How to calculate Income Tax on Salary with Example- Step by Step Guide

Every salaried person filing income tax return has to calculate income tax on salary which is a complicate and time-consuming process. The reason is the complex break up of salary structure including various perquisites and allowances, tax deductions and exemptions. This article will help you in the process of calculating income tax both under old regime vs. new tax regimes. We will try to understand income tax for salaried persons with examples step by step. This article will benefit all salaried taxpayers in determining their income tax obligation correctly.

What is income tax on salary income?

As per Income Tax Act, 1961, every salaried person who is earning income above exemption limit is required to pay tax on his salary income. This tax amount is known as “Income Tax on salary”. Income tax describes various allowances and perquisites and the limit of tax exemptions related to them. Salaried taxpayers are eligible to avail various tax deductions under section 80C to 80U while calculating income tax on salary income. They are required to pay income tax on their gross income after claiming all such eligible deductions.

How to calculate income tax on salary income?

Following steps are to be followed for calculating income tax on salary income. Read below:

• Calculation of Gross Salary: Gross Salary of a salaried person includes components like Basic Salary, allowances, bonuses, perquisites etc. For determination of gross salary, all these components are to be added together. Details of these components are available in Form 16 issued by the employer.

• Ascertain Exemptions: Next step is to ascertain exemptions allowed against various salary components. Some of the common exemptions are House Rent Allowance (HRA), Leave Travel Assistance (LTA), standard deductions etc. If you are opting for new tax regime some of these exemptions are not available. Subtract these exemptions from gross salary to arrive at net taxable salary.

• Determine taxable income other than salary: Besides salary, you might also have income from shares commonly known as capital gain on shares, interest income, rental income etc. These all incomes are also added with net salary income to ascertain Gross Taxable Income.

• Calculate Deductions under income tax: Various deductions are available under the Income Tax Act under sections 80C to 80U like deduction for life insurance premium, PPF, Provident Fund, NSC under section 80C, deduction for health insurance premium under section 80D, deduction for donations under section 80G etc.

• Determine Net Taxable Income: Deduct all the above eligible deductions from Gross Taxable Income to ascertain net taxable income.

• Apply Income tax slabs and income tax rates: Income Tax in India has various tax rates for different income slabs under two different tax regimes. Old tax regime comes with higher tax rate but with various deductions. In New Tax regime, tax rates are lower as compared to old regime but with minimum exemptions and deductions. Salaried taxpayer needs to carefully chose tax regime based on his taxable income to save income tax.

• Calculate Tax Liability: Based on the tax regime you select, calculate your total tax liability. Total tax liability will also include applicable surcharge and cess @ 4%.

• Ascertain TDS and advance tax: You need to deduct TDS deducted and advance tax from the total tax liability as computed. This will give you the final amount of tax payable or refundable. For knowing about TDS deducted, download Form 26AS from the Income Tax portal.