How is Income Tax calculated on your salary

As a salaried employee, you are required to pay tax on the income you generate in a financial year as per the tax slab you fall under. Check out this post to understand income tax calculation on salary in detail.

 

As the name suggests, income tax is the tax you pay to the Government on the income you generate. For instance, if you are a salaried employee, you will have to pay income tax on the total taxable income you generate from your job in a financial year. The tax rate will depend on your overall earnings and the tax slab you fall under.

 

While most salaried taxpayers know the above basics, many do not understand how is income tax calculated. If you too are wondering how the actual tax calculation works for salaried professionals, here is what you need to know.

Computing taxable income

To calculate income tax on salary, the first thing you need to know is your total taxable income. Your gross salary and your taxable income are two different things. Taxable income can be calculated by adjusting all the available deductions and exemptions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc. that are part of your gross salary.

If apart from your salary, you have other sources of income too, the same should also be added to your taxable income for calculating your tax liability.

After the computation of taxable income, the next thing you should know about is the different income tax slabs. The tax slabs and tax rates in India vary based on total income in a financial year as well as the age of the taxpayer.

For instance, the tax rate is nil for salaried employees below 60 years with a taxable income of less than Rs 2.5 lakh. The same for taxable income between Rs 2.5 lakh and Rs 5 lakh is 10%. Also, a cess of 4% on the tax amount applies to all the taxpayers, except for the ones falling under the nil tax bracket.

New Tax Regime Slabs (Default) for FY 2024–25:

Income Range                   Tax Rate

Up to ₹3,00,000                   Nil

₹3,00,001 – ₹6,00,000         5%

₹6,00,001 – ₹9,00,000        10%

₹9,00,001 – ₹12,00,000       15%

₹12,00,001 – ₹15,00,000     20%

Above ₹15,00,000               30%

(Plus cess @ 4%)

 

 Old Tax Regime Slabs (only if you opt for it):

Income Range                     Tax Rate

Up to ₹2,50,000                  Nil

₹2,50,001 – ₹5,00,000         5%

₹5,00,001 – ₹10,00,000       20%

Above ₹10,00,000               30%

(Rebate under Section 87A available up to ₹7 lakh in new regime and ₹5 lakh in old)

Example:

Salary: ₹12,00,000

Deductions under 80C + 80D: ₹1,70,000

Taxable Income under old regime: ₹10,30,000

Tax:

0–2.5L: Nil

2.5L–5L: 5% = ₹12,500

5L–10L: 20% = ₹1,00,000

10L–10.3L: 30% = ₹9,000

Total = ₹1,21,500

Cess = ₹4,860

Total Tax = ₹1,26,360

 

Online calculator: A smarter way to calculate Income Tax

As you can see, manually calculating income tax on salary is complex and time-consuming. A smarter alternative is to use an online income tax calculator. With all the income tax slabs and tax rates already fed into the calculator, the online tool will enable you to instantly and accurately calculate your income tax liability.

 

More importantly, do take advantage of all the available deductions and exemptions as they can reduce your income tax liability and help you save a considerable amount of money.