How to Calculate Income Tax on salary?
Calculating income tax on salary involves several steps. Let’s break it down:
- Determine Your Gross Salary:
- Start by identifying the components of your salary, such as Basic Salary, House Rent Allowance (HRA), Special Allowance, and other allowances.
- Exclude any non-taxable components (like medical reimbursements or travel allowances).
- Calculate Taxable Salary:
- Add up the following:
- Basic Salary
- HRA (after exemptions)
- Special Allowance
- Transport Allowance
- Other allowances (excluding exempt components)
- Add up the following:
- Apply Standard Deduction:
- Since Budget 2019, a standard deduction of Rs 50,000 is available for salaried individuals.
- Subtract this amount from your taxable salary.
- This deduction is applicable even in the new tax regime.
- Determine Tax Slabs:
- Tax slabs vary based on age groups:
- Up to 60 years: Different slabs apply.
- 60 to 80 years (senior citizens): Different slabs apply.
- 80 years and above (super senior citizens): Different slabs apply.
- Tax slabs vary based on age groups:
- Calculate Tax Liability:
- Use the appropriate tax slab rates to compute your tax liability.
- Consider any other income sources (interest income, rental income, etc.) and include them in your computation.
- Old vs. New Tax Regime:
- In the old tax regime, you can claim deductions under sections 80C, 80D, 80G, 80E, and 80TTA.
- In the new tax regime, you don’t get these deductions, but you have lower tax rates.
Tax Slabs for AY 2024-25
The Finance Act 2023 has amended the provisions of Section 115BAC w.e.f AY 2024-25 to make new tax regime the default tax regime for the assessee being an Individual, HUF, AOP (not being co-operative societies), BOI or Artificial Juridical Person.
However, the eligible taxpayers have the option to opt out of new tax regime and choose to be taxed under old tax regime.
Tax rates for Individual (resident or non-resident) less than 60 years of age anytime during the previous year are as under:
| Old Tax Regime | New Tax Regime u/s 115BAC | ||
|---|---|---|---|
| Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
| Up to ₹ 2,50,000 | Nil | Up to ₹ 3,00,000 | Nil |
| ₹ 2,50,001 – ₹ 5,00,000 | 5% above ₹ 2,50,000 | ₹ 3,00,001 – ₹ 6,00,000 | 5% above ₹ 3,00,000 |
| ₹ 5,00,001 – ₹ 10,00,000 | ₹ 12,500 + 20% above ₹ 5,00,000 | ₹ 6,00,001 – ₹ 9,00,000 | ₹ 15,000 + 10% above ₹ 6,00,000 |
| Above ₹ 10,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | ₹ 9,00,001 – ₹ 12,00,000 | ₹ 45,000 + 15% above ₹ 9,00,000 |
| ₹ 12,00,001 – ₹ 15,00,000 | ₹ 90,000 + 20% above ₹ 12,00,000 | ||
| Above ₹ 15,00,000 | ₹ 1,50,000 + 30% above ₹ 15,00,000 | ||
The rates of Surcharge under the two tax regimes are as under:
| Total Income | Old Tax Regime | New Tax Regime |
| Rate of Surcharge Applicable | ||
| Up to Rs. 50 Lakh | Nil | Nil |
| Above Rs. 50 Lakh and up to Rs. 1 Crore | 10% | 10% |
| Above Rs. 1 Crore and up to Rs. 2 Crore | 15% | 15% |
| Above Rs. 2 Crore and up to Rs. 5 Crore | 25% | 25% |
| Above Rs. 5 Crore | 37% | 25% |
How To Save Tax on Salary Under New Tax Regime
Following are the tax saving option under new tax regime as under-
- Gratuity u/s 10 (10)
- Conveyance Allowance
- Voluntary Retirement Scheme u/s 10 (10C)
- Leave Encashment u/s 10 (10AA)
- Transport Allowances to Persons with Disabilities
- Deposits in Agniveer Corpus Fund u/s 80CCH (2)
- Interest on a home loan on the let-out property (section 24).
- National Pension Scheme (NPS) account as per Section 80CCD (2) employer’s NPS contribution made on behalf of the employee.
- Additional Employee Cost Deduction (Section 80JJA)
- Standard deduction of Rs 50,000
- Deduction under Section 57(iia) of family pension income.
How To Save Tax on Salary Under Old Tax Regime
Let’s create a chart to distinguish between taxable and non-taxable allowances. As per the Income Tax Act, 1961, allowances are added to an individual’s salary and taxed under the head Income from Salaries.
Part 1- Exemptions
You can find out your salary structure from the CTC, which generally looks like:
| Component | Amount (₹) | Taxable | Non-Taxable | Notes |
|---|---|---|---|---|
| Basic Salary | 500,000 | 500,000 | Fully taxable. | |
| House Rent Allowance | 200,000 | 100,000 | 100,000 | Non-taxable portion depends on actual rent paid, location, etc. |
| Special Allowance | 100,000 | 100,000 | Fully taxable. | |
| Conveyance Allowance | 19,200 | 19,200 | Up to ₹1,600 per month is non-taxable. | |
| Medical Reimbursement | 15,000 | 15,000 | Non-taxable if supported by medical bills. | |
| Leave Travel Allowance | 50,000 | 50,000 | Non-taxable for travel within India, subject to conditions. | |
| Children Education Allowance | 2,400 | 2,400 | Non-taxable up to ₹100 per month per child (max 2 children). | |
| Hostel Expenditure Allowance | 7,200 | 7,200 | Non-taxable up to ₹300 per month per child (max 2 children). | |
| Performance Bonus | 50,000 | 50,000 | Fully taxable. | |
| Employer’s Contribution to EPF | 36,000 | 36,000 | Non-taxable up to 12% of basic salary. | |
| Standard Deduction | 50,000 | 50,000 | Standard deduction for salaried employees and pensioners. | |
| Gross Salary | 1,030,800 | 750,000 | 279,800 | Total of all components before deductions. |
| Deductions (Section 80C, 80D, etc.) | 150,000 | 150,000 | Investments in specified instruments under Section 80C, 80D, etc. | |
| Net Taxable Income | 600,000 | Gross Salary – Non-taxable Allowances – Deductions. |
Explanation:
- Basic Salary: Entirely taxable.
- House Rent Allowance (HRA): Partially taxable; exemption depends on rent paid, salary, and location.
- Special Allowance: Fully taxable.
- Conveyance Allowance: Up to ₹1,600 per month is non-taxable.
- Medical Reimbursement: Non-taxable up to ₹15,000 if supported by bills.
- Leave Travel Allowance (LTA): Non-taxable for travel within India, subject to certain conditions.
- Children Education Allowance: Non-taxable up to ₹100 per month per child (max 2 children).
- Hostel Expenditure Allowance: Non-taxable up to ₹300 per month per child (max 2 children).
- Performance Bonus: Fully taxable.
- Employer’s Contribution to EPF: Non-taxable up to 12% of basic salary.
- Standard Deduction: A flat ₹50,000 deduction for salaried employees.
- Gross Salary: Sum of all salary components before deductions.
- Deductions (Section 80C, 80D, etc.): Investments and expenses eligible for deductions under various sections of the Income Tax Act.
- Net Taxable Income: Gross salary minus non-taxable allowances and eligible deductions.
By properly structuring the salary components and claiming applicable deductions and exemptions, an individual can effectively reduce their taxable income and optimize tax savings under the old tax regime.
Part 2- Deductions
Let’s explore some tax-saving options under the old tax regime. Here are a few deductions you can consider:
| Section | Description | Maximum Limit |
|---|---|---|
| 80C | Investment in PPF, EPF, NSC, Life Insurance | INR 1,50,000 |
| 80CCC | Contribution to Pension Funds | INR 1,50,000 (combined with 80C limit) |
| 80CCD(1B) | Contribution to NPS | INR 50,000 |
| 80D | Health Insurance Premium | INR 25,000 (self & family), INR 50,000 (senior citizens) |
| 80DD | Maintenance of Disabled Dependent | INR 75,000 (general), INR 1,25,000 (severe disability) |
| 80DDB | Medical Expenses for Specified Diseases | INR 40,000 (general), INR 1,00,000 (senior citizens) |
| 80E | Interest on Education Loan | No Limit |
| 80EE | Interest on Home Loan for First-Time Buyers | INR 50,000 |
| 80G | Donations to Charitable Institutions | 50% or 100% of donation amount, subject to limits |
| 80GG | Rent Paid (for those not receiving HRA) | INR 60,000 or 25% of total income or rent paid minus 10% of total income (whichever is lower) |
| 80GGA | Donations for Scientific Research or Rural Development | No Limit |
| 80GGB | Contributions to Political Parties | No Limit |
| 80GGC | Contributions to Political Parties (individuals) | No Limit |
| 80TTA | Interest on Savings Account | INR 10,000 |
| 80TTB | Interest on Deposits for Senior Citizens | INR 50,000 |
| 24(b) | Interest on Home Loan | INR 2,00,000 |
Income Tax on Salary Above 50 Lakhs
In the new tax regime, individuals have the option to forgo claiming deductions and exemptions in exchange for lower tax rates.
In the old tax regime, individuals have the benefit of claiming various deductions and exemptions under the Income Tax Act. These deductions can significantly reduce the taxable income and, in turn, the tax liability.
To calculate the income tax on a salary above ₹50 lakhs in India under both the old and new tax regimes, we need to consider the specific income slabs and rates defined under each regime for the relevant assessment year. Let’s take an example salary of ₹60 lakhs to illustrate this.
Assumptions:
- The calculations are based on the financial year 2023-24.
- The salary is the only source of income.
- No deductions/exemptions are considered for the new tax regime.
- Standard deductions and other possible exemptions under the old regime are considered.
| Description | New Tax Regime (₹) | Old Tax Regime (₹) |
| Gross Income | 60,00,000 | 60,00,000 |
| Standard Deduction | 50,000 | 50,000 |
| HRA | 3,00,000 | |
| Taxable Salary Income | 59,50,000 | 56,50,000 |
| Less: Deduction – | ||
| Section 80C Deduction | – | 1,50,000 |
| Section 80D Deduction | – | 25,000 |
| Net Taxable Income | 59,50,000 | 54,75,000 |
| Total Tax Before Surcharge and Cess | 14,85,000 | 14,55,000 |
| Surcharge | 1,48,500 | 1,45,500 |
| Tax After Surcharge | 16,33,500 | 16,00,500 |
| Health and Education Cess | 65,340 | 64,020 |
| Total Tax Payable | 16,98,840 | 16,64,520 |
New Tax Regime (FY 2023-24):
Assumptions for Deductions and Exemptions:
-
- Standard Deduction: ₹50,000
Net Taxable Income:
-
- Gross Income: ₹60 lakhs
- Less: Standard Deduction: ₹50,000
- Net Taxable Income: ₹59.5 lakhs
Calculation:
- Income up to ₹3 lakhs: Nil
- Income from ₹3 lakhs to ₹6 lakhs: ₹3 lakhs @ 5% = ₹15,000
- Income from ₹6 lakhs to ₹9 lakhs: ₹3 lakhs @ 10% = ₹30,000
- Income from ₹9 lakhs to ₹12 lakhs: ₹3 lakhs @ 15% = ₹45,000
- Income from ₹12 lakhs to ₹15 lakhs: ₹3 lakhs @ 20% = ₹60,000
- Income above ₹15 lakhs: ₹44.5 lakhs @ 30% = ₹13,35,000
- Total Tax: ₹15,000 + ₹30,000 + ₹45,000 + ₹60,000 + ₹13,35,000 = ₹14,85,000
- Surcharge: 10% of ₹14,85,000 = ₹1,48,500
- Tax with Surcharge: ₹14,85,000 + ₹1,48,500 = ₹16,33,500
- Health and Education Cess: 4% of ₹16,33,500 = ₹65,340
- Total Tax Payable: ₹16,33,500 + ₹65,340 = ₹16,98,840
Old Tax Regime (FY 2023-24)
- Assumptions for Deductions and Exemptions:
- Standard Deduction: ₹50,000
- Section 80C: ₹1.5 lakhs
- Section 80D: ₹25,000
- Section HRA : ₹3 lakhs
- Net Taxable Income:
- Gross Income: ₹60 lakhs
- Less: Standard Deduction: ₹50,000
- Less: Section 80C Deduction: ₹1.5 lakhs
- Less: Section 80D Deduction: ₹25000
- Less: HRA: ₹3 lakhs
- Net Taxable Income: ₹54.75 lakhs
- Calculation:
- Income up to ₹2.5 lakhs: Nil
- Income from ₹2.5 lakhs to ₹5 lakhs: ₹2.5 lakhs @ 5% = ₹12,500
- Income from ₹5 lakhs to ₹10 lakhs: ₹5 lakhs @ 20% = ₹1,00,000
- Income above ₹10 lakhs: ₹44.75 lakhs @ 30% = ₹13,42,500
Total Tax: ₹12,500 + ₹1,00,000 + ₹13,42,500 = ₹14,55,000
- Surcharge: 10% of ₹14,55,000 = ₹1,45,500
- Tax with Surcharge: ₹14,55,000 + ₹1,45,500 = ₹16,00,500
- Health and Education Cess: 4% of ₹16,00,500 = ₹64,020
- Total Tax Payable: ₹16,00,500 + ₹64,020 = ₹16,64,520
Summary:
- New Tax Regime: ₹16,98,840
- Old Tax Regime: ₹16,64,520
Frequently Asked Questions
1. What is Gross Salary?
Gross salary is the total income earned by an employee before any deductions such as taxes, retirement contributions, and other benefits. It includes basic salary, allowances, bonuses, and any other earnings.
2. What is Net Salary?
Net salary, also known as take-home pay, is the amount an employee receives after all deductions have been made from the gross salary. This includes deductions for taxes, social security, health insurance, retirement plans, and other benefits.
3. How can I save tax through House Rent Allowance (HRA)?
HRA can be claimed as an exemption if you live in a rented house. The exempt amount is the least of:
-
- Actual HRA received.
- 50% of salary (for metro cities) or 40% of salary (for non-metro cities).
- Rent paid minus 10% of salary.
4. Which of the following allowances or deductions are allowed from the income in case an assessee pays tax under the new tax regime?
- (a) House Rent Allowance
- (b) Standard Deduction
- (c) Entertainment Allowance
- (d) Professional Tax
Correct answer: (b)
5. How does the new tax regime compare with the old tax regime for high earners?
The new tax regime offers lower tax rates without exemptions and deductions, whereas the old regime allows various exemptions and deductions. It’s beneficial to compare both regimes to see which offers better tax savings based on individual circumstances.
6. The income under the head salary shall be taxable on
- (a) due basis
- (b) receipt basis
- (c) due basis or receipt basis, whichever is earlier
- (d) due basis or receipt basis, whichever is later
Correct answer: (c)
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