How to Calculate Income Tax on Salary: Income Tax calculation in India is a complex process, and even the mention of it intimidates people, especially those who have no taxation background. But the calculation of income tax does not have to be complex. Without the required information, it is apparent that one will end up either paying less tax or paying more tax. For this reason, one should have the required knowledge regarding income tax and the calculation of income tax.
The absence of knowledge is the primary reason why most people avoid doing taxes. The process of calculating and managing income tax on salary is mentioned below.
- What is the income tax?
- Essential terms for calculating income tax
- Tax saving tools
- Deductions made under section 80
- Calculation of the income tax
According to the Income Tax Act, each individual receiving a salary must pay an amount known as income tax on their respective salary to the country. The government has made several amendments and exceptions with subsections mentioning tax payment, computation, and deduction to the law. After withdrawing the available tax-saving provisions and speculations, the final amount is given to the government as the income tax on salary.
One should consider some basic terms should while calculating the income tax. They are listed below:
The tax year
The prior fiscal year for which the income tax is calculated is known as the tax year. From 1st April, the fiscal year begins and ends on the 31st March of the following year. For example, if one calculates their income tax for the year 2020, they need to include their salary income from 1st April 2019 to 31st March 2020.
The assessment year is a broad term, but most people confuse it with the fiscal year, which is very improper since both of them are entirely different. An assessment year begins after the prior fiscal year is over. The year’s calculation when an individual’s income tax for the last fiscal year is known as the assessment year. For example, if one calculates their salary income tax for the fiscal year 2019-20, their assessment year will be 2020-21, and the last date for Income Tax efiling their I.T.R. will be July 2020.
The initial step is to get hold of the individual’s salary breakup before calculating income tax on salary. From the salary slip or salary statement, one can get hold of their salary breakup. If one fails to provide the salary slips or opinions, then one should go to their H.R. and ask for them. One will have good knowledge of the basic salary structure and will understand the significant components just by taking a good and close look at the slip or the statement. Tax deductions on paycheck like House Rent Allowance or H.R.A., Dearness Allowance or DA, etc., which are available to an individual, will help them calculate income tax.
After getting the salary breakup, one will have to calculate their taxable income. The income on which tax needs to be paid, including all other income apart from salary, is known as taxable income.
Taxable Income = Gross Income – Deductions
Source of Income with description
- Income from Salary: The income that one receives from their job, like salary, allowance, leave encashment, etc.
- Income from Property: The income one receives from a house or land (rented or self-occupied).
- Income from Business or Profession: The income that one earns from a part-time job or profession.
- Income from Gains: The income that one earns from the sale of a capital asset
- Income from other sources: Income received from any other source, like earnings from a fixed deposit, gifts, pensions, etc.
The income tax comprises paying money to the government and includes the savings one makes due to the deduction in the income tax. Under section 80 of the Income Tax, the deductions are available. These deductions are deducted from net income to get the reduced taxable income.
Taxable Income = Gross Income – Deductions
(The summation of all income from every source is known as gross income.)
One needs to have a thorough knowledge of Section 80C to calculate the taxable income. All types of deductions, like mutual fund returns, investments made on mutual funds, life insurance policies, interest on savings, N.S.C., P.P.F., S.I.P.s, etc.
Home loans, etc. According to the latest tax regime, per year, one’s deductions can go up to 2.5 lakhs. So, therefore, one can save a lot on their annual income if they plan their investments smartly.
Tax Deducted at Source or T.D.S. states that the tax one has to pay is directly reduced from their salary. A refund is available on T.D.S., so if excess T.D.S. has been deducted by mistake, then it’ll be refunded. Employees use T.D.S. to maintain a hassle-free tax design. Banks also use T.D.S. If one finds any inconsistency in the amount deducted, they can get a refund by showing the proper documents.
The payable tax calculation
After the reduction of all the applicable deductions and T.D.S., the amount calculated is the final tax amount that has to be paid to the Indian government. Payment of income tax is not required if anyone’s total income is less than 2.5 lakhs. Beyond this amount, everyone is liable to pay income tax according to their income slab.
For a salaried individual who is under the age of 60 years, the tax rate is:
- If the net income is lower than 2.5 lakhs, then payment of tax is not needed.
- If the income slab is between 2.5 and 5 lakhs, then 10% is paid as a tax rate.
- If the income slab is between 5 and 10 lakhs, then 20% is paid as a tax rate.
- If the income slab is above 10 lakhs, 30% of the amount is to be paid as a tax rate.
Every citizen desires to increase their income and decrease the amount of tax they pay, and specific methods help you get what you want. These methods are known as tax saving methods, and they help an individual save money for their future and save a significant amount on income tax. Some of the most popular tax savings tools are mentioned below:
Equity Linked Savings Schemes or ELSS is a specific equity mutual fund with a lock-in period of 3 years and is offered by every mutual fund company. It falls under section 80C of the Income Tax Act of 1961 and is exempted for up to 1.5 lakhs. ELSS does not have a fixed return rate since it is based on market changes and it keeps changing frequently, but the returns are tax-free, which is why a vast number of people prefer investment in ELSS.
PPF stands for the Public Provident Fund. It is a government scheme with a lock-in period of 15 years, which can also be extended by a block of 5 years. It has been the most preferred investment method and tax savings for millions of people. The minimum limit for investing in P.P.F. is INR 500 annually, while the maximum limit is 1.5 lakhs annually. It also provides interest at a fixed rate of 7.9%. For people who dislike volatility in investments and want to invest in safe options, P.P.F. is the best choice.
ULIP stands for The Unit Linked Insurance Plan. It is a combination of insurance and market-linked investments providing protection and savings with a lock-in period of 5 years. The authority can extend the lock-in period by up to 15 to 20 years. ULIP provides nine fund options between which an investor can switch any time they want, and the returns are also completely tax-free.
Under section 80 of the Act, many deductions are available, which help an individual to bring their taxable income down by reducing the payable tax.
These deductions are as under:
|Deduction under Section||The maximum limit||Deductions availed under|
|Section 80C||1,50,000||ELSS, ULIP, N.S.C., the Employee share of Provident Fund, L.I.C. Premium, Tuition fees for children, Home loan principal repayment, 5-year deposit scheme, purchase of a deferred annuity, Saving system for senior citizens, Setting up a pension fund by U.T.I. or mutual fund, annuity plan of L.I.C., Subscription to the scheme of Home Loan Account by the National Housing Bank and subscription to notified bonds of NABARD, Deposit scheme subscription of a company engaged in providing housing finance or public sector.|
|80CCC||N/A||On the amount deposited for a pension fund in the annual plan of L.I.C. or any other insurance plan.|
|80CCD (1)||1,50,000||Contribution of an employee to NPS account.|
|80CCD (2)||10% salary||Contribution of an employer to NPS account.|
|80CCDD (1B)||50,000||Any other contribution by an employee to the NPS account.|
|80TTA (1)||10,000||Income from interest earned on the savings account.|
|80TTB||50,000||From the post office, bank, etc., interest is received but applies only to senior citizens.|
|80GG||Monthly 5,000 or 25% of total income or rent paid – 10% of income (W.E.L)||For rent paid when an employer does not send H.R.A.|
|80E||Interest paid for eight years is equal to the amount||For education loans, interest is paid.|
|80EE||50,000||Homeowners paid the interest on home loans.|
|80CCG||25,000 or 50% of the amount invested in equity shares (W.E.L)||For investments in equities, Rajiv Gandhi Equity Scheme.|
|25,000||Self, spouse, and children’s medical insurance|
|80D||50,000||Medical insurance for parents above 60 years or parents above 80 years.|
|80DD||75,000||Medical treatment for the handicapped dependent.|
|80DD||75,000 for 40% to 80% disability and 1,25,000for more than 80% disability||For the maintenance of handicapped dependents, a specific scheme was taken whose payment is made.|
|80DDB||40,000 or the amount paid (W.E.L)||The medical expense for self or dependent who are less than 60 years.|
|80DDB||1,05,000 or the amount paid (W.E.L)||The medical expense on self or dependent who are more than 60 years.|
|80U||1,25,000 (severe disability) and 75,000 (less severe disability)
|From physical disability, the occurrence of self-suffering including blindness and mental instability.|
|80GGB||The contributed amount which is not in cash||Companies contribute to political parties.|
|80GGC||The contributed amount which is not in cash||Individuals’ contribution to political parties.|
|80RRB||Income received or 3,00,000 (W.E.L)||From royalty or patent, income is received.|
For a more straightforward calculation of the income tax, a formula is used. The formula is:
Basic salary + Special Allowance + Transport allowance + Any other allowance
= Gross income from salary
(Along with basic salary, if we add up H.R.A., special allowance, transport allowance, and any other allowance, we get the gross income from salary.)
Gross income from salary – Deductions = Net income (For calculation of tax, the income tax slab is used)
(After getting the gross income from salary, subtract deductions from it to get the net income)
Let us assume that Ms. Bose receives a monthly salary of Rs. 40,000 along with a monthly dearness allowance of Rs. 4,300, a monthly entertainment allowance of Rs. 3,250, and also pays Rs. 4,500 as professional tax. Now let us calculate her taxable income:
Her salary is Rs. 40,000 per month.
Therefore, the basic salary is 40,000 * 12 = 4,80,000
Dearness allowance is 4,300 * 12 = 51,600
Entertainment allowance is 3,250 * 12 = 39,000
Therefore, the gross salary is (4,80,000 + 51,600 + 39,000) = 5,70,600
Her professional tax is 4,500.
Therefore, net income is (5,70,600 – 4,500) = 5,66,100
Now, her taxable income is Rs. 5,66,100, so consequently, she falls into the income tax slab of 5 lakhs to 10 lakhs. Hence, as income tax, she needs to pay 20% of her net income.
The income tax on the above-mentioned net income is 20% of 5,66,100 = 1,13,220
At the beginning of the assessment year, an individual should affirm all the investments correctly to calculate the tax properly. To build a strong foundation, information regarding taxes, deductions, and returns is very important since tax evasion is considered illegal and legally offensive. Income tax fraud comprises some of the scenarios which are mentioned below:
- Submission of false or fake tax returns
- Erroneous financial statements
- Persistently, avoiding the submission of the I.T. return
- Failing to pay due to taxes intentionally
- Not reporting total income
- Fake claims
If someone is found guilty of evading taxes, then legal actions are taken against them where they need to pay a heavy penalty, and sometimes it may also result in imprisonment.