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Summary: Savvy tax planning can be financially empowering for salaried individuals. This guide provides key insights on how to calculate income tax with precision, helping you navigate the complexities of tax obligations. Read on to know more.
Karan is a salaried individual and is eager to figure out the basics of income tax and save money this year. He's on a mission to understand the ins and outs of how to calculate income tax and find strategies for smart tax planning. In this intricate financial landscape, it's crucial for people like Karan to know the basics, discover possible deductions, and make informed tax-saving choices.
Let us understand the basics of income tax, your salary and its components, tax saving investment options and how to calculate income tax so that you can save money on tax this year.
What is income tax, and why is it important?
Income tax is a direct tax, which is levied directly on income and is usually calculated as a percentage of the taxable earnings. It is a crucial part of a country's finances, providing funds for government operations. It's a required payment based on what individuals and businesses earn, supporting public services and programs. Understanding the importance of income tax helps people see the link between their earnings and national development. The amount of income tax paid is directly proportional to one's salary, emphasising the connection between personal income and the overall economy.
Before knowing how to calculate income tax, understand your salary components and their respective contributions toward taxable income. Here is a general overview -
It constitutes a fixed portion of your paycheck and serves as the guaranteed pay from your employer, exclusive of other salary perks. The basic salary is subject to taxation and should not be more than 40% of the total cost to the company. However, setting the basic salary too low may adversely affect the proportions of other salary components. The table below shows the latest income tax slabs for individuals under the old and new tax regime -
Taxable income range |
Old tax regime rate |
New tax regime rate |
Up to ₹ 2.5 lakhs |
Exempted |
Exempted |
₹ 2.5 lakhs to ₹ 3 lakhs |
5% |
Exempted |
₹ 3 lakhs to ₹ 5 lakhs |
5% |
5% |
₹ 5 lakhs to ₹ 6 lakhs |
20% |
5% |
₹ 6 lakhs to ₹ 9 lakhs |
20% |
10% |
₹ 9 lakhs to ₹ 10 lakhs |
20% |
15% |
₹ 10 lakhs to ₹ 12 lakhs |
30% |
15% |
₹ 12 lakhs to ₹ 15 lakhs |
30% |
20% |
Above ₹ 15 lakhs |
30% |
30% |
Note - In the Interim Budget 2024, Finance Minister Nirmala Sithraman addressed that income tax rates and slabs will remain unchanged.
If you're looking to minimise your tax liability, explore these tax saving investment options to optimise your tax-planning strategy -
Investment options |
Description |
Tax benefits (Section) |
Employee Provident Fund (EPF) |
Retirement fund with a 12% maximum contribution from both employee and employer |
Section 80C |
Public Provident Fund (PPF) |
Government savings scheme with a minimum of Rs 500 investment and a maximum of Rs 1.5 lakhs for each financial year |
Section 80C |
Equity Linked Savings Scheme (ELSS) |
Mutual fund with a three-year lock-in period. High-return equity investment. |
Section 80C |
Life insurance |
Tax-deductible premiums on death benefit and survival benefit |
Section 80C, Section 10(10D) |
Unit Linked Insurance Plans (ULIPs) |
Combines insurance and investment |
- |
National Pension Scheme (NPS) |
Low-risk retirement planning scheme |
Section 80C, Additional deductions up to ₹ 50,000 under Section 80CCD(1B) |
Health insurance |
Crucial for rising healthcare costs |
Section 80D |
Fixed Deposits (FD) |
Five-year lock-in period with guaranteed returns |
Section 80C |
Now that you have gained insights into various salary components and tax saving investment schemes, let us guide you on how to calculate income tax, ensuring you make informed decisions for better tax planning. Here is how to calculate income tax on salary -
Particulars |
Amount (₹) |
Gross salary |
20,00,000 |
DA and HRA |
- 2,50,000 |
Standard deduction |
- 50,000 |
Net salary |
17,00,000 |
Income from other sources |
20,000 |
Gross taxable income |
17,20,000 |
Deduction under Section 80C for (ELSS+EPF) |
-1,50,000 |
Deduction under Section 80CCD(1B) for NPS |
-50,000 |
Deduction under Section 80D for Health insurance premium |
-15,000 |
Deduction under Section 80TTA for interest on bank account |
-10,000 |
Total Income |
14,95,000 |
ITR is a form used to declare gross taxable income, deductions, exemptions, and taxes paid in a fiscal year. According to the Income Tax Act of 1961, individuals under sixty must file if their income is taxable or exceeds ₹ 5 lakhs. Filing ITR is mandatory for those who've paid advance tax, and it determines your net income tax liability based on applicable tax slabs.
After knowing how to calculate income tax, let us find out how to file an ITR accurately -
Select the appropriate ITR form (ITR-1 to ITR-7) based on income sources and residential status.
A tax rebate is a refund granted when the taxes you've paid exceed your actual tax liability. For instance, if your tax liability is ₹ 15,000, but the bank remits ₹ 25,000 as Tax Deducted at Source (TDS) to the government on your behalf, you qualify for a tax rebate. Here are a few income tax rebates available in India -
Knowing how to calculate income tax is crucial for salaried individuals. Understand your salary, explore deductions, and consider tax saving investment options. Take advantage of exemptions and allowances to reduce taxable income. File accurate returns and make the most of available rebates for effective tax planning.
With the IDFC FIRST Bank Savings Account, you have the opportunity to earn an interest rate of up to 7% p.a. Additionally, you can benefit from deductions under Section 80TTA of the Income Tax Act, aiding in the reduction of your taxable income and ultimately lowering your tax liability.
Disclaimer
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