Here’s a simple 5 step process for tax calculation on salary

Nov 30, 2018 | 12 months ago | Read Time: 3 minutes | By iKnowledge Team

Make use of efficient online tax calculators to make tax calculation simpler and help you with the nitty-gritties of tax calculation.

Credit: Biswa Net

Every year, as the deadline to file Income Tax Returns (ITR) approaches, most employed Indians make a run for their personal Chartered Accountant or a financial advisor to sort through the tax clutter and retrieve some of what they have already paid as taxes. But apart from delegating this responsibility to a professional financial planner, it is essential that you also understand the tax code yourself.

An accurate and thorough knowledge of the income tax structure and the general tax system in India, gives you a comprehensive idea of all that is involved in the tax calculation process. In the process, you discover ways to save and reduce the tax out-go by yourself.


Things to remember

The first thing that must be kept in mind while calculating is that income tax in India follows a slab structure, i.e., it is calculated in income ranges or groups.

According to the latest tax slabs since Financial Year 2017-2018, men and women with less than Rs 2.5 lacs of income per annum, were exempted from income tax. The rates for income of up to Rs 5 lacs stand at 5%, while those earning Rs 5-10 lacs are liable to pay 10% of it as income tax. For income that exceeds Rs 10 lacs, 30% of your paycheck is taxable.

A few other things need to be kept in mind, especially regarding surcharges, tax rebate, tax liability and cess tax (like Education tax). It is important to know at which stage you must calculate them. Note that the calculation is different for senior citizens (above 60 years) and super senior citizens (above 80 years).

Credit: The Economic Times

Once all of this is in place, you may go ahead calculating your income tax returns for the current year.

Here are five easy steps to remember while calculating your tax this year.

  • Calculate your gross total income by including any and every taxable income from all sources.
  • Add the extra income of interest, commission, bonuses, rental income and capital gains if any.
  • Make a note of your net deductions that may include HRA, conveyance and medical expenses, donations, investments and savings such as provident fund subscriptions and life insurance premiums. The difference between your gross salary and net deductions will give you your net taxable income.
  • The rest of the process is simple. You only need to apply the income tax slab corresponding to your aggregate income to calculate the payable amount.
  • An additional 3% of Education Cess is applied on the tax payable. Only when you compute all of this,you will arrive at the total tax payable. Tax rebates or reliefs, if any, would be applicable on this amount.

If this sounds too vague, let’s take a look at this hypothetical scenario.

Rasheed’s gross salary per annum amounts to Rs. 15 lacs. Let’s assume that his net taxable income comes down to Rs. 11 lacs after exemptions and deductions.

  • The initial Rs 2.5 lacs which is tax-free leaves Rs. 8.5 lacs.
  • Again, Rs 2.5 lacs from this slab is subject to 5% tax, leaving Rs 6 lacs of income taxable on the next slab, while the tax at this stage amounts to Rs.12,500.
  • On deducting the tax, the remaining amount of Rs 6 lacs is again split in two, of which Rs.5 lacs is subject to the 20% slab.
  • At this point, the remaining Rs 1 lac would be subject to 30% tax (Rs.30,000).
  • The income tax liability would be the sum of all four taxes calculated at various stages;, i.e. 12,500+ 1,00,000+30,000 = Rs.1,42,500
  • After applying a 3% cess tax on this amount, the total tax comes to Rs. 1,46,775.

Nowadays, you can make use of efficient online tax calculators to make this even simpler and help you with the nitty-gritties of tax calculation. Aegon Life’s Income Tax calculator is one such holistic tool that not only helps you with calculating your annual income tax returns and liabilities, but also in financial planning. You need to  enter the parameters and leave the rest to the calculator. Tax calculation has never been easier and knowing the intricacies of it enables you to have a transparent idea of how much of it is redeemable when you file for tax returns.

Besides, investing in Provident Public Funds (PPF), Equity Linked Saving Schemes (ELSS) or National Saving Certificates (NSC) can help in effectively saving taxes. Even life and health insurance schemes can act as tax saving instruments. Aegon Life’s iCancer plan, for example, allows you to claim tax benefits on the premiums under Section 80D of the Income Tax Act, thus offering health as well as financial security.

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