How to Calculate Taxable Income on Your Salary?

Since any income earned is taxable unless specifically mentioned, calculating the tax on your monthly income is not difficult. However, it can seem confusing if you do not know where to start or do not understand the process. That is because there are various considerations like partial taxability of salary components, tax deductions, rebates, income slabs, etc. .

Before we look at calculating taxable income based on your salary step by step, understanding the salary structure, which can vary from employer to employer, is crucial.

• Salary components are either fully taxable, partially taxable, or fully exempt. You can identify these components by taking a look at your salary slip.

• Components like basic salary, bonus and commission, and allowances like dearness, overtime, city compensatory, tiffin, cash, project, helper, uniform, etc., are fully taxable.
• Examples of partially taxable allowances include House Rent Allowance (HRA), Leave Travel Allowance (LTA), conveyance allowance, medical, education, hostel, and other special allowances.
• Very few allowances are non-taxable. Examples of non-taxable allowances include allowances to the Supreme Court and high court judges, benefits for working with the UNO, and allowances to government employees for overseas services.
• Reimbursements received for business expenses and against proof or bill submission are non-taxable as they do not add to the employee's income.

Now that you are clear on the taxability of your salary components, here's how to calculate your taxable income and tax amount.
 

Step 1:
 

Add up the different salary components to arrive at your gross salary. This is done by adding all the allowances to your basic pay.

 

Step 2:
 

Next, deduct the non-taxable portion of partially taxable allowances, such as HRA and LTA. To calculate the HRA exemption, follow the formula prescribed by the Income Tax Department. The formula says that the exemption should be the lowest of the following amounts:

• Actual HRA received
• Actual rent per month minus 10% of basic monthly salary, or
• 50% of basic salary (40% in case of non-metro residents)
   
   

Step 3:
 

Deduct professional tax and standard deduction on salary at this stage. Salaried individuals are entitled to a standard deduction of ₹75,500 under the new regime.

• If you have another income stream other than your salary, add it to the total amount. This includes interest, fees, commission, rental income, capital gains, etc.
• The amount you arrive at is called gross total income. To understand your tax liability, you must calculate your net taxable income. This is done by deducting the tax deductions from the gross taxable income.
   
   

Step 4:
 

The next step is calculating tax deductions. These deductions from your gross taxable income are available under Chapter VI A of the Income Tax Act. If you opt for the new tax regime, which is the default regime, you may not be eligible for various deductions available under the old regime.

For instance, section 80C allows up to ₹1.5 lakh against investments and expenses. It includes payments like,

•  LIC premium

• PPF and EPF contribution

• NPS investment

• ELSS investment

• ULIP investment

• Tax-saving FD investment

• Approved superannuation fund contribution

• Senior citizen saving scheme investment

• Sukanya Samriddhi Yojana investment

• Housing loan principal repayment

• Tuition fees for colleges, schools, etc

Apart from these payments, contributions to pension funds under section 80CCC and NPS under 80CCD (1) also fall under the umbrella deduction limit of ₹ 1.5 lakh.

There are other deductions as well –

• Medical expenditure and medical insurance premiums are paid under section 80D 

• Various expenditures on disabled dependents under section 80DD 

• Expenses on specific diseases under section 80DDB

• Higher education-related expenses under section 80E 

• Interest on Home Loans under sections 80EE and 80EEA 

• Interest on Electric Vehicle Loan under section 80EEB and

• Donations under section 80G
  
   

Step 5:

Once you have made all these deductions as applicable, you will arrive at the taxable income on your salary. The income tax rate is per the tax slab applicable for the assessment year. You can even use a Tax Planning calculator to determine how much tax you must pay depending on your investments and income.

It is essential to remember that deductions and tax rates will vary depending on which tax regime you choose, i.e., the existing or the new tax regime. Consult your financial advisor on all investment and tax-related matters to ensure you make the most of the available tax-saving opportunities.

Here is a complete guide on how to pay your income tax online. 

As an HDFC Bank customer, you can ensure that all your taxes are paid on time, as the bank makes this process extremely easy. You can log into your NetBanking account to pay various taxes with ease.

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​​​​​​*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.