How to Calculate Taxable Income on Salary?

Every year, many people file Income Tax Returns (ITR) on their taxable income in India. Tax planners, chartered accountants, and online ITR filing platforms usually calculate their taxable income. However, some people prefer to calculate the taxable income themselves. 

The whole process of calculating taxable income might seem complex, but it is just a matter of a few steps. In this article, we will dive deep into calculating taxable income as per the rules outlined in the Income Tax Act of 1961. Before delving into the process, it’s essential to understand the meaning of taxable income in India. 

What is Taxable Income?

Taxable income in India encompasses various sources of income, including salary, business income, income from house property, capital gains, and other sources like interest, dividends, and gifts. Deductions, exemptions, and rebates under the Income Tax Act, 1961, help reduce tax liability. Individuals and entities must report their taxable income and pay income tax based on applicable tax slabs and regulations set by the Income Tax Department of India.

Components of Calculating Income Tax on Salary

When calculating taxable income, there are a few components that every salaried individual must keep in mind. These are:

• Financial Year
• Assessment Year 
• Tax Deductions
• Tax Exemption 
• Tax Deducted at Source (TDS)
• Salary Breakup 

Calculating Taxable Income on Salary: Procedure

Calculating taxable income can seem confusing for many salaried individuals. This guide simplifies the process. It involves several key steps to determine the taxable portion of your salary:

• Calculating Gross Income 

Knowing the amount of your gross income is the first step to arriving at your taxable income. You need to tally all components of your salary, such as Basic Pay, House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other special allowances. Valid rent receipts are required for HRA to be included in calculations. 

Include any other applicable exemptions along with your salary components. Deduct the standard deduction of INR 50,000 from this total to arrive at your net salary. Additionally, include other income sources such as rental earnings, capital gains, or interest from deposits.

• Calculate Gross Taxable Income

After determining your Gross Total Income (which includes salary components, other income sources, and after applying the standard deduction), you can claim further deductions under Chapter VI-A of the Income Tax Act. For instance, Section 80C allows deductions up to ₹1.5 lakh for investments like PPF, ELSS Mutual Funds, EPF, Sukanya Samriddhi Yojana, and term insurance premiums. By applying these deductions, you will arrive at your Gross Taxable Income. 

It is essential to identify and claim all applicable deductions under various sections of the Income Tax Act, 1961. For example, an additional ₹50,000 deduction is applicable under Section 80CCD(1B) for investments in NPS. Applying all eligible deductions will reduce your gross taxable income.

• Calculate Net Taxable Income

After subtracting all applicable deductions from your gross taxable income, you will arrive at the net taxable income, which is then taxed based on the prevailing tax slab. Different tax slabs apply based on your income and age. For salaried individuals below 60 years of age, the following tax slabs apply:

Tax slabs vary with age for senior citizens. For those above 60, no tax is levied on income up to ₹3 lakh. For those above 80, no tax is levied on income up to ₹5 lakh. 

• Calculate Tax Amount

Now that you know the applicable tax slab in your case, you can determine your tax liability. Apply the applicable tax rates to the respective income ranges within your net taxable income. For instance, if your net taxable income is ₹7 lakh, tax would be calculated as: Nil on income up to ₹2.5 lakh; 5% on the income between ₹2.5 lakh and ₹5 lakh (which is ₹12,500); and 20% on the income between ₹5 lakh and ₹7 lakh (which is ₹40,000), totaling ₹52,500.

• Consolidate Your Net Tax Amount

In the final step, you must apply any applicable rebates and cess to your taxable income to finalize your tax liability. If your taxable income is below ₹5 lakh, you can claim a rebate of ₹12,500 under Section 87A. Additionally, a 4% health and education cess is added to your calculated tax amount. For high-income earners, a surcharge may also apply: 10% for incomes between ₹50 lakh and ₹1 crore, and 20% for incomes of ₹1 crore and above.

Example: Calculating Taxable Income on Salary

Let’s simplify the process of calculating taxable income with an example:

• Gross Income: ₹6,90,000
• Standard Deduction: ₹50,000
• Section 80C Deductions: ₹1,50,000

Step 1: Calculate Income After Standard Deduction: ₹6,90,000 (Gross Income) – ₹50,000 (Standard Deduction) = ₹6,40,000

Step 2: Calculate Net Taxable Income: ₹6,40,000 (Income After Standard Deduction) – ₹1,50,000 (Section 80C Deductions) = ₹4,90,000

Step 3: Calculate Tax Before Rebate

Based on a Net Taxable Income of ₹4,90,000:

Tax on income up to ₹2,50,000: Nil

Tax on income from ₹2,50,001 to ₹4,90,000 (i.e., ₹2,40,000): 5% of ₹2,40,000 = ₹12,000

Total Tax Before Rebate: ₹12,000

Step 4: Apply Rebate and Cess

Rebate under Section 87A (since Net Taxable Income of ₹4,90,000 is less than ₹5,00,000): ₹12,000 (Rebate is limited to the tax payable).

Tax After Rebate: ₹12,000 – ₹12,000 = ₹0

Health and Education Cess (4% of Tax After Rebate): 4% of ₹0 = ₹0

Final Tax Liability: ₹0

Therefore, based on this example, your taxable income results in a final income tax liability of ₹0.

Conclusion

As per the Income Tax Act of 1961, taxable income is the portion of income subject to taxation by the Government of India. Calculating this requires following a meticulous yet straightforward procedure. The steps outlined above guide you from calculating gross income to determining your final tax liability on salary in India. Once you understand this process, you can confidently verify your taxable income and fulfill your tax obligations.