Income tax is one of the primary forms of revenue generation that the government uses to fund various public services. Employed individuals have to pay tax on their earnings, which are calculated based on the income tax slab they fall under. Calculating income tax can be a complex process, especially for those who are unfamiliar with the Indian taxation system. In this article, we will provide a comprehensive guide to help individuals calculate their income tax accurately.
What is the difference between income tax and taxable income?
Income tax is a tax levied by the government on individuals based on their earnings. Employed individuals are required to pay income tax, which is calculated based on their earnings for the financial year. The minimum age for paying income tax in India is 18 years.
Taxable income refers to the income, which an individual is liable to pay tax on. The taxable income is calculated by subtracting the deductions and exemptions from gross total income.
Aspect |
Income Tax |
Taxable Income |
Definition |
Tax levied by the government on income earned by individuals and entities. |
The part of total income that is subject to income tax after deductions and exemptions. |
Basis |
Based on the total income earned from all sources. |
Based on gross income minus allowable deductions and exemptions. |
Calculation |
Computed as a percentage of the taxable income as per the applicable slab rates. |
Determined by subtracting eligible deductions and exemptions from gross income. |
Components |
Includes all forms of income such as salary, business income, capital gains, etc. |
Includes income after adjustments like deductions under sections 80C to 80U. |
Purpose |
To generate revenue for government spending on public services. |
To identify the amount of income that will be taxed. |
Legal Reference |
Governed by the Income Tax Act, 1961. |
Determined as per the sections outlined in the Income Tax Act, 1961. |
Impact of Deductions |
Deductions reduce the overall tax liability. |
Deductions reduce the gross income to arrive at taxable income. |
Reporting |
Reported in the Income Tax Return (ITR) forms. |
Reported as part of the Income Tax Return, showing net taxable income. |
Slab Rates |
Applied to the taxable income as per the current income tax slabs. |
Not applicable directly, but used to compute the final tax payable. |
Calculate tax on income – Step-by-step process
Calculating income tax on salary can be broken down into 5 steps:
Step 1: Calculate your gross income
The first step in calculating income tax is to calculate your gross income. Gross income can be defined as the total money earned by the individual through all sources. The gross income includes basic salary, house rent allowance (HRA), interest, and other earnings during the financial year.
Step 2: Arrive at your net taxable income by removing deductions
Once you have calculated the gross income, the next step is to remove deductions to arrive at your net taxable income. Deductions such as provident fund, medical insurance, house loan interest, and other investment-related deductions can be subtracted to arrive at your net taxable income.
Step 3: Arriving at your net taxable income
After arriving at the net taxable income in the second step, the next step is to calculate the tax slab under which your income falls. The tax slab depends on the net taxable income and the rates corresponding to the income tax slabs.
Step 4: Calculate your taxes
The income tax slab rates can be found on the official government website, and the taxes can be calculated using Bajaj Finserv’s income tax calculator. The taxable income is calculated by applying the tax rate corresponding to the tax slab on the net taxable income.
Step 5: Consolidate your net tax
The final step in this process is to consolidate your net tax. The net tax includes income tax, and other cess and surcharges.
Example: 1
Basic salary:
Annual Basic Salary = 100,000 × 12 = Rs. 12,00,000
HRA:
Annual HRA = 50,000 × 12 = Rs. 6,00,000
Special allowance:
Annual Special Allowance = 21,000 × 12 = Rs. 2,52,000
Leave Travel Allowance (LTA):
Annual LTA= Rs. 20,000
Total gross income:
Total Gross Income = 12,00,000 + 6,00,000 + 2,52,000 + 20,000 = Rs. 20,72,000
Understand and calculate tax with the help of an example
Things to be taken care of while calculating income tax
- Accurately report all sources of income, including salary, investments, and other earnings.
- Consider deductions and exemptions like home loan interest or medical expenses to reduce taxable income.
- Use correct tax brackets and rates applicable to the given income level.
- Stay updated on changes in tax laws or regulations.
- Double-check all calculations for accuracy.
- Consult a tax professional if needed to avoid errors or omissions.
- Ensure compliance to avoid penalties or audits.
Suppose an individual’s gross income for the financial year is Rs. 10 lakh, and they have availed of deductions worth Rs. 1.5 lakh. This translates to a net taxable income of Rs. 8.5 lakh.
For example, the income tax slab rate is 20% for the net taxable income of Rs. 8.5 lakh, then this comes to Rs. 1.7 lakh. Additionally, a cess of 4% will be levied on this amount, which comes to Rs. 68,000. The total tax liability in this case comes to Rs. 1.7 lakh + Rs. 68,000 = INR 2.38 lakh.
Paying house taxes is a crucial part of homeownership. Additionally, you can benefit from tax deductions on the principal component of your home loan repayments under Section 80C of the Income Tax Act. So, if you are in the market looking to buy a home and require funds, you can apply for the Bajaj Finserv Home Loan, which offers attractive home loan interest rates, flexible repayment options, and extended tenures that make it easier for you to manage monthly EMIs. Additionally, with Bajaj Finserv Home Loan there are no part-prepayment or foreclosure charges, making it easier for you to repay your loan in full.
How to calculate income tax under old tax regime
- Determine gross income: Start with your total annual income.
- Claim deductions: Include deductions under Section 80C, 80D, and other applicable sections.
- Calculate taxable income: Subtract total deductions from your gross income.
- Refer to tax slabs: Use the tax slabs specific to the old income tax regime to calculate your tax liability.
- Compute tax: Apply the respective tax rates to your taxable income to find the total tax payable.
How to calculate income tax under new tax regime
- Determine gross income: Start with your total annual income.
- No deductions: Note that most deductions and exemptions are not applicable.
- Calculate taxable income: Your taxable income is generally your gross income.
- Refer to tax slabs: Use the tax slabs specific to the new regime.
- Compute tax: Apply the respective tax rates to your taxable income.
- Use a new regime tax calculator for accurate calculations and to simplify the process.
