How to Calculate Income Tax on Salary?
It is a nice feeling to get paid at the end of every month for all the effort you put in your work, but aren't you disappointed when the employer deducts higher tax? So how do you avoid the high tax deduction from your salary?
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Any income received by an employee is taxed under the head Income from Salaries. It is only taxable when an employer-employee relationship exists. The first thing one needs to know is the salary slab they fall under. Then the employee needs to submit their declaration about their proposed investments so that the employer can take them under consideration before deducting the income tax from the employee's salary. By declaring the taxes in advance you do not have to go through the lengthy process of having to file for refunds from the Income Tax Department.
If you are an employee working for an organisation under a certain employer, the income that you receive will always be taxable. The primary thing to take into consideration here is the income tax slab that you fall under. Once that has been determined, you need to furnish proofs of your investments so that it is considered by your employer during the time of income tax deduction from your total salary. Once you have declared your investments in advance, you do not have to go through the hassle of claiming refunds at a later stage.
Salary includes your Gross salary, Provident Fund, Insurance, Leave pay, Gratuity, Employee State insurance and Labour Welfare Fund.
Know How to calculate HRA from Basic Salary
Gross Salary:
You can invest under the Section 80C to a maximum of Rs.1,50,000. Or if you are in a higher tax bracket, you can save Rs.45,000 in tax.
You can make the investment in Provident Fund, Life Insurance Premium, Equity Linked Savings Scheme, Home Loan monthly instalment, National Savings Certificate, Infrastructure Bond, Pension Funds, Tuition fees and Unit Linked Insurance Plan.
Under Section 80D, a standard deduction of Rs.40,000 pertaining to the existing transport allowance and miscellaneous medical costs has been proposed by the Finance Minister. Despite that, transport allowances for differently-abled individuals will continue to be available at the same rate. This proposal will thereby lessen the tax liability of middle-class employees. This standard deduction allowance is expected to effectively benefit people who earn from pensions. The Government is said to have reserved an amount of Rs.8000 crore for this purpose.
Under Section 80D, you can claim Rs.25,000 as medical expenses and Rs.30,000 can be claimed by senior citizens.
As per Union Budget 2018, under Section 80D, the deduction limit for premiums paid on health insurances or other medical expenditures was increased from Rs.30,000 to Rs.50,000.
Additionally, the deduction limit for expenses incurred on critical illnesses (pertaining to senior citizens) has been raised to Rs.1 lakh from an earlier amount of Rs.60,000 (for senior citizens) and Rs.80,000 (for super senior citizens), under Section 80DDB.
These tax concessions are sure to provide an extra tax benefit of Rs.4,000 crore to senior and super senior citizens. In addition to these concessions, Finance Minister, Arun Jaitley has also proposed an extension of the Pradhan Mantri Vaya Vandana Yojana up until March 2020, under which an 8% tax return is guaranteed by the Life Insurance Corporation of India.
The deductions on House Rent Allowance is the least of the following:
- Either the actual HRA amount.
- 50% of your basic pay if the employee is living in metro and 40% if the employee is living in a non-metro area.
- Additional rent paid above 10% of his salary.
While you have a house of your own, you cannot claim deductions for Home loan interest payment and rent. But some people do claim both while they are living in their own homes. If they are staying with their parents, they show that they are paying rent to their parents and claim the HRA. The other case is when you have your own house, but you stay in a rented accommodation, as the workplace is far from your home. You can then claim HRA as well as deduction for the home loan interest payment.
Gross salary is the sum total of Basic pay + Dearness allowance + House Rent Allowance + transport allowance + special allowance + other allowance.
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Deductions on Income from Salary
The deductions on Income from Salary falls under the Section 16 of the Income Tax Act. The deductions are:
- Entertainment Allowance under Section 16(ii): Deduction is allowed by way of entertainment allowance given by an employer. This deduction is available only for the Government employees. The deduction is either the 1/5th of salary without including the benefits or perquisites or other allowances or Rs.5,000, whichever is lesser. The non-government employees can't avail this deduction.
- Tax on Employment under Section 16(iii): The Professional Tax is allowed as a deduction while computing income from salaries.
Note: The Standard Deduction from gross salary income is not allowable from the Financial Year 2005-2006.
The total taxable income is after all the deductions are being made to the all the different heads of income.
How to calculate TDS from Salary
How to Calculate Income Tax from Salary with Example
Let's take the example of Mr. A who is a CA and his Gross Salary is Rs.80,450, which includes:
Basic= 50000 + HRA=20000 + Travel allowance=1000 + Child's educational allowance=200 + Medical allowance=1250 + other allowance=8000
The deductions allowed will be Travel allowance=1000 + Child's educational allowance=200 + Medical allowance=1250 provided that Mr. A submits medical bills worth Rs.1250. Mr. A has a house of his own so the HRA is not deducted. So his total exemption will be Rs.2,450.
The taxable annual gross income will be Rs. (80,450-2,450) x 12 which is Rs.9,36,000.
If Mr. A declares loss on House Property for the interest he is paying for the loan taken to buy his house worth Rs.1,00,000. The Gross total income will be Rs.8,36,000 (9,36,000-1,00,000).
Mr. A declares Rs.1,00,000 as investment under Section 80C and Rs.25,000 under Section 80D, the total taxable income will be Rs.7,11,000 (8,36,000-1,25,000). This is the net taxable income. And Mr. A's income tax rate would be:
For the first Rs,2,50,000 it is nil, for the next Rs.5,00,000 it will be 5% that is Rs.25,000. And on the balance of Rs,11,000, the tax rate is 20% amounting to Rs.2,200.
Mr. A's total annual tax is Rs.53,766 (Rs.52,200 plus the educational cess and higher education cess that is charged at 3% which is Rs.1,566). The monthly tax that is levied on him will be Rs.4,480.50/-.
Computation of Tax
In the books of accounts the Computation of Tax will look like:
| Particulars | >Amount | >Amount |
|---|---|---|
| Basic pay | XXXXX | |
| + Dearness allowance | XXX | |
| + Annuity | XXX | |
| + Bonus | XXX | |
| + Commission | XXX | |
| + Arrears of salary | XXX | |
|
+ House Rent allowance
|
XXX (XXX) | XXX |
|
+ Leave travel allowance
|
XXX (XXX) | XXX |
+ Perquisites
|
XXX (XXX) | XXX |
+ Other allowances
|
XXX (XXX) | XXX |
+ VRS/ Retrenchment compensation
|
XXX (XXX) | XXX |
|
+ Gratuity received
|
XXX (XXX) | XXX |
+ Leave encashment
|
XXX (XXX) | XXX |
+ Pension
|
XXX (XXX) | XXX |
| + Employers Contribution (in excess of 12% salary of employee) | XXX | |
| + Interest on PF in excess of the notified amount | XXX | |
| Gross Salary | XXXXX | |
|
||
| Entertainment allowance | XXX | |
| Professional Tax paid | XXX | |
| Income chargeable for tax under Salaries | XXXXX |
Always remember to declare your investments at the beginning of the tax year so that the employer can make the required deductions. If you have forgotten to declare at the beginning of the year, heavy taxes will be deducted throughout the year. If you have made any investments, you can show that and claim for refund at the end of the financial year.
Holding on to more of your money is a key to building your wealth. So, it is important to know how much tax is being deducted from your salary and you must check if there are any other deductions that needs to be included.
Calculating Income Tax:
For an individual who pays tax, the knowledge about tax computation is a must. Not only do you get an idea of the amount of tax that you must pay, bust also you learn ways to save tax.
Know More About Income Tax Slabs
Computation of Tax Liability
Once you have calculated your income tax, the next step in the process will be to calculate your total tax liability. Follow the below mentioned steps:
- Your total income needs to be rounded off to the closest multiple of 10.
- Next, classify the total amount into four parts: long-term capital gains, short-term capital gains, earnings from cardgames, lotteries etc., and the total amount that remains (that is ultimately rounded off).
- Add up the computed tax.
- Whatever the balance is, levy the surcharges.
- Add education, secondary and higher education cess to the total calculated tax (including surcharges).
- Check the rebates that are allowed after surcharges are added.
- The remaining balance will be your total payable tax which is then rounded off to the closest multiple of 10.
Income Tax Slab Rates for Senior Citizens (more than 60 years but less than 80 years at any given time in the year)
| Taxable Income | Rates |
|---|---|
| 0 to Rs.3,00,000 | NIL |
| Rs.3,00,000 to Rs.5,00,000 | 5% |
| Rs.5,00,000 to Rs.10,00,000 | 20% |
| More than Rs.10,00,000 | 30% |
Income Tax Slab Rates for Super Senior Citizens (a resident of India who is 80 years old or more at any given time in the year)
| Taxable Income | Rates |
|---|---|
| 0 to Rs.5,00,000 | NIL |
| Rs.5,00,000 to Rs.10,00,000 | 20% |
| More than Rs.10,00,000 | 30% |
To get a better understanding of TDS, let us take a look at its deduction rates for FY 2017-18
Tax Rates for Indian Citizens below 60 years of age
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.2,50,000 | NIL | NIL | NIL |
| Rs.2,50,001 to Rs.5,00,000 | 5% | 2% of the total Income tax | 1% of the total Income tax |
| Rs.5,00,001 to Rs.10,00,000 | Rs.12,500 and an additional 20% | 2% of the total Income tax | 1% of the total Income tax |
| More than Rs.10,00,000 | Rs.1,12,500 and an additional 30% | 2% of the total income tax | 1% of the total income tax |
Tax Rates for Indian Citizens who are below 80 years in age but above 60 years
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.3,00,000 | NIL | NIL | NIL |
| Rs.3,00,001 to Rs.5,00,000 | 5% | 2% of the total income tax | 1% of the total income tax |
| Rs.5,00,001 to Rs.10,00,000 | Rs.1000 and an additional 20% | 2% of the total income tax | 1% of the total income tax |
| More than Rs.10,00,000 | Rs.1,10,000 and additional 30% | 2% of the total income tax | 1% of the total income tax |
Tax Rates for super senior residents of India
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.5,00,000 | NIL | NIL | NIL |
| Rs.5,00,001 to Rs.10,00,000 | 20% | 2% of the total income tax | 1% of the total income tax |
| More than Rs.10,00,000 | Rs.1,00,000 and an additional 30% | 2% of the total income tax | 1% of the total income tax |
- Checkout Highlights of Union Budget 2018-19
Computation of TDS on Salary
Fundamentally, tax deducted at source is calculated on your existing CTC that includes multiple elements such as basic salary, medical allowance, special allowance, dearness allowance and more.
Based on the wide array of investments that an individual might make for a certain financial year, the Indian government under Sections 80C and 80D of the Income tax Act, 1961, allows deductions that in turn helps the individual to opt for tax exemption.
In order to get your tax exemption declarations approved, you will need to provide corresponding proofs and documents to your employer. Evaluate the following categories that are generally considered for exemption:
- Travel Allowance
- House Rent Allowance
- Medical Allowance
Income Tax Calculator FAQ's
- What is an assessment year?
- How is assessment year different from previous year (the last fiscal year)?
- Difference between an NRI and a person of Indian origin?
- If I have paid more tax while filing tax returns, will I get a refund?
- What are receipts? Can all receipts be considered income?
- What is considered as Income?
- What is the meaning of Income Tax Return?
- Will I still be required to file income tax returns if my employer deducts and deposits TDS on my behalf?
- Is E-filing a compulsory activity?
- Is filing income tax returns absolutely important?
- How do I verify my tax return making use of EVC?
- Log in to the website of the department
- Choose the option for e-filed returns or forms from the option ‘’My Account’’
- Select ‘’Click here to view your returns pending for e-verification’’
- Choose the appropriate assessment year that you want to verify and then select from three options that are given in order to verify returns
- What is Taxable Income?
- What is Exempt Income?
- Are any documents mandated with the income tax return?
- What does TDS mean?
- What is Form 16?
The year that follows the financial year is known as the assessment year.
From the perspective of Income Tax, financial year is the year that you earn your income, whereas assessment year is the year that you compute the taxes on your previous year’s income and make subsequent payments.
A Non-Resident Indian or Overseas Indian is essentially an individual who resides outside the Republic of India but belongs to the Indian descent. A person of Indian origin is fundamentally born in India and has lived here their entire lives.
Long-Term Capital Gains and Losses: If you have an investment that you have had a possession for more than 12 months before it was sold, then the corresponding gains or losses pertaining to those investments will be termed as long-term capital gains or losses.
If your tax liability is comparatively less than the amount that you have already paid as Income Tax, then you will definitely are eligible for a tax rebate or refund. Additionally, in case you have missed out on your investment declaration, you are still eligible for a rebate which in turn will save you huge chunks of money.
A written validation that a certain sum of money has been transferred from one party to another.
No, not all receipts can be used to claim taxes. Receipts pertaining to medical, childcare expenses, work expenses that have not been reimbursed etc., can still be used to claim due taxes.
The amount of money that you receive every month for providing your services to a company or an individual is essentially what ‘’income’’ stands for. It is this amount of money that is finally computed for tax deductions and rebates.
A form that is essentially prescribed for an individual to furnish his/her details of income that he/she has earned from multiple sources (heads of income) and the amount of taxes he/she has paid for the concerned financial year to the Department of Income Tax is what income tax return stands for.
Yes, most definitely! If your income exceeds the amount of Rs.2.5 lakh, you will be required to file your tax returns even if the deduction and deposit of TDS is being made by your employer.
In most cases, yes, e-filing is necessary. In case your annual income is more than Rs.5 lakh or you have a tax refund to claim, only in these cases e-filing becomes a mandatory task!
If, during a particular financial year, your income has exceeded Rs.2.5 lakh, it will be a mandate to file an income tax return.
Incomes that are charged for taxation under the Income Tax Law is known as Taxable Income.
The kind of income that is not included in the total taxable income, or is basically exempted from tax and is thereby non-chargeable, is known as exempt income.
No, as such document attachment is not a mandate. If and only you get a summon from Income Tax Department to submit your documents, should you do the same.
Tax deducted at source or TDS is basically an adjustment made with the ultimate payable tax when income tax return is calculated.
It is a certificate provided by an employer to his employee wherein details of TDS deduction, allowances, and more are provided.
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