Income tax is the tax you pay on your income. Income Tax is levied on a person who was in India for 182 days during the previous tax year or the person who was in India for at least 60 days during the previous tax year and for at least 365 days during the preceding 4 years will be taxed.
Table of Contents
How to Calculate Taxable Income on Salary?
It is essential to gather all the details required to file your Income Tax Returns before computing your taxable income on salary. You will then have to calculate your total taxable income, followed by the calculation of final tax refundable or payable. To calculate the final tax, you will have to use the applicable tax rates before subtracting taxes already paid through advance tax or TCS/TDS from the tax amount due.
The income tax regulations allow individuals to derive income from five sources, viz. Income from Salary, Income from Business or Property, Income from Capital Gains, Income from House Property, and Income from Other Sources. Each income derived by an individual must fall under one of the aforementioned categories.
Following is the procedure for the calculation of taxable income on salary:
- Gather your salary slips along with Form 16 for the current fiscal year and add every emolument such as basic salary, HRA, TA, DA, DA on TA, and other reimbursements and allowances that are mentioned in your Form 16 (Part B) and salary slips.
- The bonus received during the financial year must be added for the income that is being calculated.
- The total is your gross salary, from which you will have to deduct the exempted portion of House Rent Allowance, Transport Allowance (for which the maximum exemption is Rs.19,200 per year), Medical reimbursement (for which the maximum exemption is Rs.15,000), and all other reimbursements provided the actual bills in respect of the expenses incurred.
- The result is your net income from salary.
Once your net income has been calculated, the following tax slabs will be applicable:
For individuals who are under 60 years of age:
|Net Income||Income Tax Rate||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.2.5 lakhs||Nil||Nil||Nil|
|Rs.2.5 lakhs to Rs.5 lakhs||5% of (Total income – Rs.2.5 lakhs)||2% of income tax||1% of income tax|
|Rs.5 lakhs to Rs.10 lakhs||Rs.25,000 + 20% of (Total income – Rs.5 lakhs)||2% of income tax||1% of income tax|
|Above Rs.10 lakhs||Rs.1,12,500 + 30% of (Total income – Rs.10 lakhs)||2% of income tax||1% of income tax|
For individuals who are between 60 and 80 years of age:
|Net Income||Income Tax Rates||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.3 lakhs||NIL||Nil||Nil|
|Rs.3 lakhs to Rs.5 lakhs||5% of (Total Income – Rs.3 lakhs)||2% of income tax||1% of income tax|
|Rs.5 lakhs to Rs.10 lakhs||Rs.10,000 + 20% of (Total income – Rs.5 lakhs)||2% of income tax||1% of income tax|
|Above Rs.10 lakhs||Rs.1,10,000 + 30% of (Total income – Rs.10 lakhs)||2% of income tax||1% of income tax|
For individuals who are above 80 years of age:
|Net Income||Income Tax Rate||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.5 lakhs||Nil||Nil||Nil|
|Rs.5 lakhs to Rs.10 lakhs||20% of (Total Income – Rs.5 lakhs)||2% of income tax||1% of income tax|
|Above Rs.10 lakhs||Rs.1 lakh + 30% of (Total income – Rs.10 lakhs)||2% of income tax||1% of income tax|
However, in addition to the tax slabs mentioned above, the Finance Minister of India, Nirmala Sitharaman has announced a new optional tax slab for individuals. The new income tax slab is an alternative and can be used instead of the existing system. The new tax slab can be summed up as follows:
New income tax slabs for individuals for FY 2020-21
|Income Tax Slab||Tax Rate|
|Up to Rs.2.5 lakh||Nil|
|From Rs.2,50,001 to Rs.5,00,000||5% of the total income that is more than Rs.2.5 lakh + 4% cess|
|From Rs.5,00,001 to Rs.7,50,000||10% of the total income that is more than Rs.5 lakh + 4% cess|
|From Rs.7,50,001 to Rs.10,00,000||15% of the total income that is more than Rs.7.5 lakh + 4% cess|
|From Rs.10,00,001 to Rs.12,50,000||20% of the total income that is more than Rs.10 lakh + 4% cess|
|From Rs.12,50,001 to Rs.15,00,000||25% of the total income that is more than Rs.12.5 lakh + 4% cess|
|Income above Rs.15,00,001||30% of the total income that is more than Rs.15 lakh + 4% cess|
Note: The tax slabs mentioned above are optional and can be used instead of the existing tax slabs. Individuals can also file their taxes on the basis of the previous income tax slabs.
Given below is an example of how income tax is calculated under the new regime (optional):
|Annual Salary (Rs.)||2.5 lakh||5 lakh||7.5 lakh||10 lakh||12.5 lakh||15 lakh|
|Computation of tax on the gross total income|
|Up to Rs.2.5 lakh||Nil||Nil||Nil||Nil||Nil||Nil|
|From Rs.2,50,001 to Rs. 5 lakh||Nil||12,500||12,500||12,500||12,500||12,500|
|From Rs.5,00,001 to Rs.7.5 lakh||Nil||-||25,000||25,000||25,000||25,000|
|From Rs.7,50,001 to Rs.10 lakh||Nil||-||-||37,500||37,500||37,500|
|From Rs.10,00,001 to Rs.12.5 lakh||Nil||-||-||-||50,000||50,000|
|From Rs.12,50,001 to Rs.15 lakh||Nil||-||-||-||-||62,500|
|Above Rs.15 lakh||Nil||-||-||-||-||-|
|Total Tax Amount||Nil||12,500||37,500||75,000||1,25,000||1,87,500|
|Additional Cess (4%)||Nil||500||1,500||3,000||5,000||7,500|
|Total payable tax amount||Nil||13,000||39,000||78,000||1,30,000||1,95,000|
Note: The calculation in this table is based on the new optional tax regime which has been announced on 1 February 2020.
Calculate Taxable Income on Salary as per the new tax slabs?
If an individual decides to file his or her taxes according to the new income tax regime, the following things are to be kept in mind:
- There are no exemptions under the new income tax regime
- There are no deductions under the new income tax regime
That said, the calculation of the taxable income as per the new income tax regime will be very straight-forward and will be calculated as a direct percentage of the income earned by an individual.
What is Salary Income?
Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual salary.
- Salary includes:
- Basic Salary or the fixed component of salary as per the terms of employment.
- Fees, Commission and Bonus that the employee gets from the employer
- Allowances that the employer pays the employee to meet his personal expenses. Allowances are taxed either fully, partially or are exempt.
- Dearness allowance paid to the employees to meet expenses due to inflation.
- City Compensatory allowance paid to those who move to big metros like Mumbai, Delhi, Chennai, where the standard of living is higher.
- Overtime allowance paid to the employee who works over the prescribed hours.
- Deputation allowance and servant allowance.
- House Rent Allowance: If the employee stays in his own house then the allowance is fully taxable. The allowance exemption is the least of
- The actual house rent allowance
- If he pays additional rent above 10% of his salary
- If the rent is equal to 50% of his salary (metros) or 40% (other areas).
- Entertainment allowance (except for Central and State Government employees).
- Special allowances like uniform, travel, research allowance etc.
- Special allowance to meet personal expenses like childrens education allowance, children hostel allowance etc.
- Foreign allowance given to employees posted abroad.
- Allowances of High Court and Supreme Court Judges.
- United Nations Organisation employees allowances.
- Rent free accommodation
- Concession in accommodation rent
- Interest free loans
- Movable assets
- Club fee payments
- Educational expenses
- Insurance premium paid on behalf of employees
Some are taxable only to specific employees like directors or those who have substantial interest in the organisation, they are taxed for:
- Free gas, electricity etc. for domestic purpose
- Concessional educational expenses
- Concessional transport facility
- Payment made to gardener, sweeper and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax are:
- Medical benefits
- Leave travel concession
- Health Insurance Premium
- Car, laptop etc. for personal use.
- Staff Welfare Scheme
- Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the category of the employee.
- Gratuity is given as appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
- Leave salaries tax depends on the category of the employee. The employee may make use of the leave or encash it.
- Provident fund is contributed by both employee and employer on a monthly basis. At the retirement, employee gets the amount along with interest. Tax treatment is based on the type of provident fund maintained by the employer.
What the term ‘’salaried income’’ means?
Dictionary meaning: Usually a form of earning or profit, provided by an employer to his/her employee. This generally comes in the form of an incentive in addition to the regular pay. This amount of money, defined as salary is the right of an employee for rendering his/her services to the employer.
Meaning as per the guidelines of the Income Tax Department: Section 17 (2) of the Income Tax Act, 1961, defines salary as the worth of an accommodation that is free of rent, from an employer to an employee.
Are allowances fully taxable?
Most often than not, salaried individuals are faced with the dilemma of determining which allowances will be taxable and which will not be taxable, and also consider the kind of implications that the tax liability might bring in.
Companies and organizations often provide allowances to their employees that are of a specified nature or for a specific cause. The primary and the most important thing to do here is to check the nature of the allowance offered. The mannerisms of allowance disbursement and its nature are the two most important elements to consider here. Primarily, an individual must know the difference between reimbursements offered on expenses such as conveyances and a basic allowance. It is vital to understand that reimbursements are always tax-free since it is just a mere amount that is being returned by the employer upon expenses incurred by the employee for certain services/products. Whereas, if the amount of money offered comes in the form of an allowance, it will be subject to taxation, unless the company declares it tax-free.
Other allowances such as leave travel allowance and children’s allowance usually enjoy tax benefits upto a certain extent, beyond which they are taxed. This is wholly dependent on the way the individual chooses to spend the amount that is offered as an allowance.
Carefully determine and segregate your allowances in order to ascertain which are taxable and which aren’t.
Salary Income Deductions
There are a handful of deductions that are allowed under salaried income. These vary in nature from perquisites and profits.
Earlier, under Section 16 of the Income Tax Act, 1961, a standard deduction was allowed to salaried professionals. However, it was discontinued from the assessment year 2005-06.
Allowance for entertainment
A deduction of Rs.5000 is offered as an entertainment allowance while computing the gross salary of an individual. It is one of the primary elements that is taken into consideration while gross salary is calculated. However, this provision can only be enjoyed by Government officials.
Section 16(ii) of the Income Tax Act, 1961
According to Section 16(ii) of the Income Tax Act, if an employee is receiving an entertainment allowance, the amount will first be dished out along with the basic salary of the person. Thereafter, will it be considered for deduction. This particular allowance will occupy one-fifth of the person’s salary and will be totally exclusive of other allowances and benefits.
Payment of Professional Tax by the employer: The Central and State Government levies a certain tax, known as professional tax, on individuals having salaried incomes, trades, employment and callings. This professional tax amount does not surpass Rs.2500 in a year.
According to Section 16(ii) of the Income Tax Act, 1961, a taxpayer has complete authority to claim a tax deduction with respect to the professional tax that he/she is paying to his/her employer. However, this deduction will only be allowed on the same year as the taxpayer pays the tax. An overdue professional tax cannot be considered for deduction, whatever the case may be.
Calculating Employee’s Net Pay
What does the term ‘’net pay’’ mean?
The portion of money received by an employee after the total amount has been withheld for state and federal tax deduction is fundamentally what ‘’net pay’’ stands for. Therefore, to put it in layman’s terms, the amount of money that comes in an individual’s paycheck is what net pay is.
How to calculate an employee’s net pay?
- Begin with your gross salary: Gross salary is essentially a salaried employee’s total yearly pay divided by the number of periods.
- Federal Income Tax Deduction: The tax bracket under which the employee falls and his/her status of filing are the two elements that determine the withholding of the federal income tax of the employee.
- Local and State withholding deductions: Consider all the sources of your income because this part is a little tricky. Since each state operates by their own standards and norms, you may have to deduct income tax for multiple states (according to their rates), if you have income coming in from multiple states.
- FICA taxes are to be withheld
- Take into consideration any other deduction that you may be allowed before computing your total net salary.
Taxable Income for Salaried Employees
The amount of your income that will be subjected to Income Tax deductions is essentially what taxable income stands for. Although most of the incomes are taxed according to the tax bracket that the individual falls under, it is important to note that sometimes certain incomes are partially taxable or not taxable at all.
Allowances that are wholly taxable - Dearness allowance, city compensatory allowance (only concerns people moving to or living in metros like Delhi, Mumbai, Chennai and Kolkata), and OA (overtime allowance)
Allowances that are partially taxable - These include House Rent Allowance (HRA), other allowances and entertainment allowance.
Allowances that are tax-free - This category comprises of foreign allowances (concerning personnels operating from a different country altogether), allowances enjoyed by supreme and high court judges and so on.
Given below is an example of a structure of a salary to grasp a better understanding of taxable and non-taxable income.
|Yearly Salary that is Taxable||Salaried Income||Tax exemption||Total Taxable Income|
|House Rent Allowance||Rs.3,00,000||Rs.1,72,000||Rs.1,28,000|
|LTA (leave travel allowance)||Rs.20,000||Rs.12,000||Rs.8000|
|Total Gross Salary||Rs.12,91,000||Rs.2,18,200||Rs.10,72,800|
Deductions on Income from Salary
The following deductions are available on the income from salary:
- Entertainment tax is allowed as deductions for the State and Central Government employees. The amount is the least of either Rs.5,000, entertainment allowance received by the employee or 20% of the basic salary.
- Professional Tax is the tax on employment which is deducted from the income every month. It is imposed at the state level for every salaried individual.
Please note that the standard deduction is not available for salary income from Assessment Year 2006-2007.
Computation of Net Salary of an Employee
Here is how the Net salary of an employee is computed:
|Particulars||Amount (In Rs.)|
|2.Fees, Commission and Bonus|
|Less: Deductions from Salary|
For computing Total income from various sources, the incomes are classified into:
- Income or loss from property
- Profit and gain from business
- Income from capital gains
- Income from other sources
This gives you an aggregate income. All the eligible deductions, allowance and reliefs are calculated on each heads.
Gross Total Income= A+B+C+D+E
Total Taxable Income= Gross Total Income- Deductions allowed from income
Total Tax Payable= Tax on Total Income- Rebates and relief allowed under Income Tax Act
FAQs on Calculating Taxable Income from Salary
- What is taxable income?
- What kind of income is subject to income tax?
Taxable income or gross income or adjusted gross income includes salaries, wages, bonuses, etc. along with unearned income and investment income. It is the amount that will be used to determine your tax liability.
The Income Tax Act, 1961, has classified income into five heads. They are as follows:
- Income from salary
- Income from capital gains
- Income from profession or business
- Income from house property
- Income from other sources
The components of salary include dearness allowance, travel allowance, house rent allowance, and other reimbursements and allowances.
In case you receive a gift that is worth more than Rs.25,000, you will be liable to pay tax on it unless you get the said gift from a relative, or if you get the gift on the occasion of your wedding. Even gifts received under a will or through inheritance are exempt from tax.
Income from other sources includes interest income, taxable gifts, dividend income, etc.