How to Calculate Taxable Income on Salary?

byjitendra7.singhSeptember 10, 2023
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Every year, you may witness many people filing Income Tax Returns (ITR) on their taxable income in India. Tax planners, chartered accountants, and online ITR filing platforms usually calculate this 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 laid under the Income Tax Act of 1961. But before learning about the process, 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 is always confusing for the salaried individual. We will make the process of calculating taxable income simple. It requires you to follow some steps. Here are the steps you must consider to know which income is taxable on your salary:

  • Calculating Gross Income 

Knowing the amount of your gross income is the first step to arriving at your taxable income. All you have to do is tally all the components of your salary like Basic Pay, House Rent Allowance (HRA), Leave Travel Allowance and other special allowances. The HRA requires you to have valid rent receipts to be able to include them in the calculations. 

Account for any other exemptions along with other components of your salary. Deduct the standard INR 50,000 from the accounted number. It will help you arrive at your net salary. You can add other income sources like rental earnings, capital gains, interest from deposits, etc.

  • Calculate Gross Taxable Income

Once you apply the standard deduction of INR 50,000, you can claim deductions under Section 80C, up to Rs 1.5 lakh for investments like PPF, ELSS Mutual Funds, EPF, Sukanya Samriddhi Yojana, and term insurance premiums. In this step, you will arrive at your gross taxable income by removing any additional deduction left in the previous step. 

You need to check for the applicable deductions by tallying them with various sections of the Income Tax Act 1961. For example, if you are investing in NPS, an additional INR 50,000 deduction is applicable under Section 80CCD(1B). After all the applicable deductions are made, it will bring down your gross taxable income.

  • Calculate Net Taxable Income

After subtracting all the applicable deductions from the gross taxable income, you will get the sum income which is taxable based on the prevailing tax slab. Different tax slabs are applicable based on your income and age. Salaried individuals who are below the age of 60 have to abide by the tax slabs given below:

Net Income RangeIncome Tax SlabTax Amount before Rebate under Section 87A
Up to ₹2,50,000NilNil
₹2,50,000 – ₹5,00,0005%₹12,500
₹5,00,000 – ₹10,00,00020%₹1 lakh
Above ₹10,00,00030%₹2,62,500 (assuming that the  net income of the individual is ₹15 lakhs)

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, make sure to utilise it to arrive at your tax amount. Apply the applicable tax rate from the previous step to your net taxable income ranges to calculate the tax for each range. For instance, if your taxable income is ₹7 lakh, you may have to pay 5% on the first ₹2.5 lakh, 20% on the next ₹2.5 lakh, and 30% on the remaining ₹2 lakh.

  • Consolidate Your Net Tax Amount

In the last step, you must apply the applicable rebates and cess on your taxable income to check for the tax incentives. If your taxable income is below ₹5 lakh, you can claim a rebate of ₹12,500 under Section 87A. In addition, if your income is higher, you may have to add a 4% health and education cess to your calculated tax amount. For high incomes ranging from ₹50 lakh – ₹1 crore, there’s a 10% surcharge, and for incomes of ₹1 crore and above, there is a 20% surcharge.

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: Gross Taxable Income ₹6,90,000 (Gross Income) – ₹50,000 (Standard Deduction) = ₹6,40,000

Step 2: Gross Taxable Income after Deductions ₹6,40,000 (Gross Taxable Income) – ₹1,50,000 (Section 80C Deductions) = ₹4,90,000

Step 3: Calculate Tax Income falls in the ₹2,50,000 – ₹5,00,000 range:

Tax on this range: 5% of ₹2,40,000 = ₹12,000

Tax on the ₹5,00,000 – ₹10,00,000 range: 20% of ₹2,50,000 = ₹50,000

Total Tax Amount: ₹12,000 + ₹50,000 = ₹62,000

Cess (4%) on Tax: 4% of ₹62,000 = ₹2,480

Final Tax Liability: ₹62,000 + ₹2,480 = ₹64,480.

So, your taxable income results in an income tax liability of ₹64,480.

Conclusion

As per the Income Tax Act of 1961, taxable income is the part of income that is subject to taxation by the Government of India. Calculating this taxable income requires following a meticulous procedure which is simple and understandable. From calculating gross income to arriving at the taxable income, all the steps mentioned above lead you to an accurate figure for calculating the tax on salary in India. Once you are well-versed in the process, you can double-check your taxable income and pay your taxes wisely.

FAQs

Whose salary is not taxable in India?

The income range up to ₹3,00,000 is not taxable as per the Income Tax Act 1961. Any income above this range is taxable as per the prevailing income tax rate.

Do the income tax slabs remain the same?

No, the income tax slabs keep on changing with each financial year. You must stay updated with the latest tax rules and slabs to arrive at the right results.

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