How to Calculate Income Tax on Salary?
Any income received by an employee is taxed under the head Income from Salaries. It is only taxable when an employer-employee relationship exists. The first thing one needs to know is the salary slab they fall under. Then the employee needs to submit their declaration about their proposed investments so that the employer can take them under consideration before deducting the income tax from the employee’s salary. By declaring the taxes in advance you do not have to go through the lengthy process of having to file for refunds from the Income Tax Department.
Gross Salary:
You can invest under the Section 80C to a maximum of Rs.1,50,000. Or if you are in a higher tax bracket, you can save Rs.45,000 in tax.
You can make the investment in Provident Fund, Life Insurance Premium, Equity Linked Savings Scheme, Home Loan monthly installment, National Savings Certificate, Infrastructure Bond, Pension Funds, Tuition fees and Unit Linked Insurance Plan.
Under Section 80D, a standard deduction of Rs.40,000 pertaining to the existing transport allowance and miscellaneous medical costs has been proposed by the Finance Minister. Despite that, transport allowances for differently-abled individuals will continue to be available at the same rate. This proposal will thereby lessen the tax liability of middle-class employees. This standard deduction allowance is expected to effectively benefit people who earn from pensions. The Government is said to have reserved an amount of Rs.8000 crore for this purpose.
Under Section 80D, you can claim Rs.25,000 as medical expenses and Rs.30,000 can be claimed by senior citizens.
As per Union Budget 2018, under Section 80D, the deduction limit for premiums paid on health insurances or other medical expenditures was increased from Rs.30,000 to Rs.50,000.
Additionally, the deduction limit for expenses incurred on critical illnesses (pertaining to senior citizens) has been raised to Rs.1 lakh from an earlier amount of Rs.60,000 (for senior citizens) and Rs.80,000 (for super senior citizens), under Section 80DDB.
These tax concessions are sure to provide an extra tax benefit of Rs.4,000 crore to senior and super senior citizens. In addition to these concessions, Finance Minister, Arun Jaitley has also proposed an extension of the Pradhan Mantri Vaya Vandana Yojana up until March 2020, under which an 8% tax return is guaranteed by the Life Insurance Corporation of India.
The deductions on House Rent Allowance is the least of the following:
- Either the actual HRA amount.
- 50% of your basic pay if the employee is living in metro and 40% if the employee is living in a non-metro area.
- Additional rent paid above 10% of his salary.
Gross salary is the sum total of Basic pay + Dearness allowance + House Rent Allowance + transport allowance + special allowance + other allowance.
Deductions on Income from Salary
The deductions on Income from Salary falls under the Section 16 of the Income Tax Act. The deductions are:
- Entertainment Allowance under Section 16(ii): Deduction is allowed by way of entertainment allowance given by an employer. This deduction is available only for the Government employees. The deduction is either the 1/5th of salary without including the benefits or perquisites or other allowances or Rs.5,000, whichever is lesser. The non-government employees can’t avail this deduction.
- Tax on Employment under Section 16(iii): The Professional Tax is allowed as a deduction while computing income from salaries.
Computation of Tax Liability
Once you have calculated your income tax, the next step in the process will be to calculate your total tax liability. Follow the below mentioned steps:
- Your total income needs to be rounded off to the closest multiple of 10.
- Next, classify the total amount into four parts: long-term capital gains, short-term capital gains, earnings from card games, lotteries etc., and the total amount that remains (that is ultimately rounded off).
- Add up the computed tax.
- Whatever the balance is, levy the surcharges.
- Add education, secondary and higher education cess to the total calculated tax (including surcharges).
- Check the rebates that are allowed after surcharges are added.
- The remaining balance will be your total payable tax which is then rounded off to the closest multiple of 10.
Income Tax Slab Rates for Senior Citizens (more than 60 years but less than 80 years at any given time in the year)
| Taxable Income | Rates |
|---|---|
| 0 to Rs.3,00,000 | NIL |
| Rs.3,00,000 to Rs.5,00,000 | 5% |
| Rs.5,00,000 to Rs.10,00,000 | 20% |
| More than Rs.10,00,000 | 30% |
Income Tax Slab Rates for Super Senior Citizens (a resident of India who is 80 years old or more at any given time in the year)
| Taxable Income | Rates |
|---|---|
| 0 to Rs.5,00,000 | NIL |
| Rs.5,00,000 to Rs.10,00,000 | 20% |
| More than Rs.10,00,000 | 30% |
To get a better understanding of TDS, let us take a look at its deduction rates for FY 2017-18
Tax Rates for Indian Citizens below 60 years of age
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.2,50,000 | NIL | NIL | NIL |
| Rs.2,50,001 to Rs.5,00,000 | 5% | 2% of the total Income tax | 1% of the total Income tax |
| Rs.5,00,001 to Rs.10,00,000 | Rs.12,500 and an additional 20% | 2% of the total Income tax | 1% of the total Income tax |
| More than Rs.10,00,000 | Rs.1,12,500 and an additional 30% | 2% of the total income tax | 1% of the total income tax |
Tax Rates for Indian Citizens who are below 80 years in age but above 60 years
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.3,00,000 | NIL | NIL | NIL |
| Rs.3,00,001 to Rs.5,00,000 | 5% | 2% of the total income tax | 1% of the total income tax |
| Rs.5,00,001 to Rs.10,00,000 | Rs.1000 and an additional 20% | 2% of the total income tax | 1% of the total income tax |
| More than Rs.10,00,000 | Rs.1,10,000 and additional 30% | 2% of the total income tax | 1% of the total income tax |
Tax Rates for super senior residents of India
| Total Income (Annual) | Rates | Education Cess | Higher and Secondary Education Cess |
|---|---|---|---|
| 0 to Rs.5,00,000 | NIL | NIL | NIL |
| Rs.5,00,001 to Rs.10,00,000 | 20% | 2% of the total income tax | 1% of the total income tax |
| More than Rs.10,00,000 | Rs.1,00,000 and an additional 30% | 2% of the total income tax | 1% of the total income tax |
