How is Income Tax calculated on your salary?

May 30, 2020

How is Income Tax calculated on your salary

As a salaried employee, you are required to pay tax on the income you generate in a financial year as per the tax slab you fall under. Check out this post to understand income tax calculation on salary in detail.

As the name suggests, income tax is the tax you pay to the Government on the income you generate. For instance, if you are a salaried employee, you will have to pay income tax on the total taxable income you generate from your job in a financial year. The tax rate will depend on your overall earnings and the tax slab you fall under. 

While most salaried taxpayers know the above basics, many do not understand how is income tax calculated. If you too are wondering how the actual tax calculation works for salaried professionals, here is what you need to know.

Computing taxable income

To calculate income tax on salary, the first thing you need to know is your total taxable income. Your gross salary and your taxable income are two different things. Taxable income can be calculated by adjusting all the available deductions and exemptions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc. that are part of your gross salary. 

If apart from your salary, you have other sources of income too, the same should also be added to your taxable income for calculating your tax liability. 

Income Tax Slabs

After the computation of taxable income, the next thing you should know about is the different income tax slabs. The tax slabs and tax rates in India vary based on total income in a financial year as well as the age of the taxpayer. 

For instance, the tax rate is nil for salaried employees below 60 years with a taxable income of less than Rs 2.5 lakh. The same for taxable income between Rs 2.5 lakh and Rs 5 lakh is 10%. Also, a cess of 4% on the tax amount applies to all the taxpayers, except for the ones falling under the nil tax bracket. 

Example

To help you understand better, let us assume that you are a 28-year-old salaried employee with a taxable income of Rs 6 lakh. Now, the tax slab you will fall under is as follows:

Tax slabsTax rates
Annual income up to Rs 2.5 lakh Nil
Annual income between Rs 2.5 lakh and Rs 5 lakh 5% tax on the income above Rs 2.5 lakh + 4% cess
Annual income between Rs 5 lakh and Rs 10 lakh Rs 12,500 + 20% tax on the income above Rs 5 lakh + 4% cess
Annual income above Rs 10 lakh Rs 1,12,500 + 30% tax on the income above Rs 10 lakh + 4% cess 

Now, out of this Rs 6 lakh, Rs 2.5 lakh can be exempted as there is no income tax for an annual income of up to Rs 2.5 lakh. The income between Rs 2.5 lakh and Rs 5 lakh will be taxed at 5%. Only the income above Rs 5 lakh will be taxed at 20% along with a 4% cess. 

So, the income tax calculation for salaried person in this case will be:

Rs 0 (for income up to Rs 2.5 lakh) + Rs 12,500 (10% of income from Rs 2.5 lakh to Rs 5 lakh) + Rs 20,000 (20% of income from Rs 5 lakh to Rs 10 lakh which in this case is Rs 1 lakh) + 4% cess on the tax amount

= Rs 32,500 + 4% cess 

= Rs 33,800

Thus, if the taxable income of an individual is Rs 6 lakh in a financial year, the income tax liability will be Rs 33,800.

 

Online calculator: A smarter way to calculate Income Tax 

As you can see, manually calculating income tax on salary is complex and time-consuming. A smarter alternative is to use an online income tax calculator. With all the income tax slabs and tax rates already fed into the calculator, the online tool will enable you to instantly and accurately calculate your income tax liability. 

More importantly, do take advantage of all the available deductions and exemptions as they can reduce your income tax liability and help you save a considerable amount of money. 

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