How are taxes calculated on salary Income?

The due date for filing an Income Tax Return (ITR) in the case of salaried individuals is approaching soon. But many salaried individuals do not know how taxes are calculated on their respective salary income. This article is for them. In this article, we have discussed how income is taxable under the head salary as per the Income Tax Act, 1961.

So, without further ado. Let’s discuss. Happy reading!!

First and foremost let’s discuss the essential components of a salary. Generally, in India salary is structured as below:-

Salary = Basic Salary + House Rent Allowance (HRA) + Bonus + PF Contribution + Other allowances (such as leave travel allowances, convenience, children's education, etc) + Gratuity + any perquisites

Please note that an individual can claim exemption/partly exemption on certain allowances such as HRA, children education allowances, leave travel allowances, etc which are received as part of his salary. Therefore, it’s really important to carefully determine which allowances are wholly taxable or partly taxable, or exempt under Income Tax Act.

Also, certain fixed deductions are also available to salaried individuals under Chapter VI-A of the Income Tax Act. To know more read our detailed articles here (please link to respective deductions articles).

Now, let’s discuss another important aspect which is TDS on salary.

Why is the TDS on salary deducted by your employer?

An employer is liable to deduct the tax at source i.e., TDS amount on the above salary amount paid to employees each month, and deposit it to the government under Income Tax Act, 1961.

How much TDS is deducted from salary?

Based on the salary structure (annual CTC), the tax slab rate applicable to you as a taxpayer & the tax declarations given by an employee for any tax-saving investments made during the relevant financial year, the employer computes the number of TDS liable to deduct.

How to verify the TDS amount deducted from your salary?

You can verify the total TDS amount deducted from your salary by reconciling Form 16 with Form 26AS. The total amount of TDS deducted by the employer is mentioned in the TDS certificate i.e., Form 16, which is provided by the employer at the end of the financial year. As well as in your Form 26AS which is available on the Income Tax Portal.

Let’s discuss two other important things related to salary income - Standard Deduction & Professional Tax.

What is a standard deduction?

The government introduced “Standard Deduction” in the Finance Act, 2018. Basically, a standard amount is deducted from an individual salary income which reduces the overall tax burden. An individual assessee can claim Rupees 50,000 as a standard deduction from his salary income.

What is professional tax?

It is a tax on employment, which is levied by the state government. An individual assessee can claim a deduction of professional tax, which is paid by him through his employer to the state government, from his salary income. Currently, an individual taxpayer can claim the maximum amount of Rupees 2,500 as a professional tax.

Let’s understand how taxes are calculated on salary with the help of an example.

Mr. A receives a handsome salary from his employer. The breakup of salary components is given as below:-

Basic Salary - Rupees 50,000/- per month
HRA - Rupees 25,000/- per month
Convenience allowance - Rupees. 5,000/- per month
LTA - Rupees 20,000/- annually

First, we will compute the gross income from salary which is taxable in the hands of Mr. A.

Particulars	Amount (annually)
Basic Salary	6,00,000
Add: HRA	3,00,000
Add: Convenience allowance	60,000
Add: LTA	40,000
Total Salary	10,00,000
Less: HRA exemption available HRA exemption available lower of:- a) actual HRA received b) 50% or 40% of basic salary + DA c) Actual rent less 10% of basic salary + DA	(3,00,000)
Less: Conveyance allowance exemption Up to Rupees 19,200 per annum is allowed as per section 10(14)(ii)	(19,200)
Less: LTA exemption (Suppose, Mr. A fully availed LTA amount)	(20,000)
Less: Standard Deduction	(50,000)
Less: Professional Taxes (Assuming paid to the state government)	(2500)
Gross Income From Salary	6,08,300
Less: Deduction under Chapter VI-A	(XXXX)
Net Income Taxable	XXXX

Now, taxes will be computed on net taxable income as per the prevailing tax slab rate.

We hope that after reading the above discussion you have a better understanding related to the tax payable on your salary income & how it is calculated. You can read our detailed article “Tax Planning Tips For Salaried Individuals” to know how can you save taxes on your salary income.

If you need any assistance in filing your Income Tax Return then feel free to reach out to our team of experts. We are always happy to help you all :)

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Are you wondering how much taxes you need to pay on your salary income? Then, read our detailed article and understand how taxes are calculated on salary income, before the due date of filing Income Tax Return for Assessment Year 2022-2023 in the case of salaried individuals i.e., 31st July 2022.