How to Calculate Income Tax on Salary with Example

Q: What components of salary are taxable?

All the components of salary such as basic pay, house rent allowance (HRA), special allowances, and bonuses are taxable. However, certain exemptions and deductions are allowed to be claimed to determine the taxable salary.

Updated: Apr 26

To calculate the income tax on your salary can be a difficult process. But with an easy, step-by-step guide, it becomes a lot simpler. This article will walk you through the process of calculating income tax under the old and new tax regimes, with detailed examples to demonstrate each and every step. Whether you are a new taxpayer or want to improve your understanding on calculating the income taxes, this article will provide you with the information you need to determine your tax obligations confidently.

How to Calculate Income Tax on Salary?

To calculate income tax on salary: Determine total income, apply eligible deductions, and compute tax liability based on relevant slab rates for the financial year. Below steps are to be followed for calculating income tax on salary:

Step 1: Understanding the Gross Salary: The gross salary comprises basic salary, house rent allowance (HRA), special allowances, and any other type of income in the nature of salary. To determine the gross salary, all the components of salary are to be added up.
Step 2: Calculation of Taxable Income: The formula for calculating the taxable income is: Gross Salary - Exemptions (like HRA, LTA) - Deductions (80C to 80U). The taxable income comprises gross salary minus eligible exemptions and deductions. Common deductions include investments made under Section 80C, health insurance premium under Section 80D and interest on home loan under Section 24.
Step 3: Applying the Income Tax Slabs: Based on the chosen tax regimes apply the tax rates. Since India has two tax regimes: the old and the new. Under the old tax regime, a higher exemption and deductions are allowed. On the other hand, the new tax regime offers lower tax rates with minimum exemptions.
Step 4: Calculation of Tax Liability: Based on the selected tax regime apply the tax slabs and compute the tax liability. Also, add cess and surcharge, if applicable.
Step 5: Calculation of TDS and Final Tax Payable: Subtract the Tax Deducted at Source (TDS) from the total tax liability to determine the final tax payable or refundable.

Components of Salary

The components of salary vary greatly between various organizations. However, there are few common components that are important for both employers and employees. Following are the common salary components:

Basic Salary: The base salary on which other components of the salary are calculated.
House Rent Allowance (HRA): HRA are given to employees to meet the expenses related to renting a house.
Dearness Allowance (DA): DA is given to offset the cost of inflation. It is computed on the basic salary.
Conveyance Allowance: Provided to employees to cover the transportation cost from residence to office and vice versa.
Medical Allowance: Given for medical expenses. It is exempt from tax up to a certain limit on submission of medical bills.
Leave Travel Allowance (LTA): LTA is given to employees when they are on leave for work. Travel costs within India are exempted based on certain conditions.
Bonus: Paid based on the performance of the employees or profits of the company.
Provident Fund (PF): Both employees and employer contribute towards the PF as a fixed percentage from the salaries of the employees.
Perquisites: These are given in kind to employees such as cars, subsidized loans, and housing.

How to Calculate Income Tax on Salary with Example for F.Y. 2023-2024: Under Old Tax Regime

Let us calculate the income tax on salary with an example of Ms. Neha, a salaried employee, for the F.Y. 2023-2024. Her tax liability under both the regimes, is calculated below:

Income Details:

Ms. Neha resides in a metro city where she pays INR 40,000 per month towards rent.

Exemption and Deductions Available under Old Tax Regime:

Exemption and Deductions Available under Old Tax Regime

Taxable Income Calculation under Old Tax Regime:

Taxable Income Calculation under Old Tax Regime:

Income Tax Calculation under Old Tax Regime F.Y. (2023-2024):

Income Tax Calculation under Old Tax Regime F.Y. (2023-2024):

How to Calculate Income Tax on Salary with Example for F.Y. 2023-2024: Under New Tax Regime

Let’s take the same example of Ms. Neha and determine her tax liability under the new tax regime:

Taxable Income Calculation under New Tax Regime:

Taxable Income Calculation under New Tax Regime:

Income Tax Calculation under New Tax Regime F.Y. (2023-2024):

Income Tax Calculation under New Tax Regime F.Y. (2023-2024):

Summary of Ms. Neha’s Tax Calculation under both the regimes:

Summary of Ms. Neha’s Tax Calculation under both the regimes:

Ms. Neha will be able to claim deductions and exemptions under the old tax regime which is otherwise not available under the new tax regime. Thus, the tax liability under the old tax regime is lower than the new tax regime. Thus, the above example presents the importance of evaluating personal expenses and investment options before selecting the tax regime.

FAQ

Q1. What components of salary are taxable?

All the components of salary such as basic pay, house rent allowance (HRA), special allowances, and bonuses are taxable. However, certain exemptions and deductions are allowed to be claimed to determine the taxable salary.

Q2. How to compute the taxable income from salary?

To compute the taxable income from salary, take the sum of all the income from salary and other sources. From this amount, deduct exemptions from HRA, travel allowances, and other allowances. Subtract the deductions under Section 80 to arrive at the taxable amount of salary.

Q3. What is the standard deduction for a salaried individual?

For the financial year 2023-2024, the standard deduction for salaried employees is INR 50,000 under both the tax regimes. This a flat deduction allowed to the salaried employees for each financial year.

Q4. How is HRA determined for tax purposes?

House Rent Allowance (HRA) exemption is determined based on least of the following:

Actual HRA received, or
50% of salary if residing in metro cities (40% in case of non-metro cities),
Rent paid minus 10% of salary.

Q5. Is interest on a home loan allowed as a deduction from the taxable salary?

Yes. Section 24 of the Income Tax Act, allows for deduction of interest paid on home loan for INR 2,00,000, in case of self-occupied house property.

Q6. Is the Leave Travel Allowance (LTA) taxable?

The leave travel allowance (LTA) can be claimed as an exemption provided the travel costs are incurred within India, and the travel is undertaken while on employment. LTA can be claimed twice in a block of 4 years.

Q7. How are bonuses taxed in salary?

Bonuses form a part of the salary and are added while determining the tax liability. The tax is computed based on the applicable slab rates.

Q8. What is the consequence of not declaring all the components of salary for tax?

Not declaring all the components of salary may lead to incorrect computation of TDS on salary and thereby may lead to imposition of penalty and interest. Thus, not declaring all the components of salary for tax will affect the computation of tax liability.

Q9. What is the effect on tax deductions if a job is switched in the middle of the year?

If the employee switches the job in the middle of the year, all incomes earned from the previous year should be reported to the new employer. This will ensure that the new employer is able to determine the tax liability for the remaining period of the year correctly.

Q10. What is Form 16? How is it used in filing Income Tax Return (ITR)?

Form 16 is issued by the employer to the employee certifying the salary paid and TDS deducted during the year. It is very important for salaried employees for filing their ITR since based on Form 16, the ITR is filed for salaried employees.