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Guide for Tax Calculation on your Salary

Taxes are complicated to understand because of the always-changing tax regulations. Here’s a straightforward guide on how to calculate the tax payable on your salary and claim tax breaks.

  • 5,327 Views | Updated on: May 20, 2024

The government offers several opportunities to reduce your tax liability through various deductions and exemptions. However, navigating through the jargon and recognizing openings for tax savings can be confusing. Most of the time, we are unaware of how much money we can save and how much money we are taxed on.

What is Income Tax?

According to the Income Tax Act of 1961, an income tax is a charge levied by the federal government on taxpayers who are either individuals or companies based on their income or earnings (commonly known as taxable income).

In most cases, income tax is computed by multiplying the amount of taxable income by the tax rate. The type of taxpayer and the type of income are two factors that can affect the tax rate.

One’s income is classified into 5 categories in accordance with the Income Tax Act of 1961.

1. Earnings from a salary

2.Income from a home investment

3.Profit from Business Income

4.Investment and capital asset income

5.Revenue from unrelated sources

Components for Calculating Income Tax

When computing income taxes, keep in mind a few crucial factors. Here is a list of these essential elements.

Financial Year (FY)

The year that revenue is earned is known as the financial year. It spans the months of April 1 this year through March 31 the following year. During this period, you must prepare all of your investment proofs and compile all of your paperwork.

Assessment Year (AY)

An assessment year is the year in which your revenue from a specific financial year will be evaluated.

As an illustration, the year 2023 will be used to compute your income from April 1, 2022, to March 31, 2023.

Tax Deductions

Enable you to lower your total taxable income in accordance with Section 80 of the Income Tax Act, Chapter VI-A.

For instance, you can claim a tax deduction of up to ₹1,50,000 on premiums paid for life insurance plans and other investments listed in Chapter VI in accordance with the tax regulations of Section 80C of Chapter VIA. One of the most popular methods of tax savings is this.

Tax Exemption

It is a set amount that is subtracted from gross income before tax is calculated. Both Section 10 and Section 54 provide these exemptions. The list is as follows

1. Salary Income Exemptions, Allowances, and Deductions

2.Rental Income from House Property Deductions

3.Deduction from Business or Profession Income

4.TDS

5.Salary Breakup

6.Taxable Income

7.Payable Tax Calculation

How to calculate income tax on salary?

1. Find out your gross annual income

Contact your HR department to get your Pay Slip or Tax Statement (Form 16) to learn about your salary details.

2. Add up salary components listed in Form 16 and salary slip, such as

1.Base pay

2.TA and DA

3.House Rent Allowance (HRA)

4.Leave Travel Allowance (LTA)

5. Food coupons, compensations for mobile bills, and other reimbursements

6. Bonus, if any

3. Arrive at your net income by subtracting the exemptions allowed on your salary components, including

1. HRA (if you stay in a rented home)

2. Transport allowance

3. LTA if you have travelled within India in the past four years

4.The standard deduction of ₹50,000 to which every salaried employee is entitled

4.Estimate the deductions allowed for investments in tax-saving instruments under Section 80 of the Income Tax Act, 1961

You can avail of deductions up to ₹1.5 lakhs under Section 80C on the following investments:

1.ELSS Mutual Funds

2.Your EPF contribution (up to 10% of your basic salary plus DA)

3.NPS contributions

4. NSC Tax-saving term deposits from banks and post-offices Sukanya Samriddhi Yojana

5.Contributions up to ₹50,000 in NPS or the Atal Pension Yojana, over and above the 80C limit, under Section 80CCD(1B)

6.Your employer’s contribution to your NPS and EPF, up to 10% of your salary for NPS and up to 12% for EPF (provided the collective contribution does not exceed ₹7.5 lakhs in the financial year)

7.Payments for pension plans or annuity schemes from life insurance companies

8 Life insurance premiums



Kotak Life offers a wide range of life insurance products for income protection, savings for future needs, wealth creation, and financial stability in retirement. You can view the details on the website and select a policy matching your insurance and tax-planning objectives.

Some expenses also count under 80C deductions, such as
Apart from 80C tax breaks, you can subtract the following expenses from your annual salary to work out your taxable income:

1 Home loan principal repayment

2 Stamp duty and registration charges paid for any property you purchased

3 Your children’s tuition fees

    1.Health insurance premiums and preventive health check-up costs for yourself and your dependent spouse, children, and parents

    2. Interest paid for home loans, and education loans

    3. Interest on loan taken to buy electric vehicles

    4. Donations to charities

    5. ent is paid if your salary structure does not include HRA Support and upkeep of differently-abled relatives

    6. Medical expenses under Section 80DDB

    5.Assess your payable tax

    You must pay tax on your taxable income as per your applicable tax slab rate.

    Taxable income

    Tax Rate

    First ₹2,50,000

    0%

    The next ₹2,50,000

    5%

    ₹5,00,000 – ₹10,00,000

    ₹12,500 + 20% of income over ₹5,00,000

    The part exceeding ₹10,00,000

    ₹ 1,12,500 + 30% of income exceeding ₹ 10,00,000

    Conclusion

    To accurately determine the tax due, all investments must be disclosed at the beginning of the assessment year. To lay a strong financial foundation, it is imperative to have a working knowledge of taxes, deductions, and returns. It’s against the law to make inaccurate tax payments, give false information, and lie.

    Penalties for tax fraud include jail time and hefty fines. Everyone aspires to live a lavish life but feels that it is difficult because taxes consume a sizable percentage of their income. Understanding how to do precise calculations and deductions helps with wise financial planning and tax reduction, enabling you to enjoy the luxurious life you’ve always desired. It also stops tax fraud from happening.

    Key takeaways

    How to calculate income tax on salary?

  • Find out your gross annual income
  • Add up salary components listed in Form 16 and salary
  • Arrive at your net income by separating the exemptions allowed on your components
  • Estimate the deductions allowed for investment in a tax-saving instrument under Section 80 of the Income Tax Act, 1961
  • Assess your payable tax

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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