How to calculate Income Tax on salary with examples

One of the main reasons that salaried employees have difficulty with tax calculations is the inability to comprehend the salary structure and components. The net CTC provided to you by your employer includes a variety of tax-saving components. In order to get the most benefit from these benefits, you need to be aware of the structure of your salary.

Since tax season is just close to the mark, this is the best moment to know what you can do to determine your tax liability based on the salary component. This will allow you to make the best investments in tax-efficient and smart instruments like short-term life insurance health insurance, term life insurance, and Unit linked plans for insurance (ULIPs).

We’ll begin by identifying the key components of the structure of your pay and also how they will help you calculate and cut down on taxes.

Tax is deducted at the source (TDS) on the salary

Also, you should be aware that your employer takes TDS from your earnings and then pays this directly to the Income Tax Department. TDS is calculated based on your income as well as the investment declarations you provided at the start of your year. This is to be presented to you by the company. It is therefore important to complete your declarations properly and in time.

In June, July, or at any time throughout the year the employer will give you with a TDS certificate that includes the information about tax deducted . This certificate is then submitted at the time of tax collection to the department. The certificate is known informally as the Form 16. If your annual income is only salaried it is possible to use this form 16 to submit your tax return.

If, however, you earn rental income, receive dividends or interest in your portfolios, or traded securities like bonds or stocks in the fiscal year it is also necessary to declare it on the tax return you file for your income.

Understanding the structure of your salary or CTC is an essential skill that will assist you in your professional and financial life. Knowing your salary component will not only saves you money on taxes but can also help you negotiate to get a higher salary. If you’re not familiar with the terms used, seek out your HR’s explanation of the concept in greater detail.

Understanding the components of your salary on the pay roll

  • Salary base
    The basic salary is the primary portion of your salary slip. Other important tax-saving elements like house rental allowance (HRA) and employee benefit funds (EPF) contribution are determined on the basis of your salary.
  • Rent allowance for houses (HRA)

    If you reside in a house that you rent and you are a tenant, you may claim an HRA deductions from your taxable income. The amount of tax deductions you are eligible for under HRA is based on the following elements:

  1. Total HRA is listed on your pay slip
  2. 50% of the basic salary plus Dearness Allowance (DA) in metropolitan cities.
  3. 40% of the basic salary + DA in cities that are not metropolis
  4. Actual rent paid less 10% of the basic salary plus DA

Be aware that if you are paying rent that is that exceed the amount of Rs. 1 lakh over the course of a year, you need to give the landlord’s PAN number in order to claim deduction.

  • Travel and leave allowance (LTA)
    LTA can also be an income-tax saving element of you salary plan. If you are a salaried worker, you can claim tax deductions on a trip that you take with only family members, spouses, and siblings who are dependent on parents or siblings in India. The amount of exemption is in proportion to the actual costs incurred during the trip, which must be claimed through the submission of original invoices. LTA exemptions are available for just two trips in the span of four years.
  • Contribution to the Employees Provident Fund (EPF) The EPF is an initiative by the Government of India initiative to offer retirement benefits to employees. According to the EPF Act employees as well as the employer must make a contribution of 12% from their base income to the EPF each month. EPF contributions made from your salary can be claimed to be tax-deductible according to income tax rules.

You can calculate your net tax-deductible income taking out deductions

Tax deductions can help you lower your tax liability by saving, investing or spending money on specific items.

First , there is an ordinary deduction of Rs . 50,000 (mentioned in the earlier section) This is available to all without investing or spending on specific product.

Then, deduct investment and expenses that are eligible under Section 80.

under Section 80C, which is the largest deduction pool You can claim up to 1.5 lakh in deductions for different expenses and investments. The investments into PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana as well as the premium you pay to term insurance, are a few of the most sought-after methods to get this deduction. Additionally, if you own an outstanding home loan that principal amount you pay in the previous year could be deducted in this section. Additionally, your EPF that is portion of your earnings is included within the category.

If you’re investing in NPS You can benefit from a deduction of Rs 50,000 in the form of Section 80CCD(1B) which is above and beyond the limit of Rs 1.5 lakh limitation under Section 80C. In addition If you’ve paid for premiums on the health insurance plan of your entire family or your parents, you may claim the amount as tax deductions under Section 80D..

If you have home loans that portion of interest of EMI to be paid over the course of the fiscal year is eligible for deductions in excess of an amount of 2 lakh, as per Section 24. It is, of course, in addition to the deduction of the principal amount in Section 80C.


Calculate Your Taxes

Today, one pays tax on the net income that is tax deductible.

  • For the first amount of Rs. 2.5 million of tax-deductible income , you pay no tax
  • If you pay the next amount of Rs. 2.5 lakhs, you will have to pay the 5% i.e. Rs 12,500
  • Then for the 5 lakhs, you will must pay 20 percent i.e. Rs 1,00,000
  • If your tax-deductible income that exceeds the amount of Rs. 10 lakhs, you have to pay 30% of the total amount

Step 5 Consolidate your tax net

Tax rebate in the context of Sec A 87ATax Rebate is type of tax incentive offered by the government for individuals who earn less than the limit specified. If your taxable income after deductions isn’t more than five lakh rupees and you are eligible for a tax an exemption under Sec 87A for Rs 12,500.

When taxable earnings are greater than 5 lakh, then you are able to apply the healthcare and educational tax that is 4 percent of your tax sum to calculate the total amount you’ll be required to pay.

If you are in the extremely wealthy bracket, i.e. between 50 lakhs and 1 crore, these individuals have to pay an additional 10. For income between Rs 1 and 2 crore, the surcharge of 20 percent is required.

Let’s look at this using an example

Akash is employed at an Mumbai-based MNC and his gross annual pay is around 15 lakh. After taking all exemptions off his salary, such as HRA and deductions for standard deductions, his net income is 12.5 lakh.

Let us understand this with an example: 

Vikash works in an Intelligence Bureau and his annual gross salary is Rs. 22 lakhs. After the deduction of HRA and Leave Fare Concession, the net income comes to Rs. 18 lakhs. PPF is Rs. 60,000/-. He has taken the LIC and its premium is Rs. 12,000/-, Medical Insurance deduction is Rs. 10,000/-. He further gained an interest on bank account of Rs. 15,000/-

As per section 80C, total deduction is Rs. 60,000 + Rs. 20,000 = Rs. 80,000/-

As per section 80D (for Medical Insurance)  total deduction is Rs. 10,000/- and as per Section 80CCD(1B) (for NPS) total deduction is Rs. 50,000/-

Now, Vikash Net salary is = Gross salary – (HRA+LTA+ Standard deduction of Rs. 50,000/-) = Rs. 17.50 lakhs. He gained Rs. 15,000/- as interest on bank account. So, his Gross taxable Income is Rs. 17.50+ Rs. 0.50 = Rs. 18 Lakhs

Total Deduction = Rs. 80,000/- + Rs. 10,000 + Rs. 50,000/-= Rs. 1,40,000/-

Now the total Income of Vikash is Gross taxable Income – Total deduction = Rs. 18,00,000 – Rs. 1,40,000 = Rs. 16,60,000/-

Vikas has to pay tax each year = 30% of (Rs. 16,60,000 – 10,00,000) = Rs. 1,98,000/-


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