Income tax can be a little harsh and difficult to understand for many people. With ever-changing tax regulations and a plethora of jargon to interpret – tax exemption, tax rebate, tax deduction, tax saving, and so on – we often don’t realise how much of our income is taxed and how we might save money.
Individual income without the tax exemptions, deductions, and rebates is the taxable income. In this article, we’ll show you how to calculate your income tax so that you can perform your own arithmetic and take the necessary steps to save as much money as possible the next time.
Steps to calculate income tax on salary
Step 1: Determine your gross earnings.
First, make a list of your annual gross salary. This will contain all aspects of your salary, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and special allowances such as food coupons and mobile phone reimbursements, among others.
After that, remove the exemptions from the salary components. HRA (House Rent Allowance) and LTA (Leave Travel Allowance) are the two significant exemptions you obtain.
Remember that you can only claim HRA if you live in a rental home. HRA is totally taxable if you have your own place or live with your parents. In addition, your HRA tax exemption is calculated using the lowest of the following amounts:
- An employer has given you an HRA.
- Actual rent paid is less than 10% of the monthly basic pay.
- If the taxpayer lives in a metropolis, he or she will receive 50% of their basic earnings.
- If the taxpayer lives in a non-metropolis, he or she will be entitled to 40% of their basic salary.
To arrive at the net salary amount, subtract the standard deduction of Rs 50,000 (every salaried employee is entitled to this deduction).
Then you must include any money you may have earned from other sources. This could include rental income, interest earned on deposits, capital gains, and so on.
Your gross total income is the amount you arrive at.
Step 2 – Subtract your deductions to arrive at your net taxable income.
By investing, saving, or spending on specific products, you can lower your taxable income even more.
The first is the Rs 50,000 Standard Deduction (discussed in the preceding section), which can be claimed by anyone without having to invest in or spend money on any specific products.
Then, under Section 80, deduct your investment and expenditures.You can deduct up to Rs 1.5 lakh for various investments and expenses under Section 80C, which is the largest pool of deductions.
Some of the most popular ways to claim this deduction are PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana, and premium paid for term insurance. Also, if you have a home loan, you can deduct the principal amount paid back in the year under this provision. Your EPF, which is a portion of your pay, is also included in this category.
If you invest in an NPS, you can deduct an additional Rs 50,000 under Section 80CCD(1B), in addition to the Rs 1.5 lakh maximum under Section 80C. Aside from that, if you paid premiums for your family’s and parents’ health insurance policies, you can claim that amount as a deduction under Section 80D.
The interest part of the EMI paid for the financial year can be claimed as a deduction under Section 24 up to a limit of Rs 2 lakh in the event of a home loan. This is in addition to the Section 80C deduction for the principal amount.
Step 3: Calculating your taxable net income
You will arrive at your total income on which you must pay tax based on your tax bracket by subtracting all allowable deductions from your gross taxable income.
- If your net income range is less than ₹ 2,50,000, you don’t have to pay any income tax.
- If your net income lies between ₹ 2,50,000 to ₹ 5,00,000, your income rate will be 5 percent and your tax bill before the Section 87A rebate will be ₹ 12,500.
- If your net income range is between ₹ 5,00,000 – ₹ 10,00,000, your income rate will be 20 percent and your tax bill before the Section 87A rebate will be ₹ 1 lakh.
- Now, if your net income range exceeds ₹ 10,00,000, your income rate will be 30 percent and your tax bill before the Section 87A rebate will be ₹ 2,62,500 (based on a supposed net income of 15 lakh).
However, note that Senior persons pay a separate slab rate. The tax rate is zero for those over 60 years of age with a net income of up to Rs 3 lakh. The tax rate is 0% for senior individuals over the age of 80 with a net income of up to Rs 5 lakh. In general, the tax rates that apply to you are determined by your age and net income.
We’ll now go on to the most important part of the process: computing your tax.
Step 4: Combine your net tax returns.
Tax refund under Section 87A: A tax rebate is a type of tax incentive offered by the government to people who earn less than a certain amount of money. If your total taxable income after deductions is less than Rs 5 lakh, you can receive a Rs 12,500 rebate under Sec 87A.
If your taxable income exceeds Rs 5 lakh, you can now add a 4% health and education cess to your tax bill to determine how much you’ll pay in total.
A 10% surcharge is imposed on persons with extremely high incomes, defined as those earning between Rs 50 lakh and Rs 1 crore. The surcharge is 20% for income between Rs 1 and Rs 2 crore.
How to Calculate Income Tax
Calculating income tax is actually rather simple. The procedure to calculate it as follows:
- Minimum pay plus HRA plus Special Allowance plus Transportation Allowance, and any extra allowances. This will give you your gross income from salary.
- Now you have to subtract the deductions. This becomes your net income.
- Now calculate tax according to the income tax slab given above.
Understanding with an example
Mr. Bansal’s taxable income would be determined as follows:
If Mr. Bansal’s monthly salary is Rs. 25,000, with a DA of Rs. 4500, an entertainment allowance of Rs. 2250, and a professional tax payment of Rs. 3500, his taxable income would be calculated as follows:
His taxable income is Rs. 3,77,500, which puts him in the 2.5 lakhs to 5 lakhs income tax bracket. As a result, he must pay income tax on 10% of his net income.
Tax on excess net income = ten percent of Rs. 3,77,500 = Rs. 37,750