How to Calculate Income Tax on Salary with Example?

Understanding how income tax is calculated on salary is essential for smart financial planning. It helps you estimate tax liabilities, claim deductions, and maximise savings. 

In this guide, we’ll walk you through how to calculate income tax on salary with example.

What is Income Tax on Salary?

Income tax on salary is a compulsory tax imposed by the government on the income earned by individuals. The amount of tax payable depends on income slabs defined by the government, with higher earnings attracting higher tax rates. 

Breaking Down Salary Components

Your salary has different components, each impacting how income tax is calculated on salary. Here’s a quick overview:

• Basic Salary: The fixed part of the salary.

• House Rent Allowance (HRA): Allowance for accommodation expenses, with partial or full tax exemption.

• Special Allowances: Travel, medical, and dearness allowance.

• Bonuses: Performance-based incentives that are fully taxable.

Steps to Calculate Income Tax on Salary

Here’s the step-by-step approach to calculate tax on salary-

1. Compute gross salary by adding basic salary, HRA, allowances, and bonuses.

2. Deduct eligible exemptions like HRA and standard deduction to get net taxable salary.

3. Calculate taxable income based on 80C, 80D, and other deductions to arrive at the final taxable income.

4. Calculate your tax as per the income slab.

5. Deduct rebate under Section 87A, if applicable.

6. Add 4% cess on total tax payable.

Tax Slabs for Individuals Below 60 Years, according to the old tax regime:

Tax slabs according to the new tax regime-

Income Tax Calculation on Salary with Example

Let’s understand income tax calculation with an example, under old and new tax regime.

Rajesh Sharma is a 30-year-old marketing manager at ABC Pvt Ltd in Delhi, paying a rent of ₹20,000. He also makes tax saving investments and pays health insurance premium. His salary breakdown is-

Step 1: Compute Gross Salary

Salary Breakdown:

Step 2: Calculate the exemptions

Under Section 10(13A) of the Income Tax Act, HRA exemption is calculated as the least of the following three:

• Actual HRA received
• 50% of salary (for metro cities like Delhi; 40% for non-metros)
• Rent paid minus 10% of salary

In Rajesh’s case-

Basic Salary = ₹8,00,000/year

HRA received = ₹2,00,000/year

Rent paid = ₹20,000/month = ₹2,40,000/year

So, HRA exemption will be the least of- 

Actual HRA received = ₹2,00,000

50% of salary = 50% of ₹8,00,000 = ₹4,00,000

Rent paid – 10% of salary = ₹2,40,000 – ₹80,000 = ₹1,60,000

= ₹1,60,000

Step 3: Calculate income tax based on slabs

Final Thoughts

Understanding income tax calculations helps you make smarter financial decisions. Regularly reviewing your salary structure, exemptions, and deductions can reduce tax liability and increase savings.

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