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How to Calculate Income Tax for Salaried Individuals?

Learn about Income tax for salaried in detail

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Income tax for salaried person is calculated based on various tax slabs. Filing income tax on salary in a hurry at the end of a financial year is not the right choice as you can end up making a wrong financial decision.

Tax planning must be started with the start of a new fiscal year to have ample time to make better investment decisions. After various deductions, income tax for salaried person is calculated based on multiple tax slabs.

Also Read: Tax Saving Options For Salaried Individuals

Income Tax Slab for Salaried Person

FY 2019-20 (Income Tax on Salary for Individuals below 60 years)

Annual Income

Income Tax Slab Rates

Up to Rs.2.5 lakh

Exempt

Rs.2.5 lakh - Rs.5 lakh

5%*

Rs.5 lakh - Rs.10 lakh

20%

Above Rs.10 lakh

30%

 

*As per Section 87A of the Income Tax Act, 1961, individuals having taxable income of up to Rs.5 lakh will be able to avail a rebate of Rs.12500 or 100% of income tax amount, whichever is less. [1]

 

FY 2020-21 (Income Tax on Salary as per New Tax Regime for Individuals below 60 years)

Annual Income

Income Tax Slab Rates

Up to Rs.2.5 lakh

Exempt

Rs.2.5 lakh - Rs.5 lakh

5%*

Rs.5 lakh - Rs.7.5 lakh

10%

Rs.7.5 lakh - Rs.10 lakh

15%

Rs.10 lakh - Rs.12.5 lakh

20%

Rs.12.5 lakh - Rs.15 lakh

25%

Above Rs.15 lakh

30%

*As per Section 87A of the Income Tax Act, 1961, individuals having taxable income of up to Rs.5 lakh will be able to avail a rebate of Rs.12500 or 100% of income tax amount, whichever is less. [1]

FY 2019-20 & FY 2020-21 (Income Tax on Salary for Senior Citizens)

Annual Income

Income Tax Slab Rates

Up to Rs.3 lakh

Exempt

Rs.3 lakh - Rs.5 lakh

5%

Rs.5 lakh - Rs.10 lakh

20%

Above Rs.10 lakh

30%

Note: The income tax slab rates under the new tax regime is applicable to all the individuals and senior citizens. There is no exception available to senior citizens in the income tax slab 2020 under the new tax regime. Senior citizens are above the age of 60 years.

FY 2019-20 & FY 2020-21 (Income Tax on Salary for Super Senior Citizens)

Annual Income

Old Tax Regime

Up to Rs.5 lakh

Exempt

Rs.5 lakh - Rs.10 lakh

20%

Above Rs.10 lakh

30%

Note: Super senior citizens can also opt for the Income tax slab 2020 under the new tax regime. The Income tax slab rates 2020-21 are same for all tax payers (individuals, senior citizens and super senior citizens). Super Senior citizens are above the age of 80 years.

Know More: Income Tax Slab For FY 2020-21

What is Income from Salary?

Salary is the compensation given by an employer for the services rendered by the employee for a specific period. It is paid in fixed cycles, e.g. monthly.

1. Total income from salary include:

  • Basic salary or fixed components as per the term of employment
  • Fees, bonus, the commission received by the employee
  • Allowance paid by the employer for meeting personal expenses

Income Tax for Salaried Max Life Insurance

What is Income from Salary?

Salary is the compensation given by an employer for the services rendered by the employee for a specific period. It is paid in fixed cycles, e.g. monthly.

1. Total income from salary include:

  • Basic salary or fixed components as per the term of employment
  • Fees, bonus, the commission received by the employee
  • Allowance paid by the employer for meeting personal expenses
Income Tax for Salaried Max Life Insurance

2. Fully Taxable allowances of income from salary:

  • Dearness allowance paid by the employer to meet inflation expenses
  • City compensatory compensation paid by the employer to move around cities
  • Overtime allowance paid by the employer
  • Deputation allowance
  • Servant allowance

3. Partly taxable allowance – income tax for salaried:

  • House rent allowance (HRA)
  • Entertainment allowance – except for state or central employees
  • Special allowance like travel, uniform, research
  • Special allowance like children’s education allowance

4. Fully exempt allowance – income tax for salaried:

  • Foreign allowance for employees posted abroad
  • Compensation of supreme court or high court judges
  • United Nations Organization employee allowance

5. Privileges of income tax for salaried:

  • Rent-free accommodation
  • Concession in rent
  • Interest-free loans
  • Club fee payments
  • Movable assets
  • Educational expenses
  • Insurance premium paid on behalf of employees

The fringe income tax for salaried:

  • Medical benefits
  • Health insurance premium
  • Leave travel concession
  • Laptop, car for personal use
  • Staff welfare scheme

1.) Also Read: TDS on Salary

How to Calculate Income Tax for Salaried People?

Many tools are available online that can help you know how to calculate taxable income. These are vital tools as they calculate income tax for salaried people easily.

How to Calculate Taxable Income?

Income from salary includes transport allowance, special allowance, basic salary, and house rent allowance. Individual components like telephone bill reimbursement, leave travel allowance, a portion of HRA was exempt from income tax on salary in the old regime. However, such exemptions are not available in the new system for income tax for salaried.

Let us understand with an example of how to calculate taxable income.

Assuming the following per month basis for the calculation of income tax for salaried:

Basic salary (per month): Rs 90,000

HRA: Rs 45,000

Special allowance: Rs 20,000

Actual rent paid: Rs 25,000

Leave travel allowance: Rs 18,000

To calculate income tax for salaried, include the following:

1.) Salary

2.) Income generated from selling market shared or a housing property

3.) Interest generated from a fixed deposit account, bonds, or savings account

4.) Rental income

Also Read: What is Salary Slip?

The total income here falls under 30% slab of income tax for salaried. It also includes 4% cess levied by the government. Gross income is a sum of total income from salary received in a financial year along with the income generated from other sources.

Components

Amount (Rs)

Deductions (Rs)

Net Amount for Income Tax on Salary (New Regime in Rs)

Basis salary

10,80,000

Nil

10,80,000

HRA

5,40,000

3,00,000

5,40,000

Leave Travel Allowance (LTA)

18,000

10,000

18,000

Special allowance

2,40,000

Nil

2,40,000

Standard deductions

Nil

50,000

Nil

Gross income

Nil

Nil

18,78,000

Exemption of income tax for salaried not available under new tax regime:

1.) PPF

2.) NPS

3.) EPF

4.) Bill reimbursement

5.) Savings investments under tax saving options for salaried

6.) HRA

It is only a short process on how to calculate taxable income for salaried people.

Deduction Under Income Tax for Salaried Employees

For the financial year 2019-20, many deductions of income tax for salaried people can increase tax savings. Here are some of the standard deductions of income tax for salaried.

1. House Rent Allowance (HRA)

House rent allowance or HRA is a standard deduction under income tax for salaried people. An employee living in rented accommodation can get benefits of deductions under income tax on salary. However, under a new tax regime, you will have to pay income tax on HRA component of salary.

Income Tax for Salaried Max Life Insurance

Deduction Under Income Tax for Salaried Employees

For the financial year 2019-20, many deductions of income tax for salaried people can increase tax savings. Here are some of the standard deductions of income tax for salaried.

1. House Rent Allowance (HRA)

House rent allowance or HRA is a standard deduction under income tax for salaried people. An employee living in rented accommodation can get benefits of deductions under income tax on salary. However, under a new tax regime, you will have to pay income tax on HRA component of salary.

Income Tax for Salaried Max Life Insurance

You can claim income tax deductions for salaried employees either or not by providing rent receipts to your employer. This deduction is calculated for whichever is least of the following:

1.) Total HRA received by an employee

2.) Actual rent paid less 10% of basic salary + DA

3.) 50% of salary for metro city / 40% of salary for non-metro city

The component having the least amount will be considered under income tax deductions for salaried employees.

1. Leave Travel Allowance (LTA)

LTA or leave travel allowance are specific income tax deductions for salaried employees. The deduction under income tax for salaried does not include expenses incurred due to personal reasons such as shopping, food expenses, leisure, or entertainment.

A person can claim leave travel allowance upto the amount of actual expense incurred under income tax for salaried and can be claimed two times in a block of four years, which can also be carried forward if not used in any block.

Some restrictions of LTA under income tax for salaried people are:

1.) LTA is specific to domestic travel only

2.) Mode of your travel can be either by rail, air, or any other public transport

2. Standard Deductions

Finance ministry has announced a standard deduction of Rs. 40,000 under income tax for salaried employees. The income tax deductions for salaried employees came after the removal of transport allowance (Rs 19,200) and medical reimbursement (Rs 15,000).

Interim budget 2019 increased total limit of standard deduction under income tax for salaried people to Rs 50,000.

3. 80CCD(1), 80CCC, Section 80C

Tax savings options for salaried employees include investments computed under section 80C – where an individual or HUF can receive a deduction of income tax on salary up to Rs. 1.5 lakh.

Income arising due to capital gains is not allowed for deductions under income tax for salaried people.

Some investments included under deduction of income tax for salaried are:

1.) Life insurance premium

2.) Employee Provident Fund (EPF)

3.) Equity Linked Savings Scheme (ELSS)

4.) Pension schemes

5.) Home loan principal payment

6.) Sukanya Samriddhi Yojana

7.) Contribution to PPF account

8.) Fixed deposit

9.) National Savings Certificate (NSC)

10.) Post office scheme deposits

11.) National Pension Schemes (NPS)

12.) Health insurance schemes (section 80D)

There is more government savings scheme included under deduction of income tax for salaried employees. Many of these tax savings options for salaried people are covered under section 80C, 80CCC, 80CCD, 80D.

5. Deductions Against Loan Interests

The principal amount paid towards any loan taken for home or higher studies is eligible for deduction under income tax for salaried people. Typically, principal amount deduction under income tax for salaried can be claimed up to Rs. 2 lakh for a home loan and Rs. 1.5 lakh for similar other investments.

You can make claim deductions of income tax for salaried people under section 80C, 24, and Section 80E.

 

Income Tax for Salaried Max Life Insurance

5. Deductions Against Loan Interests

The principal amount paid towards any loan taken for home or higher studies is eligible for deduction under income tax for salaried people. Typically, principal amount deduction under income tax for salaried can be claimed up to Rs. 2 lakh for a home loan and Rs. 1.5 lakh for similar other investments.

You can make claim deductions of income tax for salaried people under section 80C, 24, and Section 80E.

Income Tax for Salaried Max Life Insurance

Exemptions/ Tax Savings Options for Salaried People

An exemption is a specific amount excluded from your gross salary before calculating income tax for salaried people. Under section 10 and section 54, you are eligible for a deduction of income tax for salaried.

Exemptions under income tax for salaried people includes leave travel allowance and similar salary components, interest earned from tax-free bonds.

Tax savings options for salaried people have already been discussed above.

FAQs on Income Tax for Salaried

Q. For which assessment year or financial year should income tax for salaried employees be calculated?

A. For the assessment year 2020-21 or financial year 2019-20, a person can calculate income tax for salaried employees.

Q. Who should use income tax calculator?

A. Every person should use a tax calculator to know how much income tax for salaried employee is deducted.

Q. Does income tax calculator facility extend to foreign companies or firms?

A. Yes. You can check our Income Tax Calculator and find out the income tax liability for FY 2019-20 (AY 2020-21) and FY 2020-21 (AY 2021-22).

Q. What is my taxable income?

A. Your taxable income is a sum of basic salary paid by the employer, wages, bonus, income from investments or any other sources. Income tax for salaried employees is calculated based on pre-determined tax liability as per slabs.

Q. What is income from other sources?

A. Income tax for salaried people includes income from other sources like gifts, interest income, dividend income, and similar.

Sources:

[1]https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?path=https://www.incometaxindia.gov.in/charts++tables/tax+rates.htm&k&IsDlg=0

https://cleartax.in/s/income-tax-allowances-and-deductions/#SD

https://www.maxlifeinsurance.com/income-tax-slab-2020-21

https://www.bankbazaar.com/tax/how-calculate-income-tax-on-salary-with-example.html

https://www.bankbazaar.com/tax/how-calculate-taxable-income-from-salary.html

ARN: Aug21/Bg/18XX

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