How to Calculate Taxable Income on Your Salary?
10 April, 2023
Since any income earned is taxable unless specifically mentioned, calculating the tax on your monthly income is not difficult. However, it can seem confusing if you do not know where to start or do not understand the process. This is because there are various considerations like partial taxability of salary components, tax deductions, rebates, income slabs etc.
Here is a look at the process of calculating taxable income based on your salary in a stepwise manner.
The first step is understanding the salary structure, which can vary from employer to employer. However, the salary components are either fully taxable, partially taxable, or fully exempt. You can identify these components by taking a look at your salary slip.
Components like basic salary, bonus and commission, and allowances like dearness, overtime, city compensatory, tiffin, cash, project, helper, uniform etc., are fully taxable.
Examples of partially taxable allowances include House Rent Allowance (HRA), Leave Travel Allowance (LTA), conveyance allowance, medical, education, hostel, and other special allowances.
Very few allowances are non-taxable. Allowance to the supreme court and high court judges, benefits for working with the UNO, and allowance to government employees for overseas services are examples of non-taxable allowances.
Reimbursements received for business expenses and against proof or bill submission are non-taxable as they do not add to the employee's income.
Steps to calculate taxable income
Now that you are clear about the taxability of your salary components, here's how you can arrive at your taxable income and tax amount.
Add up the different salary components to arrive at your gross salary. This is done by adding all the allowances to your basic pay
Next, deduct the non-taxable portion of partially taxable allowances, such as HRA and LTA. To calculate the HRA exemption, follow the formula prescribed by the Income Tax Department. The formula says that the exemption should be the lowest of the following amounts:
Actual HRA received
Actual rent per month minus 10% of basic monthly salary, or
50% of basic salary (40% in case of non-metro residents)
You also must deduct professional tax and standard deduction on salary at this stage. Salaried individuals are entitled to a standard deduction of ₹ 52,500.
If you have another income stream other than your salary, add it to the total amount. This includes interest, fees, commission, rental income, capital gains, etc.
The amount you arrive at is called gross total income. To understand your tax liability, you now have to calculate your net taxable income. This is done by deducting the tax deductions from the gross taxable income.
Calculating tax deductions
The next step is to consider various deductions available under Chapter VI A of the Income Tax Act from your gross taxable income.
For instance, section 80C allows up to ₹ 1.5 lakhs against investments and expenses. It includes payments like,
LIC premium
PPF and EPF contribution
NPS investment
ELSS investment
ULIP investment
Approved superannuation fund contribution
Senior citizen saving scheme investment
Sukanya Samriddhi Yojana investment
Housing loan principal repayment
Tuition fees for colleges, schools etc.
Apart from these payments, contributions to pension funds under section 80CCC and NPS under 80CCD (1) also fall under the umbrella deduction limit of ₹ 1.5 lakhs.
There are other deductions as well –
Medical expenditure and medical insurance premiums are paid under section 80D
Various expenditures on disabled dependents under section 80DD
Expenses on specific diseases under section 80DDB
Higher education-related expenses under section 80E
Interest on Home Loans under sections 80EE and 80EEA
Interest on Electric Vehicle Loan under section 80EEB and
Donations under section 80G
Once you have made all these deductions as applicable, you will arrive at the taxable income on your salary. The income tax rate is as per the tax slab applicable for the assessment year. You can even use a Tax Planning calculator to figure out how much tax you need to pay depending on your investments and income. As an HDFC Bank customer, you can ensure that all your taxes are paid on time, as the bank makes this process extremely easy. You can log into your NetBanking account to pay various taxes.
It is also essential to remember that deductions and tax rates will vary depending on which tax regime you choose, i.e. existing tax regime or the new tax regime. Consult your financial advisor on all investment and tax-related matters to ensure you are making the most of the tax-saving opportunities available to you.
Here is a complete guide on How to deposit self-assessment tax online. Click here to read.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.
