How to Calculate Income Tax on Salary in India? A Step-by-Step Guide with Example

With the income tax season underway, many salaried individuals are trying to understand how much tax they owe under India’s tax regime. Calculating income tax on salary involves identifying your taxable income, choosing the right regime (old or new), and applying the respective slab rates. Here’s a step-by-step breakdown with an example to make it easier.

1. Understanding Salary Components

A typical salary structure includes:

• Basic Salary – Fixed component.
• HRA (House Rent Allowance) – Exemptions possible if you pay rent.
• Special Allowances & Perquisites – Fully or partly taxable.
• Provident Fund Contribution (Employer + Employee).
• Standard Deduction – ₹50,000 (available in both regimes).

2. Choosing the Tax Regime

• Old Tax Regime: Allows exemptions (HRA, LTA, deductions under Section 80C, 80D, etc.).
• New Tax Regime: Lower slab rates but very few deductions or exemptions.

3. Tax Slabs (FY 2024-25)

New Tax Regime (default option)

• Up to ₹3,00,000 – Nil
• ₹3,00,001 to ₹7,00,000 – 5%
• ₹7,00,001 to ₹10,00,000 – 10%
• ₹10,00,001 to ₹12,00,000 – 15%
• ₹12,00,001 to ₹15,00,000 – 20%
• Above ₹15,00,000 – 30%

Rebate under Section 87A: If taxable income ≤ ₹7,00,000, tax payable = Nil.

Old Tax Regime

• Up to ₹2,50,000 – Nil
• ₹2,50,001 to ₹5,00,000 – 5%
• ₹5,00,001 to ₹10,00,000 – 20%
• Above ₹10,00,000 – 30%

Rebate under Section 87A: If taxable income ≤ ₹5,00,000, tax payable = Nil.

4. Example Calculation

Case: Mr. Arjun, a salaried employee

• Gross Annual Salary: ₹12,00,000
• HRA claimed: ₹1,20,000 (eligible exemption ₹80,000)
• Investments under 80C: ₹1,50,000
• Health Insurance Premium (80D): ₹25,000

Income Tax Calculation Under Old Regime

• Gross Salary = ₹12,00,000
• Less: HRA exemption = ₹80,000
• Less: Standard Deduction = ₹50,000
• Net Income before Deductions = ₹10,70,000
• Less: 80C Deduction = ₹1,50,000
• Less: 80D Deduction = ₹25,000
• Taxable Income = ₹8,95,000

Tax Calculation:

• 0–2.5 lakh = Nil
• 2.5–5 lakh = ₹12,500 (5%)
• 5–8.95 lakh = ₹79,000 (20%)
• Total Tax = ₹91,500
• Add 4% cess = ₹95,160

Tax Payable under Old Regime = ₹95,160

Income Tax Calculation Under New Regime

• Gross Salary = ₹12,00,000
• Less: Standard Deduction = ₹50,000
• Taxable Income = ₹11,50,000

Tax Calculation:

• 0–3 lakh = Nil
• 3–7 lakh = ₹20,000 (5%)
• 7–10 lakh = ₹30,000 (10%)
• 10–11.5 lakh = ₹22,500 (15%)
• Total Tax = ₹72,500
• Add 4% cess = ₹75,400

Tax Payable under New Regime = ₹75,400

5. Key Takeaways

• Salaried individuals must compare old versus new regime before filing.
• Those with high investments (like 80C, 80D, HRA) usually benefit under the old regime.
• Those with fewer deductions generally save more under the new regime.
• Filing deadline for individuals (without audit) is July 31 of the assessment year.