How to Calculate Income Tax on Salary in India? A Step-by-Step Guide with Example (FY 2024-25)
Calculating your income tax doesn’t have to be complicated. Whether you are a salaried employee, a beginner in your career, or an experienced professional, knowing how to calculate your tax can help you save money and plan your finances better. This comprehensive guide explains how to calculate income tax on salary in India step-by-step with a real-life example for the financial year (FY) 2024-25.
Why Is Income Tax Calculation Important?
Understanding your income tax calculation is essential for several reasons:
- Financial Planning: Helps you plan your investments and savings.
- Avoiding Penalties: Paying the right amount of tax on time prevents penalties.
- Maximizing Savings: Helps you utilize tax-saving schemes like Section 80C, 80D, and HRA.
- Awareness: Keeps you informed about your actual take-home salary.
Step 1: Understand Your Salary Components
Your salary is not just the amount you receive in your bank account (net salary). It includes multiple components:
- Basic Salary – Fixed portion forming the foundation of your salary.
- House Rent Allowance (HRA) – If you live in rented accommodation.
- Dearness Allowance (DA) – Offered mostly in government jobs.
- Leave Travel Allowance (LTA) – For travel expenses within India.
- Special Allowances – Performance incentives, bonuses, etc.
- Other Perquisites – Food coupons, company car, etc.
Gross salary = Basic salary + HRA + DA + LTA + Bonuses + Allowances
Step 2: Choose Your Tax Regime – Old vs New
India offers two tax regimes. You must select one at the start of each financial year:
Old Tax Regime
- Allows deductions & exemptions like HRA, LTA, Section 80C, 80D, etc.
- Suitable if you have higher investments in tax-saving instruments.
New Tax Regime
- Offers lower tax rates but minimal deductions.
- Standard deduction of ₹50,000 is allowed.
How to decide?
- If your deductions (80C, 80D, home loan interest, etc.) exceed ₹2.5–3 lakh, the old regime is often better.
- If you have minimal deductions, the new regime might save more tax.
Step 3: Calculate Your Gross Income
Add all salary components, including:
- Basic Pay
- Allowances
- Bonus
- Perquisites
This gives you your annual gross income.
Step 4: Claim Exemptions (Old Regime)
If you opt for the old regime, you can claim various exemptions:
- HRA Exemption (based on rent paid, city of residence, and salary structure)
- LTA Exemption
- Standard Deduction – ₹50,000 for salaried individuals.
Step 5: Claim Deductions (Old Regime)
The most common deductions include:
- Section 80C: Up to ₹1,50,000 (EPF, PPF, ELSS, life insurance premium, home loan principal repayment).
- Section 80D: Health insurance premium (₹25,000 – ₹50,000 depending on age).
- Section 80E: Education loan interest.
- Section 80TTA/80TTB: Savings account or senior citizen interest.
Step 6: Calculate Taxable Income
Taxable income = Gross Income – Exemptions – Deductions
Example:
- Gross Salary = ₹10,00,000
- Less Standard Deduction = ₹50,000
- Less 80C Deduction = ₹1,50,000
- Taxable Income = ₹8,00,000
Step 7: Apply Income Tax Slabs (FY 2024-25)
Old Regime:
- ₹0 – ₹2.5 Lakh: Nil
- ₹2.5 – ₹5 Lakh: 5%
- ₹5 – ₹10 Lakh: 20%
- Above ₹10 Lakh: 30%
New Regime:
- ₹0 – ₹3 Lakh: Nil
- ₹3 – ₹6 Lakh: 5%
- ₹6 – ₹9 Lakh: 10%
- ₹9 – ₹12 Lakh: 15%
- ₹12 – ₹15 Lakh: 20%
- Above ₹15 Lakh: 30%
Step 8: Add Health & Education Cess
A 4% Health & Education Cess is added to the total tax amount.
Step 9: Subtract TDS and Calculate Final Tax Liability
If your employer has already deducted Tax Deducted at Source (TDS), subtract that to find your final payable tax or refund.
Detailed Example: Income Tax Calculation for ₹10 Lakh Salary (Old Regime)
- Gross Income: ₹10,00,000
- Standard Deduction: ₹50,000
- 80C Deduction: ₹1,50,000
- Taxable Income: ₹8,00,000
Tax Calculation:
- ₹0 – ₹2.5 Lakh: Nil
- ₹2.5 – ₹5 Lakh: 5% = ₹12,500
- ₹5 – ₹8 Lakh: 20% of 3 Lakh = ₹60,000
Total Tax = ₹72,500
Cess (4%) = ₹2,900
Final Tax Payable = ₹75,400
Old Regime vs New Regime – Which Should You Choose?
- Choose Old Regime if you:
- Have significant investments in PPF, EPF, ELSS, NPS, or tax-saving FDs.
- Claim HRA, home loan interest, and 80D deductions.
- Choose New Regime if you:
- Have minimal or no deductions.
- Prefer lower tax rates with a simplified calculation.
Frequently Asked Questions (FAQs)
1. Do I need to file an income tax return if my salary is below ₹2.5 lakh?
No, you are not required to file unless you have other income or want to claim a refund.
2. Can I switch between old and new regimes every year?
Yes, salaried individuals can switch regimes annually before filing their return.
3. What happens if I don’t pay my income tax on time?
You may face interest and penalties under Section 234A/B/C.
4. Is standard deduction applicable in both regimes?
Yes, the standard deduction of ₹50,000 is allowed in both old and new regimes.
Tips to Save More Tax Legally
- Invest in 80C schemes like PPF, ELSS, NPS, and life insurance.
- Claim HRA exemption if you live on rent.
- Buy health insurance for additional deduction under 80D.
- Use NPS contribution (80CCD(1B)) for extra ₹50,000 deduction.
- Donate to registered charities (80G).
