Income tax is one of the most tedious things one has to undertake and is taxing for many as there are a lot of changes taking place frequently which makes it difficult to understand for a common man. In a majority of cases, people don’t have a clue of how much money they have been taxed by the income tax department and different ways in which they could have saved the money. Here we explain how income tax is calculated on salary, giving an example of the same.
According to the Income Tax Act, 1961, every person who draws a salary has to pay an amount from their salary as tax. However, there are a lot of components which are involved along with many amendments and variations, expanding further to subsections which are difficult to understand and grasp easily. There are many deductions from subsections 80C to 80U and the final amount after subtracting all the possible tax saving provisions and deduction amount to the income tax on salary which has to be paid.
There are various components which are used for calculating the income tax, which are mentioned below in brief:
The financial year
It denotes the previous financial year for which the income tax is calculated. The financial year starts from April 1 and ends on March 31 of the next year. So if you are calculating your income tax in 2022, you need to take your salary income from April 1, 2021, to March 31, 2022
The assessment year
This is totally different from the financial year, as it usually starts after the previous financial year gets over. The year during which your income tax is calculated for the previous financial year is called the assessment year. For example if you are calculating your salary income tax for the financial year 2021-22, then your assessment year will be 2021-22 and the last date for filing your ITR will be July 2022.
Salary breakup
The salary slip is extremely crucial to get a clear idea of your salary breakup, which shows the major components and basic structure of your salary. There are various tax deductions available on salary like HRA (House Rent Allowance), DA (Dearness Allowance), etc.
Taxable income
The income on which you need to pay tax other than your salary is taxable income.
There are more components like deductions and TDS which add up to the total income tax you need to pay.
| Income Slab | Tax Rate |
| Up to 2.5 lakhs | None |
| 2.5 lakhs – 5 lakhs | 5% of exceeding amount |
| 5 lakhs – 10 lakhs | 20% of the exceeding amount |
| Above 10 lakhs | 30% of the exceeding |
Calculating the income tax on salary is actually very easy. The formula is as given below:
Basic salary
+ HRA
+ Special Allowance
+ Transport Allowance
+ any other allowance
————————————–
Gross income from salary
(-) Deductions
————————————–
Net income
(Tax calculated according to the income tax slab)
To make the process of calculation simpler we have various tools like ET Money Income Tax Calculator which is one of the best income tax calculator India. You can get a fair idea of the amount you would save by using this tool, which just needs you to enter the data in specified fields to get results.
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