How to Calculate Income Tax on Salary with Example For 2022-23 (2024)

By many, income tax is looked at as a necessary evil. With ever-changing tax laws and several jargons – tax exemption, tax rebate, tax deduction, tax saving, etc – to decipher, most of the time we do not even realize what portion of our income is being taxed, and how we can save some money.

In this blog, we show you how to calculate income tax on salary with examples, so that the next time, you can do your own math and take enough measures to save as much tax as possible.

First, What is Income Tax? And, What is Taxable Income?

The government levies income tax on an individual’s income. This term individual applies to a person, Hindu Undivided Family (HUF), company, cooperative societies, and trusts. The tax slabs are decided based on one’s income and age.

Now, taxable income is an individual’s income minus the tax exemptions, deductions, and rebates. It is an essential variable on which income tax on salary is determined. Calculating taxable income is laced with complicated calculations and adjustments, so we take you through them to simplify the math.

How to Calculate Income Tax on Salary?

Generally, tax is calculated by multiplying the applicable tax rate with the taxable income. Though it seems simple, it consists of several steps, including calculating gross salary, calculating deductions and exemptions, calculating tax payable, deducting tax already paid, etc.

To make it simple, here are the 5 steps that you can use to calculate income tax on salary:

Step 1: Calculate your gross income

First, write down the annual gross salary you get. This will include all the components of your salary, including House Rent Allowance (HRA), Leave Travel Allowance (LTA), and special allowances, like food coupons and mobile reimbursem*nts.

Next, take out the exemptions provided on the salary components. The major exemptions you get are HRA i.e. House Rent Allowance and LTA i.e. Leave Travel Allowance.

For HRA, remember you can claim HRA only if you live in a rented house and can submit valid rent receipts as proof. You can easily fill out and download the rent receipt from the ET Money website and submit it after affixing the revenue stamp and getting it signed by your landlord or landlady to claim the HRA benefit. If you have your own accommodation or live with your parents, then HRA is fully taxable. Also, your tax exemption under HRA is taken as the lowest of the following amounts:

• HRA received from an employer
• Actual rent paid less than 10 % of the basic monthly salary
• 50% of the basic salary if the taxpayer is living in a metro city
• 40% of the basic salary if the taxpayer is living in a non-metro city

The good news is that you no longer need to use pen and paper to calculate your HRA exemption amount. All you need to do is use the online HRA calculator to know your exempt and taxable HRA Details. After this, remove the standard deduction of Rs 50,000 (every salaried individual is entitled to this deduction) to arrive at the net salary amount.

Next, you need to add income that you might have received from other sources. This could be rental income, interest earned from deposits, capital gains you might have received, etc.

The amount you arrive at is your total gross income.

Step 2 – Arrive at your net taxable income by removing deductions

Tax deductions allow you to reduce your taxable income further by investing, saving, or spending on certain items.

First is the Standard Deduction of Rs 50,000 (mentioned in the previous section), which can be availed by all, without making investments or expenditures on any defined products.

Next, deduct investment and expenses eligible under Section 80.

Under Section 80C, which is the biggest pool for the deduction, you can claim up to Rs 1.5 lakh deduction for various investments and expenditures. Investments in PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana, and premiums paid-for-term insurance are some of the most popular ways to claim this deduction. Also, if you have a home loan, the principal amount paid back in the year can be claimed as a deduction under this section. Further, your EPF, which is a part of your salary, falls in the category.

If you are investing in NPS, you can claim another Rs 50,000 deduction under Section 80CCD(1B), which is over and above the Rs 1.5 lakh limit under Section 80C. Apart from this, if you have paid premiums towards the health insurance policy of your family and your parents, you can claim that amount as a deduction under Section 80D.

In the case of a home loan, the interest portion of the EMI paid for the financial year can be claimed as a deduction, up to a maximum of Rs 2 lakh, under Section 24. Again, this is over and above the deduction on the principal amount under Section 80C.

Step 3: Arriving at your net taxable income

By subtracting all the eligible deductions from the gross taxable income, you will arrive at your total income on which you need to pay tax basis your tax slab.

Tax slab for Individual taxpayers who are of the age of less than 60 years

This slab rate is different for senior citizens. For those who are over 60 years old with up to Rs 3 lakh net income, the tax rate is nil. And for very senior citizens, who are over 80 years old, up to Rs 5 lakh net income, the tax rate is nil. Basically, the applicable tax rates depend on your age and net income.

We will now get into the crucial step of calculating your tax.

STEP 4 – Calculate Your Taxes

Now, one pays tax on his/her net taxable income.

• For the first Rs. 2.5 lakh of your taxable income you pay zero tax
• For the next Rs. 2.5 lakhs you pay 5% i.e. Rs 12,500
• For the next 5 lakhs you pay 20% i.e. Rs 1,00,000
• For your taxable income part which exceeds Rs. 10 lakhs you pay 30% on the entire amount

Step 5: Consolidate your net tax

Rebate under Sec 87A: Tax rebate is a form of tax incentive provided by the government to individuals earning an income below a specified limit. In case your total taxable income after deductions doesn’t exceed Rs 5 lakh, you can claim rebate under Sec 87A of Rs 12,500.

Now if your taxable income is more than Rs 5 lakh, you can add the health and education cess of 4 percent to your tax amount to see the final amount you will pay.

For people in the very high-income bracket, i.e. between Rs 50 lakh and Rs 1 crore, they need to pay a surcharge of 10 percent. And, for income between Rs 1 and Rs 2 crore, surcharge is 20 percent.

Let’s now understand this with an example –

Akash works at a Mumbai-based MNC and his annual gross salary is Rs 15 lakh. After removing all exemptions from his salary, including HRA and standard deductions, his net salary is Rs 12.5 lakh.

Last year, he earned Rs 10,000 as interest income from his bank account. And his total investment in ELSS Mutual Funds and contribution to EPF combined come to Rs 1.5 lakh. He has even invested in NPS (Rs 20,000) and has a health insurance policy for himself and his wife for which he pays 15,000 premium every year.

Now let’s see how much income tax on salary he has to pay for this year

As you can see, calculating income tax is a time-consuming and hectic process. To simplify your tax calculation, you can simply use the Income Tax Calculator. It is an online tool, through which you can calculate your income tax by following some simple steps.

The Bottom line:

As you can see tax deductions can help you save a lot of tax. And there are some great avenues that can help you not only achieve this but also help reduce stress around finances.

So go ahead and download the ETMONEY app and get a personalised tax saving plan. You can also invest in those products in just a few taps.