How to Calculate Income Tax on Salary (With Examples)

Many people see income tax as something they have to deal with but don't like. It can be confusing with all the different terms like tax exemption, rebate, deduction, and saving. 

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Sometimes, we don't know how much of our money gets taxed or how to save on taxes. 

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In this blog, we'll teach you how to calculate income tax on salary with examples. This way, you can do the math and find ways to save on taxes next time.

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We'll explain how tax is calculated on your salary, how to calculate income tax on your salary, and how taxable income is calculated.

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What is Income Tax?

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Income tax is a levy imposed by the government on various entities, including individuals, Hindu Undivided Families (HUFs), companies, cooperative societies, and trusts. 

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The specific tax rates depend on an individual's income level and age.

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What is Taxable Income?

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Taxable income refers to an individual's earnings after accounting for tax exemptions, deductions, and rebates. 

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How to Calculate Income Tax on Your Salary

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Calculating income tax on your salary may seem straightforward, involving multiplying the tax rate by your taxable income. 

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Calculating taxes involves calculating your income, subtracting deductions, finding your tax owed, and considering past payments. We'll guide you on how tax is calculated on your salary.

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Component of Income Taxes

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When calculating income taxes, remember these key points:

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1. Financial Year (FY):This is the year you earn money, from April 1st to March 31st of the following year. During this time, gather all your financial documents and investment proofs.

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2. Assessment Year (AY): Your income from a particular financial year gets assessed. For example, AY 2023-24 assesses income earned from April 1, 2022, to March 31, 2023.

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3. Tax Deductions: These are ways to reduce your taxable income. Section 80C of the Income Tax Act, for instance, allows you to save taxes by investing in things like life insurance and other prescribed investments.

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4. Tax Exemption: Certain income is not considered part of your total income and is excluded from taxation. Some examples include exemptions for salary components, rental income, and business expenses.

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5. TDS (Tax Deducted at Source): When someone making a payment deducts tax and sends it to the government. TDS is deducted at the time of payment or accrual, whichever happens first, but individuals and small businesses have certain exemptions.

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6. Salary Breakup: Your pay slip or salary statement breaks down your salary into different components. Understanding this breakdown is crucial when calculating your income tax.

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7. Taxable Income:To calculate your tax, subtract eligible deductions from your total income, which includes all your earnings from various sources. They may include:

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• Income from Salary: 
• Income from House Property
• Income from Business/Profession
• Income from Capital Gains
• Income from Other Sources

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1. Income from Salary: This is the money you earn when you work for someone as an employee. It includes your regular pay, bonuses, commissions, and even things like a place to live provided by your employer or a loan without interest.

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2. Income from House Property: If you own a building or land that someone else pays you to use, that's called rental income. This could be from a house, office, warehouse, or parking space. Different rules apply if you live in the property yourself.

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3. Income from Business/Profession: This is the money you make from your business or profession after deducting all your allowed expenses. It covers various types of earnings, like profits, income from partnerships, and even benefits from your business.

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4. Income from Capital Gains: If you sell something valuable like property or investments and make a profit, that's called capital gains. You pay tax on this profit in the year you sold it.

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5. Income from Other Sources: Any money you get that doesn't fit into the other categories is considered income from other sources. It's taxable unless specific tax laws exempt it.

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To figure out how to calculate income tax on salary and how much tax you owe or if you're due for a tax refund, you need to follow these steps:

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1. First, calculate your total income and make adjustments for advance tax payments and tax that's already been deducted from your earnings.

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2. Once you've done that, you'll have your net tax payable or refundable amount.

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3. Round this amount to the nearest multiple of 10 per the tax rules.

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4. If you owe tax (called self-assessment tax), make sure to pay it by the deadline when you file your tax return. If you're owed a refund, you'll get it after filing your tax return.

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For individuals below 60 years old, you have two options for tax rates: the old tax regime and the new tax regime. Here are the tax rates for both:

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Old Tax Regime:

- No tax on income up to 2,50,000.

- 5% tax on income between 2,50,001 to 5,00,000.

- 20% tax on income between 5,00,001 to 10,00,000.

- For income above 10,00,000.

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New Tax Regime:

- No tax on income up to 3,00,000.

- 5% tax on income between 3,00,001 to 6,00,000.

- 10% tax on income between 6,00,001 to 9,00,000.

- 15% tax on income between 9,00,001 to 12,00,000.

- 20% tax on income between 12,00,001 to 15,00,000.

- 30% tax on income above 15,00,000.

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You can choose between these two tax regimes when filing your taxes.

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Example of Tax Calculation

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Meet Sarah, who works for a tech company in Bengaluru. Her annual gross salary is Rs 18 lakh. After accounting for all deductions, her net salary is Rs 15 lakh.

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Last year, she earned Rs 15,000 as interest income from her bank account. She also invested Rs 2 lakh in ELSS Mutual Funds and contributed Rs 30,000 to EPF. Additionally, she invested Rs 25,000 in NPS and holds a health insurance policy for herself and her spouse with an annual premium of Rs 18,000.

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Now, let's see how taxable income is calculated and how Sarah's tax liability is calculated based on the provided details:

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1. Net Salary: Rs 15,00,000

2. Interest Income: Rs 15,000

3. ELSS Mutual Fund Investment: Rs 2,00,000

4. EPF Contribution: Rs 30,000

5. NPS Contribution: Rs 25,000

6. Health Insurance Premium: Rs 18,000

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First, we need to calculate Sarah's taxable income:

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Taxable Income = Net Salary + Interest Income - Deductions

Taxable Income = 15,00,000 + 15,000 - (2,00,000 + 30,000 + 25,000)

Taxable Income = 15,00,000 + 15,000 - 2,55,000

Taxable Income = Rs 12,60,000

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Now, let's calculate her tax liability based on the tax slabs:

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- No tax on the first Rs. 2.5 lakh of taxable income.

- 5% tax on the next Rs. 2.5 lakh (Rs. 12,500).

- 20% tax on the next Rs. 5 lakh (Rs. 1,00,000).

- 30% tax on the amount exceeding Rs. 10 lakh.

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Sarah's taxable income of Rs 12,60,000 falls into the second slab. So, her tax liability is:

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Tax Liability = Tax on Rs. 12,60,000 (Second Slab)

Tax Liability = 5% of 5,00,000 + 20% of (12,60,000 - 5,00,000)

Tax Liability = 25,000 + 1,12,000

Tax Liability = Rs. 1,37,000

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Now, let's add the 4% health and education cess to this amount:

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Cess = 4% of Rs. 1,37,000

Cess = Rs. 5,480

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So, Sarah's total tax liability, including the cess, is Rs. 1,37,000 + Rs. 5,480 = Rs. 1,42,480.

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Sarah's tax liability is Rs. 1,42,480.

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Below is a table showing the details of the calculation of Sarah's tax

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Conclusion

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Understanding how to calculate income tax on your salary is necessary for managing your finances wisely. 

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It involves knowing how tax is calculated on your salary and how taxable income is calculated.

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By following the proper steps and considering tax-saving options, you can minimize tax liability and keep more of your hard-earned money. Whether you opt for the old tax regime or the new one, knowing the rules empowers you to make informed financial decisions. 

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