Have you been wondering about which mechanism is better when it comes to saving income tax? If yes, then have a look at this article.
The Utility of an Income Tax Calculation Tool
An income tax calculation tool is a software application that helps taxpayers calculate their tax liability. The tool requires users to input basic information such as their annual salary, monthly expenses, tax-saving instruments they have invested in, and other relevant details.
The Vakilsearch tax tool then uses this information to calculate the total tax liability of the user. Here are some of the benefits of using an income tax calculation tool:
- Saves Time: The income tax calculation tool saves users a lot of time by automating the tax calculation process. Users no longer have to spend hours manually calculating their tax liability.
- Saves Money: By accurately calculating the tax liability, the tool helps users avoid overpaying or underpaying their taxes. This can save users a lot of money in the long run.
- Easy to Use: The income tax calculation tool is easy to use and requires no special skills or knowledge. Users simply need to input their basic information, and the tool does the rest.
- Helps with Tax Planning: The tool can also be used for tax planning purposes. By providing a detailed breakdown of the tax liability, the tool helps users identify areas where they can save on taxes.
How to Calculate Total Tax Liability?
Utilizing an online income tax calculation tool, you can calculate tax liability based on various factors:
- Annual income from salary and other sources.
- Earnings from savings, rent, investments, etc.
- Allowances such as transportation and house rent.
- Taxes already paid through TDS.
- Components of income eligible for exemptions.
By subtracting income eligible for exemptions and paid taxes from your gross taxable income, you can calculate taxes due.
IT Slabs Under Both Tax Mechanisms
If you want to understand the tax calculation process, you should know the rates applicable for different income limits under the two tax mechanisms. We would like to draw your attention to the table containing income tax rates as per both mechanisms.
- Old Mechanism
| Income Slab | Tax Deduction |
| ₹ 0 – ₹ 2,50,000 | 0% |
| ₹ 2,50,000 to ₹ 5,00,000 | 5% |
| ₹ 5,00,000 to ₹ 10,00,000 | 20% |
| More than ₹ 10,00,000 | 30% |
2. New Mechanism
| Income Slab | Tax Deduction |
| ₹ 0 – ₹ 2,50,000 | 0 |
| ₹ 2,50,000 to ₹ 5,00,000 | 5% |
| ₹ 5,00,000 to ₹ 7,50,000 | 10% |
| ₹ 7,50,000 to ₹ 10,00,000 | 15% |
| ₹ 10,00,000 to ₹ 12,50,000 | 20% |
| ₹ 12,50,000 to ₹ 15,00,000 | 25% |
| More than ₹ 15,00,000 | 30% |
| Cess | 4% of total tax |
Your income tax liability will be calculated on the basis of the mechanism you will select. Now, you have an idea of both mechanisms, so you should carefully select the mechanism to get the maximum benefits.
You are now aware of the applicable rates for different income slabs of both mechanisms, so now it’s time to look at the calculation formula.
IT Calculation Formula
We would like to share that the income tax calculation formula doesn’t depend on the selected mechanism, as it remains the same for both mechanisms. Here is the income tax calculation formula that an online income tax calculation tool use.
Total income tax = {Total income – (exempted limit + all applicable deductions + TDS)} x applicable tax rate as per income slab + cess
How to calculate total IT liability?
With the help of an online income tax calculation tool, the tax liability can be calculated based on the following points.
- Annual income comes from salary and profits from all other sources.
- Earnings from savings, rent, investment, etc.
- Transportation and house rent allowance.
- Tax already paid through TDS.
- Components of income are eligible for exemptions.
You need to pay taxes on your gross taxable income, which might be very clear from the formula we have mentioned above. This combines your total income minus income eligible for exemptions and already paid taxes.
We would like to draw your attention to an illustration related to this for your better understanding of the income tax calculations.
| Salary Components and Amounts (in ₹) | Exemption Under Old Mechanism (in ₹) | Exemption Under New Mechanism (in ₹) |
| Basic Salary – 12,00,000 | – | – |
| HRA – 6,00,000 | 3,60,000 | – |
| Special Allowance – 2,52,000 | – | – |
| Leave Travelling Allowance – 20000 | 12,000 (on submitting bills) | – |
| Standard Deduction | 50,0000 | – |
| Gross Taxable Income | 16,50,000 | 20,72,000 |
As you know, the applicable rates and exemptions are different under both mechanisms. Therefore we have illustrations for each mechanism so that you can get a proper idea of the tax calculation process.
- Old Tax Mechanism
| Components | Amount (₹) | Total (₹) |
| Salary | 16,50,000 | – |
| Earning from Different Sources | 20000 | – |
| Total Income | – | 16,70,000 |
| Leave Travelling Allowance – 20000 | 12,000 (on submitting bills) | – |
| Deductions | – | – |
| Under Section 80RRB | 1,50,000 | – |
| Under Section 80D | 12,000 | – |
| Under Section 80TTA | 8,000 | 1,70,000 |
| Gross Taxable Income | – | 15,00,000 |
| Total Tax (including cess) | – | 2,73,000 |
2. New Tax Mechanism
| Components | Amount (₹) | Total (₹) |
| Salary | 20,72,000 | – |
| Earning from Different Sources | 20000 | – |
| Gross Total Income | – | 20,92,000 |
| Total Tax (including cess) | – | 3,79,704 |
What Are the Different Components Involved in Both Mechanisms?
You should know the different components considered under tax mechanisms so you can know how to calculate income tax returns online
The first thing you have to do is to calculate income from all sources. It includes:
- Salary
- Rental income and interest paid for a home loan
- Capital gains
- Income from the sale or purchase of any property or any share of it.
- Business or any professional service
- Savings(FDs, PPF)
The next thing you have to do is consider the deductions based on the mechanism you have chosen.
| Deductions Under Old Mechanism | Deductions Under New Mechanism |
| Section 80C – Up to ₹1.5 lakh on investments in PPF, LIC, fixed deposits, etc. | Not applicable |
| Section 80D – Up to ₹50,000 on the medical insurance premium for self, spouse, children, and parents. | Not applicable |
| Section 80TTA – Up to ₹10,000 per year on income from interest from the savings account. | Not applicable |
Benefits of Using an Income Tax Calculation Tool
The benefits of employing an income tax calculation tool include:
- Precise tax liability planning
- Simplified, accurate, and comprehensive calculations
- Time-saving with quick and accurate results
- Free to use without sharing personal details
- Tax regime selection based on convenience
Income Tax Calculation Formula
The calculation formula for income tax remains the same for both regime. It’s defined as:
Total income tax = {Total income – (exempted limit + all applicable deductions + TDS)} x applicable tax rate as per income slab + cess.
Tax Slab Calculation
Here are the income tax slabs for FY 2023-24 (AY 2024-25) under the new tax regime:
- Up to Rs. 3,00,000: No tax
- Rs. 3,00,001 to Rs. 6,00,000: 5% on income which exceeds Rs. 3,00,000
- Rs. 6,00,001 to Rs. 9,00,000: Rs. 15,000 + 10% on income more than Rs. 6,00,000
- Rs. 9,00,001 to Rs. 12,00,000: Rs. 45,000 + 15% on income more than Rs. 9,00,000
- Rs. 12,00,001 to Rs. 15,00,000: Rs. 90,000 + 20% on income more than Rs. 12,00,000
- Above Rs. 15,00,000: Rs. 1,50,000 + 25% on income more than Rs. 15,00,000
Conclusion
As of now, we have shared all the major details about an income tax calculation tool. We will be back soon with more such updates. Till then, stay tuned to Vakilsearch.
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