How to Calculate Income Tax on Salary with Example

Income tax calculation frightens people because it has been made such a complicated process to comprehend that the moment we listen to the calculation of Income Tax we resist doing it by ourselves. If you were searching for how to calculate income tax on salary with example then it’s just because of the lack of information about this whole calculation process. Well, you don’t have to worry anymore as we are going to give you all the necessary information that you need to do it yourself, which will make this process a lot easier. 

Let’s start with some basic terminologies that are used in the calculation of Income Tax.

What is Income Tax?

As the name suggests income tax is the tax calculated on your salary or net income. As per the Income Tax Act of 1961, different tax slabs are allotted for different segments of earnings. Now, after calculating the net income, the tax slab for your net income is selected accordingly.

Important: MAXIMUM TAX EXEMPTION LIMIT

The maximum tax exemption limit for an individual below 60 years is INR 2,50,000 whereas, for senior citizens, this limit is up to INR 3 lakh, and for senior citizens above 80 years of age is INR 350,000.

Updated Tax Rates: Click on the following link to see the tax rates for the assessment years 2023-2024 and 2022-2023. 

What is the formula for net salary pay?

Net salary or Take home salary is the total amount that you receive after detecting all types of taxes like income tax, pension, professional tax, TDS, etc. 

The formula for net salary = Gross salary – Total Deductions

Gross Salary: 

It is the sum of your basic salary/CTC and all the added allowances or perks given to you on a monthly or yearly basis.

Where, Gross salary = Basic salary + HRA + TA + DA + other allowances

Deductions: 

The amount of money that you pay as tax by section 80 of the income tax act yearly on your gross salary.

Total Deductions = TDS + professional tax + any other tax etc.

How do I calculate my salary after taxes?

The salary left after deducting all taxes is your net income. As shown above,

The net income or net salary = Gross salary – Total Deductions

Where, Gross salary = Basic salary + HRA + TA + DA + other allowances

Income Tax Calculator:

You can calculate the income tax on your salary easily with this tool. Just click on the link: 

You will be taken to a page that appears like a form with multiple fields. Scan through the whole page and identify the relevant fields to enter information.

The income tax calculator has the following fields:

• Assessment year: select the Year from the drop-down menu to calculate the income tax in that year.

• Taxpayer: Select the type of taxpayer from the drop-down menu options: individual, HUF, AOP/ BOI, LLP, Foreign Company, domestic company, and cooperative society.

• Gender selection: Select the gender from the drop-down menu options: male, female, and senior citizen.

• Residential status: Select the residential status from the drop-down menu options: resident, NRI and not ordinary resident.

• Income from salary: Enter your income in this field.

• Income from house property: Click on the show details button on the side to see various options under which you can enter the most relevant one for your property income. A few options are interest paid on housing loans, income from let out property, less unrealized rent, less Municipal taxes paid during the year, net annual value and so o,n. 

• Capital Gain: Click on the show details button on the side and select the relevant options from the short-term capital gains covered under section 111 A, short-term capital gains covered under other than section 111 A, long-term capital gains ( charged to Tax at 20%) and 

• Long-term capital gains (charged to Tax at 10%). 

• Income from other sources: Click on the show details button on the side to select the relevant options: Interest, Commission/ other income, winnings from the lottery, crossword puzzles, etc.

• Profit and gains of business or profession: Enter only the amount of profit you have gained in this field.

•  Agriculture Income: Enter the income from agriculture sources if any. 

•  Deductions: Click on the show details button on the side to see various options to file deductions under different sections of section 80 C, of the Income Tax Act.

Here are all the different types of Deductions that are listed in the Income tax calculator tool:

1. Payment for annuity plan, 
2. Life Insurance premium paid 
3. Contribution toward provident fund or PPF, 
4. Investment in NSE + interest, 
5. Contribution toward ULIP, 
6. Contribution toward notified Pension Fund by MF/ UTI, 
7. Repayment of housing loan, 
8. Tuition fees paid for children, 
9. 5 years fixed deposit with PO or scheduled bank, 
10. Contribution towards NPF, 
11. Employee’s self-employed contribution toward NPS up to 20% under section 80 CCD
12. Additional contribution towards NPS under section 80 CCD 1B, 
13. Employee’s contribution towards NPS under section 80 CCD, 
14. Long-term infrastructure bonds under section 80 CCF, 
15. Investment under equity Saving Scheme under section 80 CCG, 
16. Deposit with Sukanya Samriddhi accounts, 
17. Any other deductible under section 80 C, 
18. Medi-claim premium under section 80 D, 
19. Actual payment towards medical treatment under section 80 DB, 
20. Donations under section 80 G, 
21. Deduction for maintenance medical treatment of dependent under section 80 D,
22. Interest on loan for higher education under section 80 E, 
23. Interest on loan taken for a residential house under Section 80 EE, 
24. Deduction in case of a person with a disability under Section 80, 
25. Interest on deposits in saving accounts under Section 80 TTA, 
26. Any other deductions. 

• Enter the Due date of submission of the Return

• Enter the Detail of the tax paid with the date and amount. 

Once the above fields are filled with the correct data, click on the calculate button at the bottom of the tool. 

The following will be calculated automatically by this tool:

• Net taxable income
• Deductions
• Income is liable to Tax at a normal rate
• Short-term capital gains are covered under section 111 A at 15%
• Long-term capital gains ( charged to tax at 20%)
• Long-term capital gains are chargeable to tax at 10%
• Winnings from lottery crossword puzzles etc. at 30%
• Income tax
• Surcharge
• Education Cess
• Secondary And Higher Education cess
• Total tax liability
• Relief
• TDS/ TCS/ MAT (AMT) Credit utilized 
• Amount of interest under sections 234 A, 234 B and 234 C 

This tool gives all the details you need to look for while calculating your income tax. In Particular, you can check each section given under deductions to know where you can save more taxes. 

Now, we will look into the basics of income tax calculation on salary.

How income tax is calculated on salary example?

Let us understand the basics of income tax calculation on salary by a simple example. Suppose an individual salary is 30,000 per month with DA of 5000 per month, HRA of 2250 per month, and has to pay a professional tax of INR 3,500. What will be his taxable income? How much income tax will he pay?

Solution: 

Let’s break down the salary:

Basic salary = 30,000 X 12 = 3,60,000

DA = 5,000 X 12 = 60,000

HRA = 5000 X 12 = 60,000

Gross Salary = 4,80,000

Professional tax = 3,500 

Net income = 4,80,000 – 3,500 = 4,76,500

The taxable income is INR 4,76,500 and as per the income tax slab it falls under the INR 2.5 lakh to 5 lakh category. The income tax rate for this slab is 10%. 

Therefore, the income tax payable on the net income of INR 4,76,500 will be:

10% of 4,76,500 = INR 47,650

Thus, the income tax on a salary INR 4,76,500 is INR 47,650.

FAQ-  How to calculate income tax on salary with an example

1. Is tax calculated on basic salary?

No, the tax is calculated on the gross salary of the individual. Basic salary forms 50 to 60 % of the gross salary.

2. What is my CTC if my salary is 30000?

The CTC or cost to the company is the total amount of money a company/employer is paying you to get your services. It means

CTC = Basic salary + HRA + CA+DA+ Medical expense + EPF contribution + gratuity + special allowances

If your total in-hand salary is 30,000. Your CTC will be 30,000 X 12 = 3,60,000 

3. How is TDS calculated on salary?

TDS or text deducted at source is the amount deducted by the employer or the deductor before crediting the salary in your account. TDS is calculated the same as income tax based on the Income Tax Act. If your salary is less than or up to INR 2,50,000, then no TDS will be deducted. If your salary falls under the bracket INR 250 lacs to 5 lakhs, TDS will be deducted at 5%. If your salary falls under the tax bracket INR 5 lakhs to 10 lakhs, TDS will be deducted at 20% and if your salary is more than 10 lakhs annually, TDS will be deducted at 30%. Also, know that TDS is paid periodically throughout the year. The TDS is part of the income tax. Know more about its calculation process in this article: 

Conclusion:

We have tried to explain how to calculate income tax on salary with example of basic methods and using the tool given by the income tax department. However, before proceeding understand the basics of salary breakup, tax saving schemes, deductions, and income tax applicable to various sources of income. Also, don’t fill in any false information as it may be taken as tax fraud and can lead to imprisonment or penalty.

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