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Income Tax Calculation, Slab Rates & Tax Saving Guide For Beginners

Income tax filing, as well as paying, are an important part of every citizen of the country. One needs to collect all the necessary information before filing their income tax return. Then they need to compute their total taxable income. Furthermore, the next step involves final income tax calculation to know the payable tax amount and the rebate. To do this, one also has to be aware of the applicable income tax slab rates prevalent that year. Hence, we will explain the income tax calculation process and slab rate for the year 2019-2020 in this article, in a simple and easy way.

What is a Flat Tax Slab?

A Flat Tax Slab means that the same tax rate is applicable for all taxpayers regardless of income bracket. For instance, in the case of winning any income through a lottery, puzzle, or competition, etc., a 30% flat tax rate is applied. Hence, if you won Rs 10,000 then Rs 3000 would be the income tax deduction on it.

What is Cess?

Cess is an additional charge which the Central Government levies to raise funds for specific purposes. Although it is a form of tax, it falls above the base tax liability of a taxpayer. The income from cess is used to meet certain expenditures for public welfare and are discontinued once the objective is complete. For example, the Indian Central Government charges Cess for Swachh Bharat, Health Cess and Education Cess. Thus, for the financial year 2019-2020, the Cess for education and health stands at 4%. Thus, if your tax amounted to Rs 1 lakh as per your income tax calculation, then you will have to pay Rs 4000 as additional Cess with it.

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Income Tax Calculation (for winnings)

For the following income tax calculation, we take certain assumptions. Firstly, the person has no other income, neither any investments. He is also a resident of the country and below 60 years of age. The income is from winning and thus fully taxable.

Income = Rs 1000

Taxable income = Rs 1000.
Tax @ 30% = Rs 300
Surcharge @ 0% = 0
Cess @ 4% = Rs 12
Thus, take home money = Rs 688

Income = Rs 2000

Taxable income = Rs 2000.
Tax @ 30% = Rs 600
Surcharge @ 0% = 0
Cess @ 4% = Rs 24
Thus, take home money = Rs 1376

Income = Rs 3000

Taxable income = Rs 3000.
Tax @ 30% = Rs 900
Surcharge @ 0% = 0
Cess @ 4% = Rs 36
Thus, take home money = Rs 2064

Income = Rs 5000

Taxable income = Rs 5000.
Tax @ 30% = Rs 1500
Surcharge @ 0% = 0
Cess @ 4% = Rs 60
Thus, take home money = Rs 3440

Income = Rs 10,000

Taxable income = Rs 10000.
Tax @ 30% = Rs 3000
Surcharge @ 0% = 0
Cess @ 4% = Rs 120
Thus, take home money = Rs 6880

Income = Rs 20,000

Taxable income = Rs 20,000.
Tax @ 30% = Rs 6000
Surcharge @ 0% = 0
Cess @ 4% = Rs 240
Thus, take home money = Rs 13,760

Income = Rs 40,000

Taxable income = Rs 40,000.
Tax @ 30% = Rs 12,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 480
Thus, take home money = Rs 27,520

Income = Rs 80,000

Taxable income = Rs 80,000.
Tax @ 30% = Rs 24,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 960
Thus, take home money = Rs 55,040

Income = Rs 1,60,000

Taxable income = Rs 1,60,000.
Tax @ 30% = Rs 48,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 1920
Thus, take home money = Rs 1,10,080

Income = Rs 3,20,000

Taxable income = Rs 3,20,000.
Tax @ 30% = Rs 96,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 3840
Thus, take home money = Rs 2,20,160

Income = Rs 6,40,000

Taxable income = Rs 6,40,000.
Tax @ 30% = Rs 1,92,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 7680
Thus, take home money = Rs 4,40,320

Income = Rs 12,50,000

Taxable income = Rs 12,50,000.
Tax @ 30% = Rs 3,75,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 15,000
Thus, take home money = Rs 8,60,000

Income = Rs 25,00,000

Taxable income = Rs 25,00,000.
Tax @ 30% = Rs 7,50,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 30,000
Thus, take home money = Rs 17,20,000

Income = Rs 50,00,000

Taxable income = Rs 50,00,000.
Tax @ 30% = Rs 15,00,000
Surcharge @ 0% = 0
Cess @ 4% = Rs 60,000
Thus, take home money = Rs 34,40,000

What is Surcharge?

A surcharge is an additional tax on the tax. Therefore, the Central Government levies a surcharge on the tax payable and not on the income. For instance, if the income was Rs 100, on which the tax was Rs 40, then the surcharge will be applicable on Rs 40. Thus, the Cess will be calculated on the sum of tax payable and surcharge. Hence, the rate of surcharge in India for the financial year 2019-2020 is as follows:

income tax calculation

Therefore, income above Rs 50 lakh will attract a surcharge, cess and TDS. The following calculations explain this further.

Income = Rs 1,00,00,000

Taxable income = Rs 1,00,00,000.
Tax @ 30% = Rs 30,00,000
Surcharge @ 10% = 3,00,000
Cess @ 4% = Rs 1,32,000
Thus, take home money = Rs 65,68,000

Income = Rs 7,00,00,000

Taxable income = Rs 7,00,00,000.
Tax @ 30% = Rs 2,10,00,000
Surcharge @ 37% = 77,70,000
Cess @ 4% = Rs 11,50,800
Thus, take home money = Rs 4,00,79,200

Income Tax Calculation (for non-winnings)

For the following income tax calculation, we take certain assumptions. Firstly, this income of the person is not through any winning. It is income through some employment or another source. The person does any investments also. He is a resident of the country as well as below 60 years of age. The following tax slab rates will be applicable in this case.

Income Tax Slabs

Applicable on income through sources other than winning. For the financial year 2019-2020, the income tax calculation happens with respect to the following tax slabs:

income tax calculation

Income = Rs 1,60,000

Taxable income = Rs 1,60,000.
Tax @ 0% = 0
Surcharge @ 0% = 0
Cess @ 4% = 0
Thus, take home money = Rs 1,60,000

What is Rebate?

If a person’s annual income is Rs 5 lakhs or below, then he gets a rebate of up to Rs 12,500 on it, under Section 87A of the Income Tax Act. additionally, this rebate is not the same as deductions or exemptions. If the person’s annual income crosses Rs 5 lakh by even Re 1, then he is not eligible for the rebate.

Income = Rs 3,20,000

Taxable income = Rs 3,20,000.
Tax up to Rs 2.5 lakh = 0
Tax on 2.5 – 3.2 lakh @ 5% = 3500
Rebate u/s 87A = Rs 3500
Net tax = 0
Thus, take home money = Rs 3,20,000

Income = Rs 6,40,000

Taxable income = Rs 6,40,000.
Tax up to Rs 2.5 lakh = 0
Tax on 2.5 – 5 lakh @ 5% = 12,500
Tax on 5 – 6.4 lakh @ 20% = 28,000
Cess @ 4% on (12,500 + 28,000 = 40,500) = Rs 1620
Net tax = Rs 42,120
Thus, take home money = Rs 5,97,880

Income = Rs 12,50,000

Taxable income = Rs 12,50,000.
Tax up to Rs 2.5 lakh = 0
Tax on 2.5 – 5 lakh @ 5% = 12,500
Tax on 5 – 10 lakh @ 20% = 1,00,000
Tax on 10 – 12.5 lakh @ 30% = 75,000
Cess @ 4% on (12,500 + 1,00,000 + 75,000 = 1,87,500) = Rs 7500
Hence, Net tax = Rs 1,95,000
Thus, take home money = Rs 10,55,000

Income = Rs 7,00,00,000

Taxable income = Rs 7,00,00,000.
Tax up to Rs 2.5 lakh = 0
Tax on 2.5 – 5 lakh @ 5% = 12,500
Tax on 5 – 10 lakh @ 20% = 1,00,000
Tax on 10 lakh – 7 crore @ 30% = 2,07,00,000
Surcharge @ 37% = 77,00,625
Cess @ 4% on (12,500 + 1,00,000 + 2,07,00,000 + 77,00,625 = 2,85,13,125) = Rs 11,40,525
Hence, Net tax = Rs 2,96,53,650
Thus, take home money = Rs 4,03,46,350

Watch the details on the income tax calculation process as well as the current income tax slab rates in India below.

What is Gross Total Income?

Gross Total Income is hence the total earnings of a person by adding all heads of income. This thus includes income from salary, business, property, other sources and capital gain earnings in a financial year. The gross total income can further be divided into Exempted Income and Taxable Income.

income tax calculation

What is Exempted Income?

Chapter 3 of the Income Tax Act of 1961 states the provision of income tax exemption. There are thus certain types of income sources on which you can get an exemption from tax payment. Hence, these sources of income are not added in the income tax calculation process. Thus, Exempted Income refers to some sources of expenditure, income or investment on which no tax payment is levied, thus reducing the overall taxable income. Some examples of Exempted Incomes are as follows:

All such exempted income sources have to be communicated by the employee to the employer prior to the tax filing. Then the employer can commute tax payment on the balance income and deduct TDS (Tax Deducted at Source) for the employee. Learn more about TDS in How To Calculate TDS And Reduce TDS On Salary.

What is Taxable Income?

Taxable income is thus the total amount of income which is used to calculate the tax a person has to pay in a given year. Taxable income includes salary. bonus, wage, tips, investment income as well as other unearned income. It is also known as Gross Income.

What is Tax Deduction?

A Tax Deduction is a deduction from a person’s Taxable Income which thus reduces their tax liability. Tax deductions are usually expenses which the taxpayer incurs during the financial year. These deductions are then subtracted from the taxable income to figure the actual tax liability of a person. Following are some of the types of tax deductions applicable:

What is Net Taxable Income?

Net taxable income is the income minus tax deductions. Thus, Income tax calculation happens on the net taxable income.

What is Tax Rebate?

Tax rebate is a refund on your taxes. Thus, Section 87A of the Income Tax Act provides tax rebate for a marginally lower payment of taxes for people who earn income below a certain threshold. Taxpayers sometimes also receive a refund on their income tax payment. But this happens if they pay more tax than they actually owe.

Watch further explanation on Tax Exemption, Deduction and Rebate below.

Complete Tax Planning for Salaried Persons | FY 2021-22

While individuals look at all types of exemptions and deductions to reduce their tax liability, salary optimization goes unnoticed. Optimizing the annual salary to reduce the taxable income is the best way to reduce tax liability.

Income tax deduction & exemption

The best way to optimize one’s salary for taxes is by using the available exemptions and deductions. The two are not interchangeable. For instance, in the example given below, Ram has three sources of income – office salary, farming income, and silent partner in a partnership firm. Ram’s total net earning is Rs 17 lakh out of which earnings from farming and partnership firm are exempt from taxes. Even the salaried income can get some exemptions.

Hence, Ram’s total taxable income is equal to total earning minus all exemptions. His total net taxable income is equal to taxable income minus all deductions. On this net taxable income, Ram will have to pay taxes. Thus, it is important to reduce this net taxable income as much as possible.

One can also opt for the new tax regime and avoid all confusion regarding exemptions and deductions.

income tax calculation

Exemptions for salaried employees

All salary slips contain some parameters such as – Basic, DA, allowances for HRA, LTA, conveyance, etc., and in some cases reimbursements such as food and mobile. Among these parameters, employee has to pay full tax on his basic salary and DA. But allowances and reimbursements can get certain exemptions.

However, this does not mean that employees can get their full salary allotted under allowances and get exempt from taxes completely. This is because there is the Code on Wages Act which states that an employee must receive minimum 50% of his salary under basic wages. Additionally, the Income Tax Department has given certain exemption limitations on all allowances. But there are still ways around this to save one’s tax payment.

HRA tax exemption

The first method of saving tax liability is through HRA. HRA helps in major tax savings. The Government has provided exemption on HRA since it assumes that an employee will need to travel to a new city for work and it will reduce his burden on rent payment. To calculate HRA exemption – one needs to first calculate their

  • actual HRA received on salary. If employee isn’t receiving any HRA on salary then they will not get any HRA exemption at all.
  • 50% of their basic salary for metro cities and 40% of their basic for non-metro cities.
  • rent minus 10% of their basic wages.

The lowest value among these three calculations will be the actual HRA exemption for the employee.

Learn further information on House Rent Allowance (HRA) | Calculation & Exemption Rules.

LTA tax exemption

Leave Travel Allowance, also knows as LTA, is a type of allowance which the employer provides to employees. This allowance covers the travel expenses for the employee when he is on leave from work. Furthermore, under Section 10(5) of the Income Tax Act, this allowance is exempt from income tax. This is because the Leave Travel allowance is not considered as a part of the employee’s net income for the year. Following are some conditions for claiming Leave Travel Allowance

  • One has to be actually travelling to claim this benefit.
  • Only travels in India are eligible for this benefit. International travels are ineligible and cannot be used to claim this allowance.
  • The travel allowance is applicable for the employee as well as his family members. The following members are eligible for travel allowance under LTA:
    • Spouse
    • Children, but a maximum of two
    • Wholly or mainly dependent parents
    • Dependent siblings

Learn further information on Leave Travel Allowance (LTA) | How To Claim Income Tax Deduction?

Children education and hostel allowance tax exemption

Government of India offers a tax exemption of Rs 100 per child for a maximum of two children in a family. This is for the educational purpose of the children and is known as Children Education Allowance. A normal child of under 20 years of age, is eligible for this plan. Thus, an annual claim benefit of up to Rs 2400 maximum is available under this allowance. This claim falls under Section 10 (14) of the Income Tax Act.

The Government of India also offers tax exemption of Rs 300 per child for a maximum of two children in a family. This is for any hostel expenditure for the children and is known as Hostel Allowance. Thus, an annual claim benefit of maximum Rs 7200 is available for this. This claim also falls under Section 10 (14) of the Income Tax Act.

Learn more on Children Education Allowance & Hostel Allowance | Tax Saving Tips.

Reimbursements

As an employee, if one makes any expenses on behalf of their company for which the company reimburses them later, one does not need to pay any taxes on it. For example, mobile bill, wi-fi bill, meal coupons, etc. Hence, it is recommended that as employees, instead of taking multiple allowances, one gets reimbursements. Since reimbursements are mostly totally exempt. It is also recommended to discuss this with your employer.

Deductions for salaried employees

The deductions applicable for salaried employees are as follows:

  • All salaried employees get flat Rs 50,000 standard deduction.
  • 80C Deduction for investments in PPF, SSY, children’s tuition fees, ELSS.
  • 80CCD Deduction for investment in NPS.
  • 80D Deduction for taking health insurance, under which one can claim up to Rs 25,000 for personal use and Rs 50,000 for family.
  • 80EE Deduction on interest if one has taken home load or electronic vehicle loan.
  • Rs 5,000 Deduction on preventive health checkup.
  • Savings account and FD interest deduction for up to Rs 10,000 and up to Rs 50,000 for senior citizens.

Get more information on calculation for tax savings below.

FAQs on Tax Planning and Saving

Can HRA and Home Loan interest be claimed together?

Theoretically, HRA is an exemption while Home Loan rebate is a deduction and the Income Tax Act does not bar anyone from taking both together. Firstly, in the current pandemic scenario, many individuals have been purchasing homes in their hometowns rather than in the city they work. Secondly, one does not get possession of a new home as soon as they start EMI on their home loan. Rather it takes a few years in which case one has to live in a rented place. Thirdly, one’s own home may be very far away from their workplace in which case they need to stay at a rented place nearby. In all these cases, one can take both home loan deduction and HRA at the same time.

Can one claim HRA exemption if living in own house and not paying rent?

No, it is not legally possible to live in one’s own house where they do not pay any rent to anyone and claim HRA for it.

Does HRA and house rent have to be the same amount?

No, the HRA amount on the salary does not have to be the same as the rent one actually pays. The Income Tax Act does not specify this point anywhere. One’s salary and HRA are independent of each other. The CTC of an employee decides the amount of HRA they will receive. In fact, many companies decide the basic salary amount and let the employees decide the division of rest of the amount for different allowances including HRA.

Is Children’s Education Allowance same as tuition fees? Can both be claimed together?

Yes, both Children’s Education Allowance and Tuition Fees deduction can be claimed together. Under Children’s Education and Hostel Allowance, one can claim a maximum of Rs 4800 per year for one kid and Rs 9600 per year for two kids. Meanwhile, tuition fees deduction can be claimed under Section 80C of the Income Tax Act up to Rs 1.5 lakh.

Can PF be claimed under Section 80C?

Yes, one’s PF, PPF and ELSS deductions can be claimed u/s 80S of the IT Act. Moreover, when paying EMI for home loan a part of it goes towards interest and another part towards principal amount. The part paid for principal amount is also claimable u/s 80C, up to Rs 1.5 lakh. Additionally, as stated just earlier, the tuition fees of children are also claimable under Section 80C. However, the total deductions under Section 80C cannot exceed Rs 1.5 lakh.

How is it possible to pay zero tax for income up to Rs 5 lakh?

For income up to Rs 2.5 lakh, there is no income tax payment. For income between Rs 2.5-5 lakh, income tax rate of 5% is applicable which equals Rs 12,500. But Income Tax Act allows a rebate under Section 87A. Therefore, this rebate 87A allows income below Rs 5 lakh to pay no tax, while income of even one rupee above 5 lakh has to pay Rs 12,500 as tax.

How is tax paid for income earned from freelancing, Google AdMob, YouTube AdSense, etc?

Any income earned from the above or similar methods will get added to one’s income under income from other sources or income from business, and one will accordingly have to pay taxes on it. However, if one does not want to pay interest on them, then it is a good idea to let one’s company know about their additional income and ask them to deduct TDS accordingly. Thus, there will be no interest penalty fined on them later. However, if the company is unaware of one’s extra income and does not deduct TDS on it, then one can simply pay the remaining tax and interest while filing their ITR.

How to save taxes on NPS?

To save tax on NPS, one can ask their employer to contribute up to 10% of basic salary as employer contribution to NPS. This is tax-free over and above Rs 50,000 and Rs 1.5 lakh. If one goes for aggressive NPS plans with higher equity shares, they can expect 10-12% tax-free annual returns. Thus, they save 30% tax currently and 30% on their capital gain in the future during retirement, apart from the annuity part.

Example

Gross earning from salary = Rs 12 lakh
Salary division – Rs 6 lakh Basic + Rs 6 lakh HRA
Suppose monthly house rent is Rs 30,000. Therefore, annual rent = Rs 3.6 lakh

Exemptions
For HRA out of 3.6 lakh – Rs 3 lakh
Children’s Education and Hostel Allowance – NIL
LTA – NIL

Thus, Taxable Income = 12 lakh – 3 lakh = Rs 9 lakh

Deductions
EPF u/s 80C = Rs 1.2 lakh (assuming EPF contribution of Rs 10,000 per month)
Home Loan Principal u/s 80C = Rs 30,000
Mediclaim u/s 80D = Rs 10,000
Home Loan Interest u/s 24B = Rs 2 lakh
Standard Deduction = Rs 50,000

Thus, Net Taxable Salary = 9 lakh – Deduction = Rs 4.9 lakh

Now, owing to Rebate 87A the income tax payment calculation will come to NIL.

For further clarifications watch the video below.

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