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How to Calculate Income Tax on Salary - Tax Concept of Salary
Calculating income tax on your salary can seem complex, especially if you’re new to tax calculations. But once you understand the components of your salary, like CTC, PF, HRA, and Gross Salary, calculating income tax becomes much easier. In this blog, we’ll break down each of these terms and points and explain you on how to calculate income tax on your salary with an example.
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Understanding Important Points in Salary Structure
Before we get into the tax calculation, let's understand the key points of a salary:
What is CTC in Salary?
CTC (Cost to Company) is the total amount which your employer spends on you, including basic salary, allowances, bonuses, and benefits. However, this is not your take-home pay, as it includes various deductions like provident fund, gratuity, and income tax.
What is PF in Salary?
Provident Fund is a retirement savings scheme that you and your employer contribute. The employee's share is typically 12% of the basic salary, which is deducted from your monthly salary. This helps in building a retirement corpus and is partially tax-exempt.
What is Gross Salary?
Gross Salary is the amount earned before any deductions, like tax and provident fund, are made. It includes your basic salary, allowances (HRA, DA, etc.), and bonuses.
What is DA in Salary?
Dearness Allowance (DA) is a cost-of-living adjustment allowance paid to employees, especially in the government sector, to offset inflation. It is calculated as a percentage of the basic salary.
What is HRA in Salary? (HRA Full Form in Salary)
HRA (House Rent Allowance) is an allowance given to employees for paying house rent. This allowance is partially or fully exempt from income tax, depending on certain conditions.
How to Calculate Income Tax on Salary with Example in Old Regime?
To calculate your income tax, you need to understand the income tax slabs set by the government. For the Financial Year 2024-25 and 2025-26, the following tax slabs apply under the Old regime.
| Income Slab | Tax Rate |
|---|---|
| Up to ₹2.5 lakh | Nil |
| ₹2.5 lakh – ₹5 lakh | 5% |
| ₹5 lakh – ₹10 lakh | 20% |
| Above ₹10 lakhs | 30% |
Let's calculate the income tax with a step-by-step example.
Example
Suppose your CTC is ₹10 lakh, broken down as follows:
Income Tax Calculator (Click here)
Example
Suppose your CTC is ₹10 lakh, broken down as follows:- Basic Salary: ₹4,00,000
- HRA: ₹2,00,000
- DA: ₹1,00,000
- Other Allowances: ₹2,00,000
- PF Contribution: ₹60,000 (employee's contribution)
Step 1: Calculate Gross Salary
Add up all the components, excluding employer’s PF contribution:
Gross Salary = Basic Salary + HRA + DA + Other Allowances
Gross Salary = ₹4,00,000 + ₹2,00,000 + ₹1,00,000 + ₹2,00,000 = ₹9,00,000
Taxable Income = ₹9,00,000 - ₹50,000 - ₹1,00,000 = ₹7,50,000
Gross Salary = ₹4,00,000 + ₹2,00,000 + ₹1,00,000 + ₹2,00,000 = ₹9,00,000
Step 2: Calculate Taxable Salary
Now, deduct exemptions like HRA (if you’re paying rent) and standard deduction:
- Standard Deduction: ₹50,000
- HRA Exemption Calculation (depends on rent paid, location, etc., here assumed as ₹1,00,000 for simplicity)
Taxable Income = ₹9,00,000 - ₹50,000 - ₹1,00,000 = ₹7,50,000
Step 3: Calculate Income Tax Based on Slabs
Based on the taxable income of ₹7,50,000:
- For income up to ₹2.5 lakh: No tax
- For ₹2.5 lakh - ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500
- For ₹5 lakh - ₹7.5 lakh: 20% of ₹2.5 lakh = ₹50,000
(Rebate Under section 87a =12,500 Maximum Applicable only if Income Up to 5 Lakh)
Tax Payble = 62,500
Step 4: Add Cess
Add 4% health and education cess on tax: Total Tax with Cess = ₹62,500 + (4% of ₹2,500) = ₹62,500 + ₹2,500 = ₹65,000
Final Income Tax Payable = ₹65,000
How to Calculate Income Tax on Salary with Example in New Regime?
The new tax regime introduced in the latest Budget 2025 aims to simplify tax calculations by providing lower tax rates and fewer exemptions. In this guide, we’ll explain how to calculate your tax on salary using the new regime and provide a practical example.
New Tax Slabs (Budget 2025)
Under the new regime, the following tax slabs apply to individual taxpayers (note that these figures are illustrative and may be updated by the government):
New Tax Regime Applicable from FY 2025-26 (Budget 2025)
- Up to ₹4,00,000: Nil
- ₹4,00,001 – ₹8,00,000: 5%
- ₹8,00,001 – ₹12,00,000: 10%
- ₹12,00,001 – ₹16,00,000: 15%
- ₹16,00,001 – ₹20,00,000: 20%
- ₹20,00,001 – ₹24,00,000: 25%
- Above ₹24,00,000: 30%
- Up to ₹3,00,000: Nil
- ₹3,00,001 – ₹6,00,000: 5%
- ₹6,00,001 – ₹9,00,000: 10%
- ₹9,00,001 – ₹12,00,000: 15%
- ₹12,00,001 – ₹15,00,000: 20%
- Above ₹15,00,000: 30%
In addition, a health and education cess of 4% is levied on the total tax.
Income Tax Calculator (Click here)
Step-by-Step Tax Calculation Example ( As per New Slab Rate for 2025-26)
Let’s consider an example where an individual’s annual salary is ₹12,75,000.
Standerd Deduction is ₹75,000 so Net Income in ₹12,00,000
Step 1: Break Down the Salary According to Slabs
First ₹4,00,000:
- Tax: 0%
- Tax Amount: ₹0
Next ₹4,00,000 (₹4,00,001 to ₹8,00,000):
- Tax: 5%
- Tax Amount: 5% of ₹4,00,000 = ₹20,000
Next ₹4,00,000 (₹8,00,001 to ₹12,00,000):
- Tax: 10%
- Tax Amount: 10% of ₹4,00,000 = ₹40,000
Step 2: Calculate Total Tax Before Cess
- Total Tax = ₹0 + ₹20,000 + ₹40,000 = ₹60,000
Tax Liability = ₹60,000 - Rebate ₹60,000 = Nil
Step 3: Add Health and Education Cess
- Cess = 4% of Tax (if there is a tax)
Step 4: Final Tax Liability
- Total Liability = Tax + Cess
Key Points for the New Regime
- No Major Deductions:The new regime does away with most exemptions and deductions (like HRA, standard deduction, etc.), making tax calculation straightforward.
- Simplified Calculation:With clear tax slabs, individuals can easily compute their liability without complex adjustments.
- Choice Between Regimes:Taxpayers have the option to choose between the old and new regimes. The new regime is beneficial if you have fewer deductions to claim, while the old regime may suit those with significant deductions.
Conclusion
Using the new tax slabs under Budget 2025, calculating tax on salary is now more straightforward. For an annual salary of ₹12,00,000, the tax liability under the new regime comes out to approximately nil. Tax calculators based on this structure can help you plan your finances more effectively by quickly comparing the tax liabilities under different regimes.
Tips for Understanding Your Salary Structure and Saving on Taxes if you are opt for Old tax regime
- Optimize HRA: If you live in a rented house, utilize the HRA component to maximize tax savings. Ensure you keep rent receipts as proof.
- Claim Deductions on PF and Other Investments: Invest in tax-saving options like ELSS, PPF, and NPS to claim deductions under Section 80C, up to ₹1.5 lakh.
- Salary Slip Analysis: Review your salary slip each month. Ensure that deductions are in line and that you’re claiming all applicable exemptions.
Salary Slip Format Example
Here’s a typical format of a salary slip to help you understand how components are listed:
| Earnings | Amount | Deductions | Amount |
|---|---|---|---|
| Basic Salary | ₹40,000 | Provident Fund (PF) | ₹2,400 |
| House Rent Allowance (HRA) | ₹20,000 | Professional Tax | ₹200 |
| Dearness Allowance (DA) | ₹5,000 | TDS | ₹3,000 |
| Other Allowances | ₹10,000 | ||
| Total Earnings | ₹75,000 | Total Deductions | ₹5,600 |
| Net Pay | ₹69,400 |
Final Thoughts
Understanding your salary components like CTC, PF, HRA, DA, and Gross Salary is essential for accurate tax planning. By breaking down each element and knowing how exemptions work, you can calculate your income tax with ease and ensure you’re not overpaying.
Whether you’re a seasoned professional or new to the workforce, having a clear understanding of your salary structure and tax liabilities can help you manage your finances better and maximize your take-home pay.