How to Calculate Taxable Income on Salary

Many people fear tax season and feel overwhelmed by the prospect of calculating their income tax. But tax calculations can be pretty straightforward if you understand the basics. What is your income? How much of it is taxed? At what rate? How can you reduce it? This guide on how to calculate your taxable income will help you answer most of these questions.

Income Tax Slab For Fy 2019–2020

The Structure Of Your Salary

Let’s start by understanding something you are familiar with – your salary and its elements. Your gross salary or CTC includes components like the basic pay, dearness allowance, house rent allowance, special allowance and other allowances.

Basic Salary

This is the basic component of your income. Many of your allowances like HRA and benefits such as PF are calculated as a percentage of your basic salary.

Bonus

Bonus, an optional benefit awarded once or twice a year, based on the performance of an employee is a fully taxable component of your salary.

Contribution to Employees’ Provident Fund (EPF)

Companies with more than 20 employees must be members of EPFO or Employee’s Provident Fund Organization. Any employee whose basic pay plus dearness allowance is higher than Rs 15,000 must contribute to EPF. The employer and employee contribute 12% of the employee's salary every month to EPF. This matures in 15 years but you can make a partial withdrawal after seven years. You can also withdraw your PF balance if you have been unemployed for two months. Interest rates on PF varies from year to year and is often linked to the inflation rate.

Standard Deduction

In the Union Budget of 2019, the Finance Ministry increased the standard deduction to Rs 50,000 from the earlier Rs 40,000. This straightaway allows you to reduce your taxable income by up to Rs 50,000

Taxability Of The Allowances

Some of the allowances are taxed fully, others are taxed partially and few of them are tax-free.

Fully Taxable Allowances

Dearness Allowance

Dearness allowance is linked to inflation and is a fully taxable component of your salary. In 2019, for example, the Central Government increased the DA for central government employees and pensioners by 5%.

City Compensatory Allowance

Companies give CCA to employees moving to metro cities to meet expenses and the higher cost of living. This is also fully taxable.

Overtime OT Allowance

Companies also compensate employees for working more than the regular number of hours by paying OT allowance which is fully taxable.

Partially Taxable Allowances

Entertainment Allowance

Part of your gross pay, entertainment allowance is partially taxable. You can claim a deduction up to 1/5th of your salary or Rs. 5,000, whichever is lower if you are a central or state government employee.

House Rent Allowance

If you are a salaried employee living on rent, you can save taxes by claiming HRA. But the HRA is fully taxable for those living in their own houses.

The exemption on HRA is the least of these three:

• The actual HRA
• Rent over and above 10% of salary
• Rent equal to 50% of the salary in metro cities or 40% of the salary in non-metro cities.

Special Allowances

Certain special allowances are awarded to employees to meet personal expenses. These are partially exempt.

Special allowances include

• Children’s education allowance
• Hostel fee allowance,
• Tribal area allowance,
• Compensatory field area allowance, and
• Counter-insurgency allowance for members of armed forces

The amount of exemption in case of Special Allowances is fixed.

Tax-free Allowances

Some allowances are tax exempt, like:

Travelling

An allowance given for travel for work or transfer while in service is included in traveling allowance.

Research allowance

Allowance for the purpose of research or pursuit of academic knowledge pertaining to one’s field of work is called Research Allowance.

Foreign allowances

You can claim an exemption for expenses made out of the allowance given to you during official foreign travels. You must, however, submit documentary proof of such expenses.

Leave Travel Allowance

You can claim LTA as exemption only for the cost of travel within India with your spouse and children. You must provide proof of expenses in the form of bills and tickets. However, you can claim this exemption only twice over a four-year period.

Sources Of Income

Taxable Income

Your salary alone does not constitute your total income. According to tax laws, it also includes the earnings from other sources like rental property, interest income and capital gains. Total income is covered under five heads:

Salary income

What you are paid by your employer, including all allowances.

Income from house property

Earnings by way of rent on owned property.

Income from capital gains

The profits you make from investments into mutual funds, equities or real estate is treated as capital gains.

Income from business and profession

Income you make from freelancing or some other business or profession

Income from other sources

Income from any other sources apart from the ones listed above, like the interest income on fixed deposits or post office deposits and savings accounts are included here.

The Tax Deductions Or Exemptions Available

India’s tax system allows you to claim deductions under the Income Tax Act to reduce your taxable income. The idea behind these deductions is to encourage investments and reduce the tax burden on individuals who are already paying for big-ticket expenses like homes, education and healthcare. Some of the major deductions include:

Section 80C: Savings and Investments

This section allows a deduction of up to Rs 1.5 lakh for investments in specific financial instruments, including.

-Contributions to PPF or Public Provident Fund -Contributions to EPF -Tax saving mutual funds -National Savings Certificate -Fixed deposits -Repayment of home loan principal -Premium on Life Insurance Policy -Tax-saving Equity Mutual Funds

Section 80CCD: Investments in the National Pension Scheme

You can claim an additional Rs 50,000 as deductible for investments made Section 80CCD of Income Tax Act in NPS or the National Pension Scheme.

Section 80TTA: Savings Account

You can claim a deduction on up to Rs 10,000 you earn via interest on your savings bank account.

Section 80CCG: Investments in equity schemes

Under Section 80CCG also called ‘Rajiv Gandhi Equity Saving Scheme’, you can claim a 50% deduction or Rs.50,000, whichever is lower, if you are investing in the equity market for the first time.

Section 80CCC: Investments in annuity plans

Under Section 80CCC you can claim a deduction up to Rs.1.5 lakh if you are paying a premium on an existing plan or you have bought an annuity plan from LIC or other insurers.

Section 80CCC: Investments in annuity plans

Under Section 80CCC you can claim a deduction up to Rs.1.5 lakh if you are paying a premium on an existing plan or you have bought an annuity plan from LIC or other insurers.

Section 80D: Payment of health insurance premiums

Section 80DD and 80DDB: Medical expenses for individuals or dependents with disabilities

Section 24: Payment of interest on home loan

Section 80E: Payment of interest on education loan

Section 80G: Donations to charity

Section 80GG: House rent paid

As a taxpayer, you can reduce your income tax liability for FY 2019–20 and FY 2020–21 by claiming these exemptions and deductions.

However, whether you are eligible to claims these benefits in FY 2020–21 will depend on which taxation regime you choose. Union Budget 2020 introduced a new and optional taxation regime which offers lower tax rates but does away with the exemptions and deductions. Should you opt for this new regime, you will not be able to claim the tax benefits outlined above.

TDS On Salary

TDS is tax deducted at source. It is the part of your monthly salary retained by your employer and deposited with the Central Government.

Based on your annual salary and investment declarations, the employer assesses your taxes to arrive at a monthly TDS amount. You receive your TDS certificate or Form 16 from your employer which has the details of your TDS deductions. The certificate should ordinarily reach you at the latest by 15 June. But in FY 2019–20, owing to the impact of COVID-19, the deadline to issue the certificate has been shifted to 15 August 2020.

Various agencies are authorised to deduct TDS. For example, banks deduct TDS at 10% for interest income exceeding Rs 10,000 (Rs 50,000 in the case of senior citizens). If you fail to provide PAN information, TDS will be deducted at 20%.

How To Calculate Net Pay

Net pay is the income you receive after tax.

• Add up income from all your sources to get your gross income
• Calculate deductions (standard deductions, allowances, investments) and minus them from the gross income
• The value you arrive at is the income on which you must pay the tax.

Your tax is calculated according to income tax slabs.

• If you are under 60 years of age, you don’t need to pay tax if your taxable income is below Rs. 2.5 lakh per annum.
• For income between Rs 2.5 lakh to Rs 5 lakh, the tax rate is 5 per cent.
• For income over Rs 5 lakh but lower than Rs 10 lakh, the rate increases to 20 per cent
• For income over Rs 10 lakh, the tax slab is 30 per cent.
• For senior citizens or those above 60, the minimum taxable income is Rs 3 lakh per annum.
• For super senior citizens, that is individuals who are older than 80 years of age, the minimum taxable income is Rs 5,00,000.

On top of income tax, you must pay a health and education cess of 4% on total income tax + surcharge.

These rates are valid for both FY 2019–20 and FY 2020–21. But taxpayers in FY 2020-21 can also opt for the special income tax rates set out by a new taxation regime.

Here, the slabs are the same for taxpayers of all ages.

• You don’t need to pay tax if your annual taxable income is below Rs. 2.5 lakh.
• If you earn between Rs 2.5 lakh and Rs 5 lakh, the tax rate is 5 per cent.
• If you earn more than Rs 5 lakh but less than Rs 7.5 lakh, the rate increases to 10 per cent
• An income over Rs 7.5 lakh but under Rs 10 lakh is taxed at 15 per cent.
• Earnings above Rs 10 lakh but less than Rs 12.5 lakh attract 20 per cent tax.
• If you earn more than Rs 12.5 lakh but less than Rs 15 lakh, the tax rate is 25%.
• And if your earnings exceed Rs 15 lakh, the slab rate is 30%.

An Example Of How To Calculate Your Tax

Ms Mary is a banking executive. Here is what we know about her income, investments and deductions

• Gross salary is Rs 90,000 per month. Her gross salary includes:
• Basic pay of Rs 60,000
• HRA of Rs 20,000
• Travel allowance of Rs 2,000
• Child’s tuition allowance of Rs 2,000
• Medical allowance of Rs 6,000

Ms Mary can claim the following deductions:

• Travel allowance (Rs 2,000)
• Child’s tuition (Rs 2,000)
• Medical allowance (Rs 6,000)
• HRA (Rs 20,000, since she lives in a rented apartment).

Her total deductions add up to Rs 30,000. Her annual gross income that is taxable is Rs 7.2 lakh.

Now we assume, Ms Mary declared an investment of Rs 1.5 lakh under Section 80C and medical insurance of Rs 25,000 under Section 80D. Then, her net taxable income would be reduced further to Rs. 5.45 lakh.

How will the slabs be applied to her in FY 2019–20?

Let’s assume that Ms Mary’s income and tax-saving investments remain unchanged in FY 2020–21. She can now choose between two taxation regimes. Under the old regime, her tax payable will be the same as for FY 2019–20. But how would it work out under the new regime?

Note that none of the exemptions and deductions she claimed earlier will be available under the new rates. That means her entire gross income of Rs 7.2 lakh will be taxable.

Here is how the slabs will apply in FY 2020–21 if Ms Mary chooses the new regime: