).
• Section 80D – Health insurance premiums for self, spouse, children, and parents (Limit: Rs. 25,000; Rs. 50,000 for senior citizens).
• Section 80E – Interest paid on education loans for higher studies (No upper limit).
• Section 80G – Donations to registered charities and relief funds (50% or 100% exemption depending on eligibility).
• Section 80GG – Rent paid by individuals not receiving HRA (Limit: Rs. 5,000 per month or 25% of income).
• Section 80TTA – Interest earned on savings accounts (Exemption up to Rs. 10,000 for individuals).
• Section 80TTB – Interest on deposits for senior citizens (Exemption up to Rs. 50,000).
• Section 24(b) – Interest paid on home loans for self-occupied property (Limit: Rs. 2 lakh).
• Section 10(14) – Special allowances such as uniform, travel, and conveyance allowances.
• Leave travel allowance (LTA) – Exemption available for domestic travel undertaken with family.
• HRA exemption – Available under Section 10(13A) based on rent paid and salary structure.
• National Pension Scheme (NPS) under Section 80CCD(1B) – Additional deduction of Rs. 50,000 beyond 80C.
• Standard deduction for salaried individuals – Fixed deduction of Rs. 50,000 from gross salary.
• Deduction for disability (Section 80U) – Rs. 75,000 to Rs. 1.25 lakh based on disability percentage.
• Deduction for medical treatment (Section 80DDB) – For specified diseases, deduction up to Rs. 1 lakh for senior citizens.
• Section 87A rebate – For income below Rs. 7 lakh (new regime) or Rs. 5 lakh (old regime), no tax is payable.

Conclusion

Calculating taxable income requires assessing all income sources, applying exemptions, and utilising deductions. The tax regime chosen, whether old or new, significantly impacts tax liability. While the old regime allows multiple deductions, the new regime offers simplified slabs with no exemptions. Taxpayers should carefully evaluate their financial position before deciding the suitable regime. Proper planning, including deductions under various sections, ensures a lower tax burden and higher savings. Ensuring timely tax payments, considering TDS deductions, and filing income tax returns correctly helps in avoiding penalties and compliance issues.

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