How to Calculate Income Tax: 4 Simple Steps

Income tax may seem to be a complicated subject to understand.  But determining the total tax on your income isn’t as difficult as you think. Read this post to know four simple steps that you can use for calculating your income tax.

Every taxpayer must know his/her taxable income as well as total tax liability for accurate tax filing. This will allow you to understand the exemptions for reducing your tax liability. Here are four simple steps that you can use for calculating your income tax-

  1. Calculating Taxable HRA

If you are a salaried employee, you must know your taxable HRA (House Rent Allowance). The HRA component is part of your monthly salary, and it is mentioned on your salary slip. The taxable HRA will be the lowest of the three provisions below-

  • Total HRA received annually
  • Rent after deducting 10% of the basic salary
  • 40% of the basic pay if you reside in a non-metro city and 50% if you are in a metro city

Your salary can also include other components like LTA (Leave Travel Allowance), which has a maximum exemption of up to Rs. 19,200 in a year.

  1. Calculating Total Deductions

As per the Income Tax Act, there are several deductions available for expenses, investments, and medical conditions. For reducing your tax liabilities, you must take advantage of the available deductions. Some of the most commonly used deductions are as follows-

  • Section 80C- Investment in mutual funds, NSC, PF, housing loan repayment, bank fixed deposit (Maximum deduction of up to Rs. 1.5 lakh in a financial year)
  • Section 80CCC- Investment in a pension fund (Maximum deduction of up to Rs. 1.5 lakh in a fiscal year)
  • Section 80D- Investment in a health insurance policy (Maximum deduction of up to Rs. 25,000 in a financial year for non-seniors and up to Rs. 50,000 for seniors)
  • Section 80EE- Interest paid on housing loan (Maximum deduction of up to Rs. 50,000 in a financial year)

There are other deductions like Section 80DD (Maintenance of dependent with a disability), Section 80E (Interest paid on education loan), Section 80TTA (Interest earned from a savings bank account) that you can claim.

  1. Calculating Gross Taxable Income

Once you know your taxable HRA and deductions, the next step is to calculate your gross taxable income. This will be your total gross income from salary (Basic Salary + Taxable HRA + Taxable LTA + Special Allowance if any) minus the deductions you have made use of.

For instance, if your gross taxable income is Rs. 7 lakhs and your total deductions are Rs. 1.5 lakhs, your gross taxable income would be Rs. 5.5 lakhs.

  1. Calculating Your Income Tax Liability

Now to calculate your tax liability, you need to know the income tax slab you fall under. The tax slabs are as follows-

  • Income below Rs. 2.5 lakhs- Nil tax
  • Income between Rs. 2.5 lakhs- Rs. 5 lakhs- 5%
  • Income between Rs. 5 lakhs- Rs. 10 lakhs- 20%
  • Income above Rs. 10 lakhs- 30%

There is also an additional cess of 4% of the total tax. So, taking the same example, as the income Rs. 5.5 lakhs falls under the 20% tax bracket, income up to Rs. 5 lakhs will be taxed at 5% and income above Rs. 5 lakhs (Rs. 50,000) will be taxed at 20%.

So, 5% of Rs. 5 lakhs is Rs. 25,000 and 20% of Rs. 50,000 is Rs. 10,000. The total income tax you should be paying is Rs. 35,000. Adding the cess at 4%, this would become Rs. 36,400. The total income tax you should be paying is Rs. 36,400.

Is There An Easier Way to Calculate Income Tax?

You can consider using an income tax calculator if you are looking for an easier alternative. The online tool allows you to enter all the details like age, annual income, deductions, etc. to calculate your tax liability accurately.

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