How to Calculate Income Tax for Salaried Individuals?

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

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

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

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

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

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

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?

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

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.

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

2. 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

3. 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.

4. 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)

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.