You can use the following income tax calculator to understand the amount of tax you will be required to pay.
Let us first take a look at some important concepts you should know before you start calculating your income tax on salary.
What is the difference between Assessment Year and Financial Year?
Financial year (FY) is the period between 1st April and 31st March across any two consecutive calendar years. If you earn an income during this period, you will be required to pay tax on this income.
Assessment year (AY) is the year that follows the financial year. During the assessment year, the taxpayer is expected to file his/her income tax returns for the tax that was paid in the previous year (which is essentially, the financial year). Assessment year also begins on 1st April and ends on 31st March of two consecutive calendar years.
Let us understand this better through an example:
Mr. Dutta is a salaried employee of an organisation. Tax is deducted on a monthly basis from his salary in the financial year that starts from 1 April 2019 and ends on 31 March 2020. He will be required to file his income tax returns between 1 April 2020 and 31 March 2021. This period is regarded as the assessment year.
|Salary Earned During||Financial Year (FY)||Assessment Year (AY)|
|1 April 2019 – 31 March 2020||2019-2020||2020-2021|
How to Calculate Income Tax on Salary with an Example
The easiest way to calculate your tax liability is through an online income tax calculator. However, it can be done manually as well.
Let us consider the example of Mr. Dutta whose earnings include a basic salary of Rs.37,500 per month (i.e., Rs.4.5 lakh per annum) in the financial year 2019-2020.
- His salary also includes House Rent Allowance (HRA) of Rs.20,000 per month or Rs.2.4 lakh per year.
- The Leave Travel Allowance (LTA) is Rs.15,000 on an annual basis.
- There is also a special allowance component of Rs.10,000 per month (i.e., Rs.1.2 lakh per year).
- Mr. Dutta stays in Kolkata and pays rent of Rs.15,000 per month, which amounts to Rs.1.80 lakh per year.
- There is also an EPF component (Mr.Dutta’s share) that is deducted from his salary per month. This is equivalent to 12% of his basic salary on a monthly basis, i.e., Rs.(37,500 * 0.12) = Rs.4,500. On an annual scale this will amount to Rs.54,000.
Step 1: Calculation of Taxable HRA
The first step is to identify the HRA chargeable to tax. Mr. Dutta uses an online HRA Calculator tool to determine the taxable component of his HRA. The manual method of calculating the taxable HRA component is not very complicated either. In this case, it is calculated as shown below:
The lowest value among the following will be exempt from tax:
- 50% of Mr. Dutta’s annual basic salary = Rs.(4.5 lakh * 0.5) = Rs.2.25 lakh
- HRA received on an annual basis = Rs.2.4 lakh
- Rent that is paid in excess of 10% of annual basic salary = Rs.(1.8 lakh - (0.1 * 4.5 lakh)) = Rs.1.35 lakh
Hence, the total taxable HRA = Rs.2.4 lakh – Rs.1.35 lakh = Rs.1.05 lakh
Step 2: Calculation of Taxable Income from Salary
The annual gross income from his salary is outlined in the table below:
|Component||Total Amount||Exemption||Taxable Amount|
|Basic Salary||Rs.4.5 lakh||-||Rs.4.5 lakh (A)|
|HRA||Rs.2.4 lakh||Rs.1.35 lakh||Rs.1.05 lakh (B)|
|Special Allowance||Rs.1.2 lakh||-||Rs.1.2 lakh (C)|
|LTA||Rs.15,000||Rs.10,000 (travel bills submitted)||Rs.5,000 (D)|
|Standard Deduction*||Rs.50,000 (E)|
|Gross Income from Salary||Rs.8.25 lakh (sum of the above rows in this column)||A + B + C + D - E = Rs.6.3 lakh|
*Standard deduction was proposed to be Rs.40,000 in the Union Budget 2018. In the Interim Budget of 2019, it was increased to Rs.50,000.
Step 3: Calculation of Total Deductions
Now let us take a look at the investments made by Mr. Dutta.
- On an annual basis, consider that he has earned interest of Rs.9,000 from a savings account.
- He has also made investments in Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) during the financial year 2019-20. These investments amount to Rs.50,000 for PPF and Rs.15,000 towards ELSS.
- He is also paying premium worth Rs.10,000 for a life insurance policy and Rs.12,500 for a health insurance policy.
Mr. Dutta can claim tax deduction for each of these investments, as shown below:
|Section||Maximum Deduction Allowed||Investments Eligible for Tax Deduction||Deductions Claimed by Taxpayer|
|80C||Rs.1.5 lakh||PPF – Rs.50,000 (L) ELSS – Rs.15,000 (M) Life insurance – Rs.10,000 (N) EPF contribution deducted by employer – Rs.54,000 (O)||L + M + N + O, up to a maximum limit of Rs.1.5 lakh = Rs.1.29 lakh|
|80D||Rs.25,000 for self and Rs.50,000 for parents||Health insurance – Rs.12,500||Rs.12,500|
|80TTA||Rs.10,000||Interest from savings account – Rs.9,000||Rs.9,000|
Step 4: Calculation of Gross Income that is Taxable
The next step is the calculation of the gross taxable income for Mr. Dutta for the financial year 2019-20.
|Gross Taxable Income from Salary||Rs.6.3 lakh|
|Income from Other Sources||Rs.9,000 (from savings account interest)|
|Gross Total Income||Rs.6.39 lakh|
|Gross Taxable Income (Gross Total Income – Total Deductions)||Rs.4,88,500|
Step 5: Calculation of Income Tax Liability
The final step is to analyse the tax slabs and identify Mr. Dutta’s tax liability. The amount of tax he needs to pay is dependent on the tax slab that his income falls under. The tax slabs for the financial years 2019-2020 and 2018-2019 are as shown below. The amount due to be paid by Mr. Dutta is also indicated in the following table:
|Income Slab||Rate of Taxation||Amount to be Paid|
|Below Rs.2.5 lakh||No tax||0|
|Between Rs.2.5 lakh and Rs.5 lakh||5%||5% of (Rs.4,88,500 less Rs.2.5 lakh) = Rs.11,925|
|Between Rs.5 lakh and Rs.10 lakh||20%||0|
|Rs.10 lakh and above||30%||0|
|Cess||4% of total tax||11,925 * 0.04 = Rs.477|
|Total Income Tax Liability||Rs.11,925 + Rs.477||Rs.12,402|
*The above tax slabs are applicable to taxpayers below 60 years of age
Mr. Dutta is liable to pay the tax for the financial year 2019-2020 and will have to file the income tax returns during the assessment year 2020-2021.
Now that you have a clear idea of the income tax calculation on salary, here are some common income tax terms you may be interested in understanding:
What is the difference between Exemption and Deduction?
Both exemption and deduction help reduce your tax liability, but these are availed under different sections of the Income Tax Act.
- Deduction is a reduction in the total taxable income based on Section 80 and Chapter VI-A. Specific kinds of spending such as investment in life insurance policies and payment of children’s tuition fee help you avail a tax deduction.
- Exemption is a specific amount that is excluded from the gross total income before calculating tax. Exemptions are available under Sections 10 and 54. Interest earned from tax-free bonds and salary components like LTA are examples of exemptions.