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.
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:
As per the old and new tax regimes, the tax slab rates are:
Before learning the income tax calculation formula, there are some components you need to be familiar with.
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.
Assessment year (AY) assesses the income from the FY. For instance, AY 2023-24 assesses your income from April 2022 – March 2023.
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.
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.
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.
Your payslips and statements mention your salary breakdown. It is an essential element in the income tax calculation formula.
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.
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Tax deductions are always calculated on one’s gross salary.
Any earning adult with a salary eligible to pay taxes for the financial year can use an income tax calculator.
