How to Calculate Income Tax on Salary with Examples

Tax season is stressful for everyone, and more so if you’re a salaried employee trying to figure out how your income tax is calculated. Many people find the process daunting, but once you know how it works, it makes planning your finances much simpler and helps avoid last-minute surprises.

Steps to Calculate Income Tax on Salary

Step 1: Understanding What Is Salary Income

Your salary income includes various aspects other than your basic pay:

• Basic salary
• House Rent Allowance (HRA)
• Special allowances or performance bonuses
• Perquisites (like a company car or free accommodation)
• Any other employer benefits

Add all these components and subtract any exemptions or deductions if applicable when calculating taxable or salary income.

Step 2: Knowing Available Exemptions and Deductions

This is an important step; reduce your income by availing applicable exemptions and deductions before calculating your tax. Some exemptions include:

• HRA exemption (for rented accommodation)
• Leave Travel Allowance (LTA)
• Standard Deduction of ₹50,000 under the old tax regime and ₹75,000 under the new tax regime (available to all salaried taxpayers)
• Section 80C deductions
• Section 80D (for health insurance premiums)

Once you deduct what is applicable among these, you’ll get your net taxable income.

Step 3: Apply Income Tax Slabs

Apply the income tax slab rates that match your chosen regime: old or new.

New Tax Regime (FY 2024–25) Slabs

• Up to ₹3,00,000 – No tax
• ₹3,00,001 to ₹6,00,000 – 5%
• ₹6,00,001 to ₹9,00,000 – 10%
• ₹9,00,001 to ₹12,00,000 – 15%
• ₹12,00,001 to ₹15,00,000 – 20%
• Above ₹15,00,000 – 30%

(The old regime has differing slab rates and more deductions.)

Step 4: Cess and Surcharge (if applicable)

• Once you calculate your income tax , apply Health and Education Cess at 4% of the tax amount.
• A surcharge is also applied for high-income earners, that is, above ₹50 lakh.

How to Calculate Income Tax on Salary with Example

Now that you understand the process, let’s see how to calculate income tax on salary with an example:

Example:
Your total annual salary = ₹10,00,000
Deductions (Standard Deduction ₹50,000 + Section 80C ₹1,50,000) = ₹2,00,000
Taxable Income = ₹8,00,000

India follows a slab system, so different portions of your income are taxed at differing rates, and not the whole amount at one rate.

Under the new tax regime (FY 2024–25):

Total Tax = ₹35,000
Add 4% Health & Education Cess = ₹1,400
Final Tax Payable = ₹36,400

Takeaways

Calculating your income tax on salary early helps you plan your investments better and make use of exemption while avoiding year-end tax stress.