How to Calculate Income Tax on Your Salary?

The calculation of income tax* and to save tax in India can sound like a cumbersome task to many, but with time, this process has only gotten easier with time. Calculating the income tax on your salary can be broken down into easy steps, which start with understanding what forms your salary and deductions. This can also include various investments such as online life insurance and other investment options.

 

The Income Tax* Department in India is responsible for collecting tax* and generating revenue for the Indian Government; hence, the tax* is levied on the income earned by resident Indian taxpayers. To make it easier for taxpayers to understand how the tax* is calculated on their income, an individual’s salary or income is divided into 5 separate heads of income, as they are called – income from salary, income from residential property, profits from business or profession, income from capital gains, income from other sources.

 

What is the Meaning of Salary Income?

In simple terms, salary means the monetary benefit or remuneration that an employee receives from their employer in exchange for a service they offer over a certain period of time. The salary, paid at fixed or regular intervals, mostly on a monthly basis, comprises:

 

• Basic Salary – This is the set component of salary and can vary as per the terms and conditions of the employment contract.
• Fees/Commission/Bonus – These are the additional benefits that an employee can receive from their employer.
• Allowances – To help employees meet their personal expenses, certain allowances are also paid out, which can be partially or completely tax* exempt.
  
  

Fully-taxable allowances

• Dearness allowance, which is paid to the employees so that they can meet certain expenses during inflation to save tax in India.
• The city compensatory allowance is an amount or allowance paid out to employees who relocate to metro cities from other towns or cities and helps them meet the higher standards of living in the metro.
• An overtime allowance can be paid out to employees who work and render their services beyond the usual or regular office timings.
• Servant allowance and Deputation allowance.
  
  

Partly taxable allowances

 

The House Rent Allowance or HRA is completely taxable if the employee has their own home or their own place of residence. The exemption of the HRA is the least of the following:

• The house rent allowance (HRA)
• If an additional rent paid by the employee exceeds 10% of their salaried income.
• If the employee pays rent of 50% of their salary (metro) or 40% (other areas).
• Entertainment allowance, which does not apply to certain employees such as those of the State and Central Government.
• Certain allowances for travelling, buying uniforms for the job, research and others.
• An additional allowance that helps employees to manage expenses such as their children’s education, boarding school/hostel accommodation allowance and others.
  
  

Tax-exempt allowances

• Foreign allowance for employees working abroad for the company.
• Allowances paid to High Court and Supreme Court Judges.
• Allowances paid to United Nations Organisation employees.

Perquisites are payments that an employee receives over and above their salary. Additionally, no reimbursement is made for their expenses. These are some of the few perquisites are taxed in the hands of the employees:

• Loans that are interest-free
• Rent-free accommodation
• Concession in residential rent
• Educational expenses
• Movable assets
• Payments for club fees
• Employee insurance premiums paid by the employer
• While some of the perquisites are taxable, they can be taxable for certain employees such as directors or key employees in an organisation who have extensive interest in the company. These perquisites are:
  
• Electricity, free cooking gas and resources meant for household purposes
• Concessional transport facility
• Concessional educational expenses
• Wages paid out to sweepers, gardeners, and helpers.

Apart from these perquisites, the others are exempt from taxes. These are some of the benefits on which no tax is levied:

• Healthcare benefits
• Medical insurance premiums
• Staff Welfare Scheme
• Concession for leave travel
• Vehicles or laptops for personal use.
• Retirement benefits paid to employees during their service or after they retire.
• The pension of an employee that is paid in a lump sum amount on retirement or as a monthly income. This can be taxable, depending on the employee’s category.
• Gratuity paid to an employee for their performance through their career during retirement time is exempt from tax* up to a certain limit.
• The tax* on leave salaries depends on the employee’s category or on how they want to use their leaves. Alternatively, they can also encash these leaves.
• EPF contributions made by the employee and employer every month. The interest received by the employee at the time of withdrawing or receiving the amount can be taxable if the interest exceeds ₹2.5 Lakh.
  
  

Life insurance plans from Tata AIA Life Insurance offer tax* deductions and benefits as per the prevailing tax* laws under Section 80C and 10(10D) of the Income Tax* Act.

Deductions on Salary Income

These are the following deductions applicable to an individual’s salary:

State and Central Government employees pay entertainment tax on the least of the amount received:

• ₹5,000,
• 20% of the basic salary
• entertainment allowance paid employee
  
  

Professional tax* is the tax* levied on the income from salary section of the employee and is deducted before the payment of the salary. Between the assessment years 2006-2007, the standard deduction was not applicable to salary income.

Computation of Income from Salary

To calculate the net income from different sources, an individual’s various sources of income can be divided into the following

• Income from salary
  
• Income earned from house  property
• Gains/profits earned from business
• Income earned from capital gains
• Income earned from other sources
  
  

The sum of these incomes become the combined income of individual and the deductions and allowances are calculated on each of the 5 heads. Therefore, the formula will be:

• Gross Taxable Income= A+B+C+D+E
• Total Taxable Income = Gross Income –Deductions
• Total Tax Payable = Tax on Total Income - Rebates (as per Income Tax Act)
  
  

An individual’s salary determines how much income tax will be levied on them. This is the way taxable income can be divided into 4 parts.

Income tax slab rates (FY2020-21): New and Old Tax Regime

 

Income Tax Slab	Existing Regime Slab Rates for FY 20-21 (AY 21-22)			New Regime Slab Rates for FY 20-21 (AY 21-22)
	Individuals and HUF (below 60 years) & NRIs	Individuals & HUF between 60 to 80 years of age	Individuals & HUF over 80 years of age	Individuals & HUF
₹0.0 – ₹2.5 Lakh	Not deductible	Not deductible	Not deductible	Not deductible
₹2.5 – ₹3.00 Lakh	5% (tax* rebate u/s 87a is available)	Not deductible	Not deductible
₹3.00 - ₹5.00 Lakh		5% (tax* rebate u/s 87a is available)	Not deductible
₹ 5.00 – ₹7.5 Lakh	20%	20%	20%	10%
₹7.5 – ₹10 Lakh	20%	20%	20%	15%
₹10.00 – ₹12.50 Lakh	30%	30%	30%	20%
₹12.5 – ₹15 Lakh	30%	30%	30%	25%
More than ₹15 Lakh	30%	30%	30%	30%

 

A surcharge, according to the individual’s tax* slab is also levied along with the tax* rates while an education cess of 2% is also levied on the entire tax* amount.

 

Conclusion

The calculation of tax* on one’s salary is dependent on the category of the taxpayer as well as their income. Moreover, taxpayers can also choose if they want to follow the new tax* regime or continue with the old one. One can also claim tax* deductions to get tax* benefits and savings on the investments they make under the old tax* regime.

L&C/Advt/2022/Sep/2293