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How to Calculate Income Tax on Salary with an Example?

If you are looking forward to calculating the income tax on your salary, then you are at the right place. Check out this article to know more.

Many people in India still think that calculate income tax is a complicated and tough process. We can say there are two sides to this point. If you are unaware of all the components and formulas of calculating income tax, it can be a complicated process for you.  But if you know all the essential information about income tax and the procedure used to calculate it, then it can be one of the easiest things to do. Also, having complete information about income tax and other segments can help you save a lot of bucks in taxes. 

Most of the people who are unaware of the facts related to income tax end up paying more tax than they are supposed to pay. Lack of information is the main reason behind all this. So, today, we will share all the essential details related to income tax and the calculation of income tax. These details will surely make the Calculate Income Tax task an effortless task for you. 

What Is Income Tax?

According to the Income Tax Act: https://www.incometax.gov.in/iec/foportal/, of 1961, every person earning a salary in India must pay an amount from their salary to the country as tax. This amount of tax is termed income tax. The law consists of many variations and amendments, and many deductions are available under section 80. We will be sharing every detail related to it in this blog post. 

Components for Calculating Income Tax

While calculating income tax, you should know some basic terminologies. 

  • The tax year: The tax year is the previous financial year for which the income tax had to be paid. The financial year starts on the 1st of April and ends on 31st March of next year. 
  • Assessment year: Many people think that the assessment year and financial year are the same, but this is not true. Both of them are entirely different things. The assessment year starts after the financial year gets over. In simple words, we can say that the year in which you have to pay income tax for the last financial year is known as the assessment year. 
  • Salary breakup: Your salary is divided into basic pay, transport allowance, entertainment allowance, and many others. You can get your salary breakup from your company’s HR. 
  • Taxable income: Taxable income is the income on which you need to pay taxes like income from salary, income from property, income from the business, and income from ITR for presumptive income
  • Deductions: Taxable income = Gross income – Deductions. Deductions are the savings you do not need to pay taxes on. More details about deductions are given below. 

Use Vakilsearch’s take home salary calculator to calculate your in-hand salary. The salary breakup calculator will help determine your exact take home salary.

Deductions Under Section 80

Under section 80 of the Income Tax Act, 1961, many deductions are mentioned by the act makers that benefit an individual taxpayer by bringing down the taxable income and reducing the taxes that must be paid. You should be aware of these deductions so that you can save a lot of bucks in taxes. Here are the 80D deduction that are mentioned. 

Section Maximum Limit Deductions
Section 80C 1,50,000 ULIP, ELSS, NSC, the Employee share of PF, LIC Premium, Children’s tuition fees, Home loan principal repayment, 5-year deposit Scheme, purchasing of a deferred annuity, Senior citizen’s saving scheme, Pension fund set up by UTI or mutual fund, annuity plan of LIC, Subscription to Home Loan Account Scheme of the National Housing Bank, Subscription to notified bonds of NABARD, Subscription to deposit scheme of a public sector or company engaged in providing housing finance.
Section: 80CCC NA
Section: 80CCC NA On the amount deposited in the annuity plan of LIC or any other insurance plan for a pension fund.
Section: 80CCD(1) 1,50,000 Employee’s contribution to NPS account
80CCD(2) 10% salary Employer’s contribution to NPS
Section: 80CCD(1B) 50,000 Any other contribution to NPS by an employee
80TTA(1) 10,000 Income from interest earned on savings account
80TTB 50,000 Interest received from banks, post office, etc. but applicable only to senior citizens
Section: 80GG 5000 per month / 25% of total income/rent paid – 10% of total income (W.E.L.) For rent paid when HRA is not received from an employer
Section: 80E Amount equal to the interest paid for 8 years Interest paid on education loan
Section: 80EE 50,000 Interest paid on home loans by the first time homeowners
Section 80CCC 25,000/ 50% of amount invested in equity shares (w.e.l.) Rajiv Gandhi Equity Scheme for investments in Equities
Section: 80D 25,000 Medical insurance of self, spouse and children
Section: 80D 50,000 Medical insurance of parents over 60 years or uninsured parents over 80 years of age.
80DD 75,000 Medical treatment of handicapped dependent
Section: 80DD 75,000 (40%-80% disability), ` 1,25,000 (more than 80%) Payment made to specific scheme taken for maintenance of handicapped dependent
Section: 80DDB 40,000 or amount paid (w.e.l.) Medical expense on self or dependent less than 60 years old
Section: 80DDB 1,05,000 or amount paid (w.e.l.) Medical expense on self or dependent more than 60 years old
Section: 80U 1,25,000 (severe disability), ` 75,000. Self-suffering from physical disability including blindness and mental instability
Section: 80GGB Contributed amount (Not in cash) Contribution made to political parties by companies
Section: 80GGC Contributed amount (Not in cash) Contribution made to political parties by individuals
Section: 80RRB Income received / 3,00,000 (w.e.l.) Income received from royalty or patent

How to Calculate Income Tax on Salary? 

We would like to tell you that it is very easy to calculate income tax. The formula for calculating income tax on salary is as follows:

Gross income from salary(Basic salary+HRA+Special Allowance+Transport Allowance+Any other allowance) – Deductions = Net Income(Tax calculated according to the income tax slab)

  • Example

If Mrs. Sharma has a salary of Rs 30,000 per month with a dearness allowance of Rs 3500 per month, transport allowance of Rs 3000 per month, and pays Rs 4500 towards professional tax, then her taxable income would be:

Basic Salary 30000 * 12 = 3,60,000
DA 3500 * 12 = 42,000
EA 3000 * 12 = 36,000
Gross Salary = 4,38,000
Professional Tax 4500
Net income = 4,33,500

Her income is ₹ 4,33,500, so she falls in the tax slab of ₹2.5 lakhs – ₹5 lakhs. She has to pay 10% of her net income as income tax. Income tax on her net income= 10% of 4,33,500 = 43,350

Conclusion

As of now, we have shared all the significant details about the process of calculating income tax. We will be back soon with more such updates. Till then, stay tuned to Vakilsearch

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