Table of Contents
- Introduction
- What is Income Tax?
- Who is Required to Pay Income Tax in India?
- Components of Salary Income
- Taxable vs Non-Taxable Components
- Standard Deduction
- Exemptions and Deductions
- How to Calculate Income Tax on Salary
- Step 1: Determine Gross Salary
- Step 2: Deduct Exemptions
- Step 3: Calculate Taxable Income
- Step 4: Apply Tax Rates as per Slabs
- Step 5: Claim Deductions
- Step 6: Calculate Tax Liability
- Step 7: Consider Rebate under Section 87A
- Step 8: Add Surcharge and Cess
- Step 9: Deduct TDS
- Step 10: Pay Additional Tax if Any
- Income Tax Slabs Rates for FY 2022-23
- How to Save Tax on Salary Income?
- Frequently Asked Questions
Introduction (Calculate Income Tax on Salary India 2023)
Calculating income tax on your salary can seem complicated, especially if you are doing it for the first time. However, understanding how to calculate Income Tax on Salary India in 2023 is crucial for effective financial planning and tax savings.
This step-by-step guide will help salaried individuals in India learn how to calculate their income tax liability for Financial Year 2022-23 (Assessment Year 2023-24). We will cover key aspects like taxable components, exemptions, deductions, income slabs, and how to reduce tax on salary legally.
So let’s get started!
What is Income Tax?
Income tax refers to the tax levied by the Government of India on income earned by individuals and businesses. If your total taxable income in a financial year exceeds the minimum exemption limit, you are liable to pay income tax.
For salaried individuals, the tax is deducted at source (TDS) from the salary paid by the employer. TDS is deducted every month and the total TDS for the year is adjusted against the final tax liability calculated at the time of income tax return filing.
Who is Required to Pay Income Tax in India?
You must pay income tax if your total taxable income exceeds the basic exemption limit in a financial year. The basic exemption limits are:
- ₹2.5 lakh for individuals below 60 years
- ₹3 lakh for senior citizens (60-80 years)
- ₹5 lakh for very senior citizens (above 80 years)
So if your total taxable income is higher than the exemption limit applicable to you, you have to pay income tax.
Now let’s understand what constitutes taxable salary and how to calculate tax on Salary.
Components of Salary Income
Broadly, your salary income will include:
- Basic Salary: This is the core component which is a fixed monthly amount.
- Dearness Allowance (DA): DA is paid to adjust for inflation. It aims to negate the impact of rising prices.
- House Rent Allowance (HRA): HRA is provided by employers to cover rented accommodation expenses.
- Conveyance Allowance: This allowance covers commute expenses to travel to and from the workplace.
- Other Allowances: Other common allowances include children’s education allowance, helpers’ allowance, uniform allowance, etc.
- Perquisites: This includes non-cash benefits like employee stock options (ESOPs), cars, accommodation, etc.
- Bonuses & Commissions: Performance bonuses, incentives and sales commissions are taxable.
- Reimbursements: Money spent by employees on business activities and reimbursed by the employer.
- Retirement Benefits: PF, gratuity and leave encashment are taxable up to specified limits.
- Other Income: Interest income, capital gains, income from other sources etc.
Now that you know the components of salary, let’s understand what is taxable and what is not.
Taxable vs Non-Taxable Components
Taxable Components
The following salary components are fully taxable:
- Basic Salary
- Dearness Allowance (DA)
- Bonuses & Commissions
- Other Allowances
- Perquisites
- Reimbursements
- Retirement Benefits like PF & Gratuity (taxable over exemption limit)
Non-Taxable Components
The following are partially or fully non-taxable:
- House Rent Allowance (HRA – exempt up to certain limit)
- Leave Travel Allowance (LTA – exempt up to certain limit)
- Conveyance Allowance (exempt up to ₹1600 per month)
- Child Education Allowance (exempt up to ₹100 per month per child, up to 2 children)
- Helper Allowance (exempt to the extent of expenditure incurred by Individual)
- Food Coupons (exempt up to ₹50 per meal)
- Uniform Allowance (exempt amount notified by employer)
Standard Deduction
All salaried taxpayers are allowed a flat standard deduction of ₹50,000 per year from their salary income under Section 16(ia). This flat deduction reduces taxable salary income.
For example, if your gross salary income is ₹6 lakh and you claim the standard deduction of ₹50,000, your taxable salary income reduces to ₹5.5 lakh.
This standard deduction replaced the earlier ₹40,000 exemption for transport and medical expenses.
Exemptions and Deductions
Beyond standard deduction, claim exemptions and deductions to lower taxable salary income, reducing income tax liability. Lets understand:
1. House Rent Allowance (HRA) Exemption
Occupants of rented houses are eligible to claim a tax exemption on the received HRA, as determined by the subsequent calculations:
Renthouse dwellers can claim tax exemption on HRA as per calculations:
- Actual HRA received
- 50% of basic salary, if living in metro cities (40% for non-metro)
- Rent paid minus 10% of basic salary
The least of the above three amounts is exempt under HRA.
2. Leave Travel Allowance (LTA) Exemption
LTA exemption can be claimed on the amount received from your employer for travel expenses of self and family within India. The minimum expenses to claim exemption are:
- ₹1000 per person for travel via air economy class
- ₹600 per person for travel via train AC class
3. Section 80C Deductions
Under Section 80C, you can claim deductions up to ₹1.5 lakh for investments like:
- PPF
- ELSS
- Life insurance premium
- NSC
- FD
- NPS
- Sukanya Samriddhi Yojana
4. Section 80D: Medical Insurance Premium
You can claim deductions up to:
- ₹25,000 for self, spouse and children’s mediclaim
- ₹25,000 for health insurance of parents aged below 60 years
- ₹50,000 for health insurance of parents aged above 60 years
5. Home Loan Interest Deduction u/s 24
You can claim deductions up to ₹2 lakh on interest paid for a home loan taken for a self-occupied property. An additional deduction of ₹1.5 lakh can be claimed under Section 80EEA in the year of loan sanction.
6. NPS Contribution Deduction u/s 80CCD(1B)
An additional tax benefit on contribution up to ₹50,000 invested in the NPS account can be availed over and above the ₹1.5 lakh limit of Section 80C.
These exemptions and deductions help you optimize your tax outgo by reducing taxable income.
Now let’s run through the step-by-step process of calculating income tax on salary.
How to Calculate Income Tax on Salary in India 2023
Follow these 10 steps to accurately compute your income tax if you are a salaried individual:
1st STep: Determine Gross Salary
- Firstly, tally all your salary components mentioned on your salary slips or Form 16.
- Add the following to compute your gross salary:
- Basic salary
- Dearness Allowance (DA)
- House Rent Allowance (HRA)
- Other allowances
- Bonuses
- Commissions
- Perquisites
- Reimbursements
- Retirement benefits
2nd Step: Deduct Exemptions
- From the gross salary, deduct eligible exemptions like:
- HRA exemption
- LTA exemption
- Transport allowance exemption
- Other non-taxable allowances
- This gives you taxable salary income
3rd Step: Calculate Taxable Income In Salary
- From taxable salary income, deduct the standard deduction of ₹50,000 under Section 16(ia).
- Add income from any other sources like interest income, capital gains, income from house property, etc.
- This gives you your gross total income.
4th Step: Apply Tax Rates as per Slabs
- Based on your gross total income, you will be taxed as per the applicable income tax slabs for the financial year.
- For FY 2022-23, the income tax slabs are:
| Income Slab | Tax Rates |
|---|---|
| Up to ₹2.5 lakh | Nil |
| ₹2.5-5 lakh | 5% |
| ₹5-10 lakh | 20% |
| Above ₹10 lakh | 30% |
- Your income falls into a specific tax slab, and the corresponding tax rate applies.
5th Step: Claim Deductions
- Claim all deductions you are eligible for under:
- Section 80C (PPF, ELSS, NSC etc)
- Section 80D (Health insurance)
- Section 24 (Home loan interest)
- Section 80EEA (Additional home loan interest)
- Section 80CCD(1B) (NPS contribution)
- Aggregate all the deductions and reduce the total from your gross total income.
6th Step: Calculate Tax Liability
- On the reduced income after claiming deductions, your tax liability will be calculated as per the applicable rates.
- Add education cess of 4% on the tax liability.
7th Step: Consider Rebate under Section 87A
- Taxable income below ₹5 lakh is eligible for a rebate of up to ₹12,500 under Section 87A.
- This directly reduces your tax liability.
8th Step: Add Surcharge and Cess
- Surcharge may be applicable at 10% if your income exceeds ₹50 lakh.
- Health and Education cess of 4% will be levied on tax liability.
9th Step: Deduct TDS
- From the final tax liability, deduct TDS already deposited by your employer.
10th Step: Pay Additional Tax if Any
- Pay additional self-assessment tax and file ITR if net tax liability exceeds TDS deducted.
- You may have to pay interest if there is a shortfall in advance tax payments.
This completes the 10 steps to accurately calculate your income tax on salary.
Income Tax Slabs Rates for FY 2022-23
Here are the latest income tax slab rates for Financial Year 2022-23:
- 0% tax on income up to ₹2.5 lakh
- 5% tax on income between ₹2.5-5 lakh
- 20% tax on income between ₹5-10 lakh
- 30% tax on income above ₹10 lakh
Senior citizens above 60 years have higher basic exemption limits, and very senior citizens above 80 have the highest limits.
How to Save Tax on Salary Income?
Here are some tips to reduce income tax on your salary legally:
- Optimize your deductions under Section 80C, 80D, 24, 80EEA etc.
- Invest in tax-saving instruments like PPF, ELSS funds
- Use online tax planning tools to maximize benefits
- Include parents in your health insurance to claim higher deduction
- Take advantage of NPS and ULIPs for tax-free income
- Claim HRA exemption if living in rented accommodation
- Avail rebate under Section 87A if income below ₹5 lakh
- Invest surplus money in avenues offering tax-free income
The key is to proactively plan your taxes at the start of the financial year using all available exemptions and deductions optimally.
Frequently Asked Questions on Calculate Income Tax on Salary India 2023
Q. How to Calculate Income Tax on Salary India 2023?
Income tax liability on salary is determined by aggregating taxable components to arrive at gross salary income, claiming exemptions and deductions to obtain taxable income, applying tax rates based on the relevant income slab, and subtracting TDS from the total tax liability.
Q. Which allowances are fully taxable?
Allowances like Dearness Allowance (DA), City Compensatory Allowance, Overtime Allowance, Bonus, Commission etc are fully taxable.
Q. How much HRA exemption can I claim?
You can claim least of: actual HRA received, 50% of basic salary (40% for non-metro) or Rent paid minus 10% of basic salary as HRA exemption.
Q. Do I need to pay advance tax on salary income?
If tax liability on your estimated total income for the full year exceeds ₹10,000, you have to pay advance tax in installments. Else TDS on salary will cover your tax liability.
Q. What is Form 16 and how do I get it?
Form 16 is the TDS certificate provided by your employer showing income and TDS details. You can request Form 16 from your employer after the end of the financial year.
I hope this detailed guide will make calculating income tax on your salary an easy process! Make sure to plan your taxes diligently and utilize all exemptions and deductions to minimize your tax outgo and maximize savings.
