How to Calculate Income Tax on Salary (With Examples)

Learn how to calculate taxes from your salary with easy examples. This will help you understand your financial duties and increase your take-home pay.

Many people see income tax as something they have to deal with but don't like. It can be confusing with all the different terms like tax exemption, rebate, deduction, and saving.

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Sometimes, we don't know how much tax authorities take from our money or how to save on taxes.

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In this blog, we'll teach you how to calculate income tax on salary with examples. This way, you can do the math and find ways to save on taxes next time.

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We will explain how you calculate tax on your salary. We will show you how to calculate income tax on your salary. We will also explain how to calculate taxable income.

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What is Income Tax?

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Income tax is a levy imposed by the government on various entities, including individuals, Hindu Undivided Families (HUFs), companies, cooperative societies, and trusts.

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The specific tax rates depend on an individual's income level and age.

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What is Taxable Income?

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Taxable income refers to an individual's earnings after accounting for tax exemptions, deductions, and rebates.

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What are the Different Sources of Income?

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The different sources of income are-

• Wages, salaries, and tips
• Capital Gains
• Business Income
• Investments
• House / Other Rental Income
• Interest and dividends
• Retirement Income
• Social Security and other benefits
• Other Miscellenious income

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How to Calculate Income Tax on Your Salary

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Calculating income tax on your salary may seem straightforward, involving multiplying the tax rate by your taxable income.

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Calculating taxes involves calculating your income, subtracting deductions, finding your tax owed, and considering past payments. We will guide you on how to calculate tax on your salary.

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Component of Income Taxes

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When calculating income taxes, remember these key points:

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1. Financial Year (FY):This is the year you earn money, from April 1st to March 31st of the following year. During this time, gather all your financial documents and investment proofs.

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2. Assessment Year (AY): Your income from a particular financial year gets assessed. For example, AY 2023-24 assesses income earned from April 1, 2022, to March 31, 2023.

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3. Tax Deductions: These are ways to reduce your taxable income. Section 80C of the Income Tax Act helps you save on taxes. You can do this by investing in life insurance and other approved options.

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4. Tax Exemption: Certain income is not considered part of your total income and is excluded from taxation. Some examples include exemptions for salary components, rental income, and business expenses.

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5. TDS (Tax Deducted at Source): When someone making a payment deducts tax and sends it to the government. TDS is taken out when payment is made or when it is recorded, whichever comes first. However, individuals and small businesses have some exemptions.

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6. Salary Breakup: Your pay slip or salary statement breaks down your salary into different components. Understanding this breakdown is crucial when calculating your income tax.

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7. Taxable Income:To find your tax, subtract eligible deductions from your total income. This total includes all your earnings from different sources. They may include:

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• Income from Salary: 
• Income from House Property
• Income from Business/Profession
• Income from Capital Gains
• Income from Other Sources

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1. Income from Salary: This is the money you earn when you work for someone as an employee. It includes your regular pay, bonuses, commissions, and even things like a place to live provided by your employer or a loan without interest.

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2. Income from House Property: If you own a building or land that someone else pays you house rent to use, that's called rental income. This could be from a house, office, warehouse, or parking space. Different rules apply if you live in the property yourself.

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3. Income from Business/Profession: This is the income you earn from your business or employment after deducting all permissible expenses. It covers various types of earnings, like profits, income from partnerships, and even benefits from your business.

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4. Income from Capital Gains: When you sell valuable assets such as real estate or investments at a profit, it's referred to as capital gains. You pay tax on this profit in the year you sold it.

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5. Income from Other Sources: Any money you obtain that doesn't fit into other categories is considered income from supplementary sources. Subject to tax unless certain laws exempt it.

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To calculate income tax on your salary, follow these steps. This will help you find out how much tax you owe or if you will get a tax refund.:

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1. First, add up your total income. Then, adjust for any advance tax payments and tax already taken from your earnings.

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2. Once you've done that, you'll have your net tax payable or refundable amount.

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3. Round this amount to the nearest multiple of 10 per the tax rules.

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4. If you owe tax (called self-assessment tax), make sure to pay it by the deadline when you file your tax return. If you're owed a refund, you'll get it after filing your tax return.

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If you are under 60 years old, you have two choices for tax rates. You can choose the old tax regime or the new tax regime.. Here are the tax rates for both:

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New Tax Regime After 2024:

- No tax on income up to 3,00,000.

- 5% tax on income between 3,00,001 to 6,00,000.

- 10% tax on income between 6,00,001 to 9,00,000.

- 15% tax on income between 9,00,001 to 12,00,000.

- 20% tax on income between 12,00,001 to 15,00,000.

- 30% tax on income above 15,00,000.

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Old Tax Regime Before 2024:

- No tax on income up to 2,50,000.

- 5% tax on income between 2,50,001 to 5,00,000.

- 20% tax on income between 5,00,001 to 10,00,000.

- For income above 10,00,000.

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You can choose between these two tax regimes when filing your taxes.

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Example of Tax Calculation Under the New Tax Regime 2024

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Meet Sarah, who works for a tech company in Bengaluru. Her annual gross salary is Rs 18 lakh. After accounting for all deductions, her net salary is Rs 15 lakh.

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Last year, she earned Rs 15,000 as interest income from her bank account. She also invested Rs 2 lakh in ELSS Mutual Funds and contributed Rs 30,000 to EPF. Additionally, she invested Rs 25,000 in NPS and holds a health insurance policy for herself and her spouse with an annual premium of Rs 18,000.

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Now, let's see how taxable income is calculated and how Sarah's tax liability is calculated based on the provided details:

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1. Net Salary: Rs 15,00,000

2. Interest Income: Rs 15,000

3. ELSS Mutual Fund Investment: Rs 2,00,000

4. EPF Contribution: Rs 30,000

5. NPS Contribution: Rs 25,000

6. Health Insurance Premium: Rs 18,000

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First, we need to calculate Sarah's taxable income:

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Taxable Income = Net Salary + Interest Income - Deductions

Taxable Income = 15,00,000 + 15,000 - (2,00,000 + 30,000 + 25,000)

Taxable Income = 15,00,000 + 15,000 - 2,55,000

Taxable Income = Rs 12,60,000

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Now, let's calculate her tax liability based on the tax slabs:

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- No tax on the first Rs. 2.5 lakh of taxable income.

- 5% tax on the next Rs. 2.5 lakh (Rs. 12,500).

- 20% tax on the next Rs. 5 lakh (Rs. 1,00,000).

- 30% tax on the amount exceeding Rs. 10 lakh.

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Sarah's taxable income of Rs 12,60,000 falls into the second slab. So, her tax liability is:

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Tax Liability = Tax on Rs. 12,60,000 (Second Slab)

Tax Liability = 5% of 5,00,000 + 20% of (12,60,000 - 5,00,000)

Tax Liability = 25,000 + 1,12,000

Tax Liability = Rs. 1,37,000

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Now, let's add the 4% health and education cess to this amount:

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Cess = 4% of Rs. 1,37,000

Cess = Rs. 5,480

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So, Sarah's total tax liability, including the cess, is Rs. 1,37,000 + Rs. 5,480 = Rs. 1,42,480.

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Sarah's tax liability is Rs. 1,42,480.

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Below is a table showing the details of the calculation of Sarah's tax

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Conclusion

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Understanding how to calculate income tax on your salary is necessary for managing your finances wisely.

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It involves knowing how tax is calculated on your salary and how taxable income is calculated.

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By following the right steps and looking at tax-saving options, you can lower your tax bill. This way, you can keep more of your hard-earned money. Whether you opt for the old tax regime or the new one, knowing the rules empowers you to make informed financial decisions.

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Frequently Asked Questions

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1. How is Income tax on salary calculated?

To calculate income tax on salary, use this formula:

Taxable Income = Gross Salary - Deductions.

Then, calculate Income Tax with this formula:

Income Tax = (Taxable Income x Applicable Tax Rate) - Tax Rebate.

This is how income tax calculator works.