Understanding how income tax is calculated on your salary in India is crucial for effective financial planning. The process involves determining your gross salary, factoring in exemptions and deductions, and applying the appropriate tax slabs. Let’s explore the details step by step.
Components of Your Salary
Your salary typically consists of the following components, each treated differently for tax purposes:
- Basic Salary: A fixed portion of your salary, which is fully taxable.
- House Rent Allowance (HRA): Paid to salaried employees for accommodation expenses. A part of this can be exempt from tax.
- Special Allowances: Additional payments such as transport allowance or dearness allowance (DA). Some of these are taxable, while others are partially or fully exempt.
- Bonuses and Incentives: These are typically fully taxable.
- Perquisites (Perks): Non-monetary benefits, such as a company car, rent-free accommodation, or subsidized meals. These may be taxable depending on their nature.
- Professional Tax: A state-imposed tax deducted by your employer, which can be claimed as a deduction from your gross salary.
Gross Salary vs. Taxable Income
- Gross Salary: The total income received before any deductions.
- Taxable Income: The portion of your salary after subtracting tax exemptions and deductions allowed by the Income Tax Act.
For instance, if your gross salary is ₹10,00,000, and you have exemptions and deductions worth ₹2,50,000, your taxable income would be ₹7,50,000.
Steps to Calculate Tax on Salary
Step 1: Calculate Gross Salary
Sum up all components of your income, including basic salary, allowances, bonuses, and perks.
Step 2: Deduct Tax-Exempt Components
Some portions of your salary may be exempt from tax. These include:
- House Rent Allowance (HRA): The exempt portion depends on your actual rent paid, basic salary, and whether you live in a metro city.
- Formula: The least of these three is exempt:
- 50% of basic salary (40% for non-metro cities).
- Actual HRA received.
- Rent paid minus 10% of basic salary.
- Formula: The least of these three is exempt:
- Leave Travel Allowance (LTA): Travel expenses incurred for domestic travel are exempt within specified limits.
Step 3: Subtract Deductions
The Income Tax Act offers several deductions that reduce taxable income:
- Section 80C: Investments in instruments like Public Provident Fund (PPF), Employees’ Provident Fund (EPF), National Savings Certificate (NSC), or ELSS mutual funds (up to ₹1,50,000 per year).
- Section 80D: Health insurance premiums (up to ₹25,000 for self and family, and an additional ₹50,000 for senior citizen parents).
- Section 80E: Interest paid on education loans.
- Section 24: Interest paid on home loans (up to ₹2,00,000 for a self-occupied property).
- Other Deductions: Donations under Section 80G, savings interest under Section 80TTA, etc.
Step 4: Apply the Tax Slabs
India follows a progressive tax system, meaning higher portions of income are taxed at higher rates. As of FY 2023-24, taxpayers can choose between the Old Tax Regime (with exemptions and deductions) and the New Tax Regime (with lower rates but fewer deductions).
Old Tax Regime Slabs:
- Income up to ₹2,50,000: No tax (₹3,00,000 for senior citizens and ₹5,00,000 for super senior citizens).
- ₹2,50,001–₹5,00,000: 5%.
- ₹5,00,001–₹10,00,000: 20%.
- Above ₹10,00,000: 30%.
New Tax Regime Slabs:
- Income 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%.
4. Illustrative Example
Let’s assume your annual salary is ₹12,00,000 under the Old Tax Regime.
Gross Salary: ₹12,00,000
- HRA Exemption: ₹1,50,000
- Deductions under 80C: ₹1,50,000 (investments in PPF and EPF).
- Health Insurance Premium (80D): ₹25,000
Taxable Income = ₹12,00,000 – ₹1,50,000 – ₹1,75,000 = ₹9,75,000
Tax Calculation (Old Tax Regime):
- 0% on ₹2,50,000 = ₹0
- 5% on ₹2,50,000 = ₹12,500
- 20% on ₹4,75,000 = ₹95,000
Total Tax = ₹12,500 + ₹95,000 = ₹1,07,500
Health and Education Cess (4%): ₹4,300
Final Tax Payable = ₹1,11,800
5. Tax Deducted at Source (TDS)
Employers deduct taxes at source (TDS) based on your projected annual income and deposit them with the government. At the end of the financial year, your employer will issue a Form 16, which summarizes your total income, TDS, and tax liability.
6. Filing Returns and Claiming Refunds
After TDS, if your actual tax liability is less than what’s deducted, you can claim a refund when filing your Income Tax Return (ITR). Conversely, if your liability exceeds TDS, you need to pay the balance as Self-Assessment Tax before filing.
7. Tips for Smart Tax Planning
- Maximize 80C Investments: Use the full ₹1,50,000 limit by investing in PPF, EPF, or tax-saving FDs.
- Claim All Exemptions: Ensure HRA and LTA exemptions are optimized.
- Review New vs. Old Tax Regime: Compare both regimes annually to choose the best option for you.
- Use Online Tax Calculators: These tools simplify tax calculations and help you estimate liabilities.
Conclusion
Tax calculation on salary in India involves evaluating exemptions, claiming deductions, and applying the relevant tax slabs. Understanding the process ensures compliance and helps you save more by leveraging tax-saving opportunities. Always consult a tax advisor if you have complex income streams or need personalized advice.
