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How to Calculate Income Tax on Salary with Example

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Created on
May 8, 2023


What’s Inside

Although income tax might not be your favourite thing to think of, you still need to understand it. With ever-changing taxes and improvisations, calculations can get difficult.

So, begin from the basics and learn about how to calculate income tax on salary.

What is Income tax on Salary?

As per ITA 1961, every person with a salary must deposit a part of their earning as tax. This tax amount paid to the government differs from person to person. Within the norms, there are several exemptions and provisions that deduce overall taxes. Hence, the remaining amount gets collected as income tax.

The 1961 ITA specifies the following taxable categories:

  • Direct income from salary
  • Income from housing properties
  • Income from professional or business profits and gains
  • Income from capital gains
  • Income from any other sources

As per the old and new tax regimes, the tax slab rates are:

How to Calculate Income Tax on Salary with Example

Before learning the income tax calculation formula, there are some components you need to be familiar with.

1. Financial year

The year in which you earn is the financial year (FY). For instance, 1 April of the present year to 31 March of next year is the current FY.

2. Assessment Year

Assessment year (AY) assesses the income from the FY. For instance, AY 2023-24 assesses your income from April 2022 – March 2023.

3. Deductions

As per the ITA section 80, chapter VI-A, there are several reductions you can avail. These deductions include life insurance, children’s tuition, etc.

4. Exemptions

Certain incomes are excluded from taxes and do not add to the total income. Some exemptions include HRA, LTA, standard deduction, and others under 80C.

5. TDS

TDS or tax deducted at source. It refers to a specific tax deducted during a natural transaction between two people to send to the government.

6. Salary Breakup

Your payslips and statements mention your salary breakdown. It is an essential element in the income tax calculation formula.

7. Taxable Income

Overall, taxable income = Total sum from earnings – eligible deductions

With these components in mind, you can calculate your total taxable income. Let us closely understand how to calculate income tax on salary with example.

Example: Mr Z earns INR 1,00,000 per month. He has a monthly HRA of INR 45,000, a monthly special allowance of INR 20,000, and a yearly LTA of INR 20,000.

With an income of INR 20,00,000, Mr Z falls above the INR 15 LPA category. So, let’s look at his net taxable income under the old and new regimes.

As the new tax regime does not offer many exemptions, people save a lot of tax with the old regime.

Now that you know how to calculate income tax on salary, just in your values and calculate.

Summing Up

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Frequently Asked Questions

1. Is tax calculated on gross or net salary?

Tax deductions are always calculated on one’s gross salary.

2. Who can use this income tax calculator?

Any earning adult with a salary eligible to pay taxes for the financial year can use an income tax calculator.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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