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How do I Calculate Income Tax on Salary? [With Example]

It is a nice feeling to get paid at the end of every month for all the effort you put in your work, but arent you disappointed when the employer deducts
higher tax? So how do you avoid the high tax deduction from your salary?
Any income received by an employee is taxed under the head Income from Salaries. It is only taxable when an employer-employee relationship exists. The
first thing one needs to know is the salary slab they fall under. Then the employee needs to submit their declaration about their proposed investments so that
the employer can take them under consideration before deducting the income tax from the employees salary. By declaring the taxes in advance you do
not have to go through the lengthy process of having to file for refunds from the Income Tax Department.
Salary includes your Gross salary, Provident Fund, Insurance, Leave pay, Gratuity, Employee State insurance and Labour Welfare Fund.

Gross Salary:
Gross salary is the sum total of Basic pay + Dearness allowance + House Rent Allowance + transport allowance + special allowance + other allowance.
You can invest under the Section 80C to a maximum of Rs.1,50,000. Or if you are in a higher tax bracket, you can save Rs.45,000 in tax.
You can make the investment in Provident Fund, Life Insurance Premium, Equity Linked Savings Scheme, Home Loan monthly instalment, National
Savings Certificate, Infrastructure Bond, Pension Funds, Tuition fees and Unit Linked Insurance Plan.
Under Section 80D, you can claim Rs.25,000 as medical expenses and Rs.30,000 can be claimed by senior citizens.
The deductions on House Rent Allowance is the least of the following:
Either the actual HRA amount.
50% of your basic pay if the employee is living in metro and 40% if the employee is living in a non-metro area.
Additional rent paid above 10% of his salary.
While you have a house of your own, you cannot claim deductions for Home loan interest payment and rent. But some people do claim both while they
are living in their own homes. If they are staying with their parents, they show that they are paying rent to their parents and claim the HRA. The other
case is when you have your own house, but you stay in a rented accommodation, as the workplace is far from your home. You can then claim HRA as
well as deduction for the home loan interest payment.

Deductions on Income from Salary

The deductions on Income from Salary falls under the Section 16 of the Income Tax Act. The deductions are:
Entertainment Allowance under Section 16(ii): Deduction is allowed by way of entertainment allowance given by an employer. This deduction is
available only for the Government employees. The deduction is either the 1/5th of salary without including the benefits or perquisites or other
allowances or Rs.5,000, whichever is lesser. The non-government employees cant avail this deduction.
Tax on Employment under Section 16(iii): The Professional Tax is allowed as a deduction while computing income from salaries.

Note: The Standard Deduction from gross salary income is not allowable from the Financial Year 2005-2006.
The total taxable income is after all the deductions are being made to the all the different heads of income.

Example for Calculating Income Tax from Salary:

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Lets take the example of Mr. A who is a CA and his Gross Salary is Rs.80,450, which includes:
Basic= 50000 + HRA=20000 + Travel allowance=1000 + Childs educational allowance=200 + Medical allowance=1250 + other allowance=8000
The deductions allowed will be Travel allowance=1000 + Childs educational allowance=200 + Medical allowance=1250 provided that Mr. A submits
medical bills worth Rs.1250. Mr. A has a house of his own so the HRA is not deducted. So his total exemption will be Rs.2,450.
The taxable annual gross income will be Rs. (80,450-2,450) x 12 which is Rs.9,36,000.
If Mr. A declares loss on House Property for the interest he is paying for the loan taken to buy his house worth Rs.1,00,000. The Gross total income will be
Rs.8,36,000 (9,36,000-1,00,000).
Mr. A declares Rs.1,00,000 as investment under Section 80C and Rs.25,000 under Section 80D, the total taxable income will be Rs.7,11,000 (8,36,0001,25,000). This is the net taxable income. And Mr. As income tax rate would be:
For the first Rs,2,00,000 it is nil, for the next Rs.5,00,000 it will be 10% that is Rs.50,000. And on the balance of Rs,11,000, the tax rate is 20% amounting to
Rs.2,200.
Mr. As total annual tax is Rs.53,766 (Rs.52,200 plus the educational cess and higher education cess that is charged at 3% which is Rs.1,566). The monthly
tax that is levied on him will be Rs.4,480.50/-.

Computation of Tax
In the books of accounts the Computation of Tax will look like:
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

+ employers 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:

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Entertainment allowance

XXX

Professional Tax paid

XXX

Income chargeable for tax under Salaries

XXXXX

Always remember to declare your investments at the beginning of the tax year so that the employer can make the required deductions. If you have forgotten
to declare at the beginning of the year, heavy taxes will be deducted throughout the year. If you have made any investments, you can show that and claim for
refund at the end of the financial year.
Holding on to more of your money is a key to building your wealth. So, it is important to know how much tax is being deducted from your salary and you must
check if there are any other deductions that needs to be included.
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