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Calculation of Tax Liability on Salary

Employees get paid every month on which most of the employers deduct TDS on it. Knowing tax calculation is important otherwise, you will never know if your employer is deducting more taxes from your salary. Your salary that you receive from your employer is taxed under the “Income from salaries” head.

Before calculating your tax liability, you must know which tax slab you fall under. Your salary is a cumulative form of many components such as Gross salary, Provident Fund, Leave pay, Insurance, Employee State insurance, Gratuity, and Labour Welfare Fund. You must need to submit all the investment details to the employer to avail all applicable deductions.

Gross Salary

Gross salary = Basic pay + House Rent Allowance (HRA) + Dearness allowance (DA) + transport allowance (TA) + special allowance + other allowance.

Under Section 80C, you can avail deduction up to INR 1.5 lakhs by investing into various tax saving instrument. For higher tax bracket salaries, individuals can save up to INR 45,000 by investing into tax saving instrument.

Investing in Life Insurance Premium, Provident Fund, Equity Linked Savings Scheme, National Savings Certificate, Home Loan monthly installment, Infrastructure Bond, Tuition fees, Pension Funds, and Unit Linked Insurance Plans can avail deduction on your taxable income.

Under Section 80D, you can avail a deduction of INR 25,000 as medical expenses if you are under the age of 60. For senior citizens, the deduction limit is INR 30,000.

Gross Salary image

The deductions you can avail in HRA are the following:

The entire amount received as HRA

Or,

50% of your basic pay if living in a metro city / 40% of your basic pay if living in a non-metro area

Or,

Rent paid that is above the amount of 10% of the salary

Deduction against home loan interest and rent payments cannot be claimed if you already own a house in your name. You can show that you are staying on rent in parent’s house to claim HRA exemption. Otherwise, if you are staying in a rented house as your workplace is far from your owned house then also you can claim HRA exemption. In this case, you can also claim home loan interest deductions as well.

Deductions on Salary Income

Under Section 16 of the Income Tax Act, deductions on Income from Salary is provisioned which can be claimed for:

  • Tax on Employment under Section 16(iii): deducting Professional Tax from salary is allowed while calculating salary income.
  • Entertainment Allowance under Section 16(ii): entertainment allowance given by the employer can be claimed as a deduction. Only Government employees can claim this deduction and only 1/5th of the salary(excluding benefits/perquisites/other allowances) or INR 5000, whichever is lesser can be claimed.

After deduction, all the applicable deductions from income, the amount left is your total taxable income.

Computation of Tax

The tax computation book looks something like this:

Particulars Amount Amount
Basic pay XXXXX
+ Dearness allowance XXX
+ Annuity XXX
+ Bonus XXX
+ Commission XXX
+ Arrears of salary XXX

+ House Rent allowance

• Amount of HRA exempted

XXX
(XXX)
XXX

+ Leave travel allowance

• Amount exempted on Leave travel allowance

XXX
(XXX)
XXX

+ Perquisites

• Amount exempted

XXX
(XXX)
XXX

+ other allowances

• Amount exempted

XXX
(XXX)
XXX

+ VRS/ Retrenchment compensation

• Amount exempted

XXX
(XXX)
XXX

+ Gratuity received

• Exempted gratuity

XXX
(XXX)
XXX

+ Leave encashment

• Exempted leave encashment

XXX
(XXX)
XXX

+ Pension

• Amount exempted

XXX
(XXX)
XXX
+ employer’s contribution (in excess of 12% salary of employee) XXX
+ Interest on PF in excess of the notified amount XXX
Gross Salary XXXXX
Deductions under the Section 16:
Entertainment allowance XXX
Professional Tax paid XXX
Income chargeable for tax under Salaries XXXXX

Always remember to declare all the investments in the starting of the financial year so that your employer can avail all the deductions for you. forgetting doing so will levy heavy tax liability on your income. However, you can claim by showing the investment proofs at the end of financial year.

Income tax Calculation illustrated with an Example

Mr. A earns a Gross Salary of INR 40,225.

Break up of his salary:

  • Basic = 25000
  • HRA =10000
  • Travel allowance = 500
  • Child's educational allowance = 100
  • Medical allowance = 625
  • Other allowance = 4000
Gross Salary image

The deduction he can avail against the allowances from the above are:

  • Travel allowance = 500
  • Child's educational allowance = 100
  • Medical allowance = 625 (on submitting medical bill worth INR 625)

Mr. A owns a house so HRA has not been deducted from taxable salary. The total exemption he can avail will be INR 1,225.

So his annual taxable salary will be INR (40,225-1225) x12 = INR 4, 68,000.

If he declares a loss of INR 50,000 on house property for the loan interest he is paying then his total income will be INR (4,68,000-50,000) = INR 4,18,000.

He can also show investments of INR 50,000 under Section 80C then his total taxable income will be INR (4,18,000.-50,000) = INR 3,68,000.

He also showed investments of INR 12,500 under Section 80D then his total taxable income will be INR (3,68,000-12,500) = INR 3,55,500.

So from INR 3,55,500, he will be taxed at the following rate:

For the first 2,50,000, tax liability will be NIL.

For the rest 1,05,500, the tax will be applicable at a rate of 10%. So the amount of tax to be paid will be INR 10,550.

So, his annual tax liability will be INR 10,550 + educational cess and higher education cess that is charged at 3% which will be INR 316.50.

So his total annual tax liability will be: INR 10,550 + 316.50 = INR 10,866.50.

And, his monthly tax liability will be INR 905.54/-.

In the News

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    18th July 2017

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