Salaried individuals must have an idea of their income tax payments to manage their finances. The process of calculating your tax can be quite complicated and intimidating because you will have to take a lot into consideration. Jump into this article to figure out how to calculate income tax on salary with an example.
Also Read – What is Tax?
How to Calculate Income Tax on Salary
If you are wondering how to calculate income tax, you will have to follow this procedure:
Step 1: Estimate Your Gross Income
You will have to calculate your gross annual income to begin with tax calculation. Your gross salary amount with its various components including HRA, LTA, and special allowances is a major part of the gross income. But while estimating the gross income, you will have to consider your other sources of income to estimate the gross income.
Step 2: Figure Out the Net Taxable Income After Deductions
After calculating your gross income, you will have to figure out the deductibles. Did you know that the standard deduction of Rs 50,000 is available for all? Another deduction of Rs 1.5 lakhs is applicable for different expenditures and investments.
NPS investments can help you claim a deduction of Rs 50,000 is available. If you are paying a home loan, you can also deduct an amount of up to Rs 2 lakh on the interest part of the EMI. Please note that these deductions are available in old tax regime.
Step 3: Check the Net Taxable Income
You will have to subtract the deductibles from the gross taxable income to get the total income on which your tax will be applicable. The tax slab for individual taxpayers below the age of 60 years under old tax regime is as follows:
Net Income Range |
Income Tax Rate |
Tax Outgo Before Rebate |
Up to Rs 2,50,000 |
Nil |
Nil |
Rs 2,50,0000 to Rs 5,00,0000 |
5% |
Rs 12,500 |
Rs 5,00,000 to Rs 10,00,000 |
20% |
Rs 1 lakh |
Above Rs 10,00,000 |
30% |
Rs 2,62,5000 for net income of Rs 15 lakh |
For people over 60, the tax rate is zero as long as their net income is up to Rs 3 lakh. The tax rate is nil for citizens above 80 with a net income of up to the limit of Rs 5 lakh.
Step 4: Estimate Your Taxes
Now, you will have to pay tax according to your applicable slot:
You will have to pay no tax as long as your taxable income is within Rs 2.5 lakh.
For the next Rs 2.5 lakh of your taxable income, a 5% tax of Rs 12,500 is applicable.
The tax applicable is 20%, i.e., Rs 1,00,000 for an income over Rs 5 lakhs.
When the taxable income part is above Rs 10 lakhs, a 30% tax is applicable on the entire amount.
Step 5: Consolidate the Net Tax
When your taxable income doesn't go above Rs 5 lakh after deductions, you will be eligible for a rebate. The rebate available for deductions not exceeding Rs 5 lakhs is Rs 12500.
If the taxable income crosses Rs 5 lakh, a health and education cess of 4% should be added to calculate the final amount. A 10% surcharge applies to individuals with an income bracket between Rs 50 lakh and Rs 1 crore. For individuals with an income between Rs 1 and 2 crore, a surcharge of 20% is applicable.
Income Tax Calculation on Salary with an Example
Let us consider an example of a person called Amrut who earns an annual gross salary of Rs.15 lakh. His net salary comes to Rs.12.50 lakh after removal of all the exemptions, such as standard deductions and HRA (House Rent Allowance).
Let us also assume that he earns Rs. 10,000 as an interest from bank account. He also invests in ELSS and NPS and has a medical insurance for himself and his wife. Please note that we have considered old regime in this example.
Income Tax Calculation |
Tax Deductions for FY 2023-24 |
Gross Salary |
₹ 15 lakh |
HRA and LTA |
– ₹ 2.5 lakh |
Standard deduction |
– ₹ 50,000 |
Net salary |
₹ 12 lakh |
Income from other sources |
₹ 10,000 |
Gross taxable income |
₹ 12,10,000 |
Tax Deduction under Section 80C (ELSS + EPF) |
– ₹ 1,50,000 |
Tax Deduction under Section 80CCD(1B) for NPS |
– ₹ 50,000 |
Tax Deduction under Section 80D for medical insurance premium |
– ₹ 15,000 |
Tax Deduction under Section 80TTA for interest on bank account |
– ₹ 10,000 |
Total Taxable Income |
₹ 9,85,000 |
Income Tax Slab |
Amount |
Up to ₹ 2.5 lakh |
0 |
5% on ₹ 2.5 lakh (₹ 5 lakh – ₹ 2.5 lakh) |
₹ 12,500 |
20% on ₹ 4.85 lakhs (₹ 9.85 lakh – ₹ 5 lakh) |
₹ 97,000 |
Disclaimer - The Tax calculation shown above is for illustration purpose and general information only. Amount(s) mentioned above may undergo a change if assumptions specified herein do not hold good. It is advised to consult your Tax Consultant or Financial Advisor to determine tax benefits applicable to you.
Also Read – What is ITR?
Components of Salary to Consider While Calculating Income Tax
If you are wondering how tax is calculated on salary, you will need to be aware of the following components:
Assessment Year
A lot of people confuse the assessment year with the financial year. However, an assessment year begins after the end of the previous financial year. In other words, the assessment year is the year during which your tax is calculated for the last financial year. If you are trying to calculate the income tax for the financial year 2022-23, the assessment year will be 2023-24.
Tax Year
The tax year refers to the fiscal or financial year for which the income tax needs to be calculated.
TDS
The type of tax that is directly deducted from your salary is the TDS. The TDS policy is followed by most employers to ensure a hassle-free tax pattern. But you will always get a refund if more TDS was deducted from your income.
Salary Breakup
While understanding how to calculate income tax on salary, you must look at an in-depth breakdown of your salary. You will have to look into your salary slip or statement to get an idea of your salary structure.
Deductions
While learning how to calculate income tax on salary, you must consider the deductions offered by the government. The deductions available for you should be subtracted from the gross income to get the taxable income.
Taxable Income
An individual's taxable income includes all sources of income, including your salary. For instance, your taxable income might consist of earnings from capital gains, house property, and other sources.
Final Words
Knowing how to calculate income tax on salary is essential for seamless financial planning. It will help you learn about tax deductions that will help you save a lot. Therefore, understanding the process of tax calculation will also help you lower stress around your finances.
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