How to Calculate Income Tax on Salary?

Written on Tuesday, May 30, 2017
By Mitali Sharma

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Most of us get a hike in our annual salary as a financial year rolls on. That's definitely a good improvement to rejoice but increase in income also increases our tax liability. However, for the FY 2017-2018, there is some tax relaxation as the liability of 10% for an income of 0 to 2,50,000 has been reduced to 5%. 

 

In the FY 2017-2018, if your income has increased by any means, then have you calculated what is your new tax liability? Knowing tax liability is important because it gives you an idea about how much you have to invest this year for tax saving. Basically, it is called tax planning. 

 
Calculating tax is complicated as it needs to take into account many things like tax bracket, cess charge, deductions, exemptions, etc. The easiest way to calculate tax is to use a tax calculator.But despite using a tax calculator, every individual with an income should know how the tax liability is calculated and how that liability can be reduced. 
 
 
Taking the cue, in this blog, you will learn how to calculate tax on your salary. But computing tax liability is just one step of the overall tax planning exercise. Prudent tax planning is the basic duty of every person and it includes three steps: 
 
Tax planning includes three steps: 
 
1. Calculate your taxable income from all sources such as salary pension, interest etc.
2. Calculate your tax liability as per the tax rate table, which is mentioned below
3. After you have calculated the amount of your tax liability, you have two options to choose from:
a. Pay your tax (no tax planning is required)
b. Minimize your tax through investments.

 

To minimize your tax liability, first you need to check and compare various tax saving schemes depending upon your age, social liabilities, tax slab and personal preferences. Next, you decide on the right mix of investments which shall reduce your tax liability to Zero or to the “Minimum” possible. 

 

How to Calculate Tax Liability?

 

Step 1: Computation of Gross Taxable Income

 
As per Income Tax Act, income of a person is computed under the following 5 heads:
 
1. Income from Salaries
2. Income from House Properties
3. Profit & Gains of Business & Profession
4. Capital Gains
5. Income from Other Sources
 
Step 2 Apply the deductions and then calculate the final taxable income
 
Sections 80 C, 80D, 80TTA, 24(b), etc. are the common tax-saving sections of Income Tax Act through which tax deductions can be claimed. Any amount for the investments done under these sections get subtracted from the taxable income.  Please note that these are the most common  and widely used tax saving sections but these are not the only tax-saving sections. There are various under sections under Income Tax Act.
 
Step 3: Use tax rate table to calculate the tax liability 
 
 
Tax Calculation Illustration
 
Following is an illustration to make you understand the logics that gets applied while calculating the tax. 
 
Mr. Amit, 35, a manager in an MNC earns an annual salary income of Rs. 13,90,000. His other source of income includes interest income from his GOI bonds and Saving Bank Accounts. 
 
As far as his tax-saving deductions are concerned he eligible to claim deductions for his investments under various sections of Income Tax Act as illustrated in the table below. 
 
 
 
 
 
The example is only for illustration purpose. 
 
Conclusion
 
Had Mr. Amit not done any tax saving investments, then his net taxable income would have been  Rs. 12,24500 (after the deductions of his house loan principal and loan repayment u/s 80C and 24 (b) respectively.) In that scenario, his tax liability would have been Rs. 17,9850 unlike the current liability of Rs. 128080. So, with proper tax planning, Mr. Amit has saved Rs. 51,770.

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