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How to Calculate Income Tax on Your Salary?

28-09-2022 |

The calculation of income tax* and to save tax in India can sound like a cumbersome task to many, but with time, this process has only gotten easier with time. Calculating the income tax on your salary can be broken down into easy steps, which start with understanding what forms your salary and deductions. This can also include various investments such as online life insurance and other investment options.

 

The Income Tax* Department in India is responsible for collecting tax* and generating revenue for the Indian Government; hence, the tax* is levied on the income earned by resident Indian taxpayers. To make it easier for taxpayers to understand how the tax* is calculated on their income, an individual’s salary or income is divided into 5 separate heads of income, as they are called – income from salary, income from residential property, profits from business or profession, income from capital gains, income from other sources.

 
What is the Meaning of Salary Income?

In simple terms, salary means the monetary benefit or remuneration that an employee receives from their employer in exchange for a service they offer over a certain period of time. The salary, paid at fixed or regular intervals, mostly on a monthly basis, comprises:

 

  • Basic Salary – This is the set component of salary and can vary as per the terms and conditions of the employment contract.
  • Fees/Commission/Bonus – These are the additional benefits that an employee can receive from their employer.
  • Allowances – To help employees meet their personal expenses, certain allowances are also paid out, which can be partially or completely tax* exempt.

Fully-taxable allowances

  • Dearness allowance, which is paid to the employees so that they can meet certain expenses during inflation to save tax in India.
  • The city compensatory allowance is an amount or allowance paid out to employees who relocate to metro cities from other towns or cities and helps them meet the higher standards of living in the metro.
  • An overtime allowance can be paid out to employees who work and render their services beyond the usual or regular office timings.
  • Servant allowance and Deputation allowance.

Partly taxable allowances

 

The House Rent Allowance or HRA is completely taxable if the employee has their own home or their own place of residence. The exemption of the HRA is the least of the following:

  • The house rent allowance (HRA)
  • If an additional rent paid by the employee exceeds 10% of their salaried income.
  • If the employee pays rent of 50% of their salary (metro) or 40% (other areas).
  • Entertainment allowance, which does not apply to certain employees such as those of the State and Central Government.
  • Certain allowances for travelling, buying uniforms for the job, research and others.
  • An additional allowance that helps employees to manage expenses such as their children’s education, boarding school/hostel accommodation allowance and others.

Tax-exempt allowances

  • Foreign allowance for employees working abroad for the company.
  • Allowances paid to High Court and Supreme Court Judges.
  • Allowances paid to United Nations Organisation employees.
 

Perquisites are payments that an employee receives over and above their salary. Additionally, no reimbursement is made for their expenses. These are some of the few perquisites are taxed in the hands of the employees:

  • Loans that are interest-free
  • Rent-free accommodation
  • Concession in residential rent
  • Educational expenses
  • Movable assets
  • Payments for club fees
  • Employee insurance premiums paid by the employer
  • While some of the perquisites are taxable, they can be taxable for certain employees such as directors or key employees in an organisation who have extensive interest in the company. These perquisites are:
  • Electricity, free cooking gas and resources meant for household purposes
  • Concessional transport facility
  • Concessional educational expenses
  • Wages paid out to sweepers, gardeners, and helpers.
 

Apart from these perquisites, the others are exempt from taxes. These are some of the benefits on which no tax is levied:

  • Healthcare benefits
  • Medical insurance premiums
  • Staff Welfare Scheme
  • Concession for leave travel
  • Vehicles or laptops for personal use.
  • Retirement benefits paid to employees during their service or after they retire.
  • The pension of an employee that is paid in a lump sum amount on retirement or as a monthly income. This can be taxable, depending on the employee’s category.
  • Gratuity paid to an employee for their performance through their career during retirement time is exempt from tax* up to a certain limit.
  • The tax* on leave salaries depends on the employee’s category or on how they want to use their leaves. Alternatively, they can also encash these leaves.
  • EPF contributions made by the employee and employer every month. The interest received by the employee at the time of withdrawing or receiving the amount can be taxable if the interest exceeds ₹2.5 lakhs.

Life insurance plans from Tata AIA Life Insurance offer tax* deductions and benefits as per the prevailing tax* laws under Section 80C and 10(10D) of the Income Tax* Act.

Deductions on Salary Income


These are the following deductions applicable to an individual’s salary:

State and Central Government employees pay entertainment tax on the least of the amount received:

  • ₹5,000,
  • 20% of the basic salary
  • entertainment allowance paid employee

Professional tax* is the tax* levied on the income from salary section of the employee and is deducted before the payment of the salary. Between the assessment years 2006-2007, the standard deduction was not applicable to salary income.

Computation of Income from Salary

To calculate the net income from different sources, an individual’s various sources of income can be divided into the following

  • Income from salary
  • Income earned from house  property
  • Gains/profits earned from business
  • Income earned from capital gains
  • Income earned from other sources

The sum of these incomes become the combined income of individual and the deductions and allowances are calculated on each of the 5 heads. Therefore, the formula will be:

  • Gross Taxable Income= A+B+C+D+E
  • Total Taxable Income = Gross Income –Deductions
  • Total Tax Payable = Tax on Total Income - Rebates (as per Income Tax Act)

An individual’s salary determines how much income tax will be levied on them. This is the way taxable income can be divided into 4 parts.

Income tax slab rates (FY2020-21): New and Old Tax Regime

 

Income Tax Slab

Existing Regime Slab Rates for FY 20-21 (AY 21-22)

New Regime Slab Rates for FY 20-21 (AY 21-22)

 

Individuals and HUF (below 60 years) & NRIs

Individuals & HUF between 60 to 80 years of age       

Individuals & HUF over 80 years of age

Individuals & HUF

₹0.0 – ₹2.5 lakh

Not deductible

Not deductible

Not deductible

Not deductible

₹2.5 – ₹3.00 lakh             

5% (tax* rebate u/s 87a is available)

Not deductible

Not deductible

 

₹3.00 - ₹5.00 lakh

5% (tax* rebate u/s 87a is available)

Not deductible

 

₹ 5.00 – ₹7.5 lakh             

20%

20%

20%

10%

₹7.5 – ₹10 lakh

20%

20%

20%

15%

₹10.00 – ₹12.50 lakh

30%      

30%

30%

20%

₹12.5 – ₹15 lakh             

30%

30%

30%

25%

More than ₹15 lakh

30%

30%

30%

30%

 

A surcharge, according to the individual’s tax* slab is also levied along with the tax* rates while an education cess of 2% is also levied on the entire tax* amount.

 

Conclusion

The calculation of tax* on one’s salary is dependent on the category of the taxpayer as well as their income. Moreover, taxpayers can also choose if they want to follow the new tax* regime or continue with the old one. One can also claim tax* deductions to get tax* benefits and savings on the investments they make under the old tax* regime.


L&C/Advt/2022/Sep/2293

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

Looking to get a new plan? 

Connect with us now

+91

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

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Read More
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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA), Tata AIA Life Insurance is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

How to choose between the old tax regime and the new tax regime?

If you do not invest a lot in tax* saving schemes, then the new tax regime is a better option as it focuses more on lower income tax* slabs, where taxpayers who do not claim deductions can go for a lower tax* rate. On the other hand, if you are earning more income, you can benefit from the old tax* regime that focuses more on the better income tax* slabs.

Who decides the income tax slab rates, and can they change?

Yes, the government can introduce changes to the income tax slab rates for the financial year during the Budget session before presenting them to the Parliament for approval. 

Disclaimers

  • Insurance cover is available under the product.
  •  The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.

Need more information?

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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.

Looking to get a new plan? 

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+91

TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in.