Guide for Tax Calculation on your Salary

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. Here’s a straightforward guide on how to calculate the tax payable on your salary and claim tax breaks.

How to calculate your taxable salary income?

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:

• Base pay
• TA and DA
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Food coupons, compensations for mobile bills, and other reimbursements
• Bonus, if any

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

• HRA (if you stay in a rented home)
• Transport allowance
• LTA if you have travelled within India in the past four years
• 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:

• PPF
• ELSS Mutual Funds
• Your EPF contribution (up to 10% of your basic salary plus DA)
• NPS contributions
• NSC
• Tax-saving term deposits from banks and post-offices
• Sukanya Samriddhi Yojana
• Contributions up to ₹ 50,000 in NPS or the Atal Pension Yojana, over and above the 80C limit, under Section 80CCD(1B)
• 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)
• Payments for pension plans or annuity schemes from life insurance companies
• Life insurance premiums

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Some expenses also count under 80C deductions, such as:

• Home loan principal repayment
• Stamp duty and registration charges paid for any property you purchased
• Your children’s tuition fees

Apart from 80C tax breaks, you can subtract the following expenses from your annual salary to work out your taxable income:

• Health insurance premiums and preventive health check-up costs for yourself and dependent spouse, children, and parents
• Interest paid for home loans and education loans
• Interest on loan taken to buy electric vehicles
• Donations to charities
• Rent paid if your salary structure does not include HRA
• Support and upkeep of differently-abled relatives
• Medical expenses under Section 80DDB

5. Assess your payable tax

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

From the payable tax, you have to reduce the amount your employer has deducted from your salary as TDS (tax deducted at source). You can find the details in your Form 16. If the income surpasses ₹ 5,00,000, you need to add 4% Cess to the tax amount. Also, if your income is less than ₹ 5,00,000, you can claim ₹ 12,500 tax rebate under Section 87A.