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

Nov 30, 2018 | 2 years ago | Read Time: 4 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.

The Indian Finance Minister introduced a new slab structure in the Union Budget 2020 for the Financial Year 2020 – 21. As per this tax system amendment, taxpayers in India shall follow either of the two slab structures for income tax calculation – the existing income slabs or the new slab structure.

According to the latest income slab structure for Financial Year 2020 – 21, income above Rs. 5 lakhs and up to Rs. 7.5 lakhs will be taxed at 10%, whereas a 15% tax rate shall be levied on income between Rs. 7.5 lakh and Rs. 10 lakhs.

However, as per the recent tax system, 70 of the existing 100 tax exemptions and deductions will not be available to taxpayers who opt to file their tax according to the latest income slabs. In case you have only a handful of investments and spending that qualify for existing tax exemptions, then you can benefit from the new income slab structure. On the other hand, if you have channelled your income towards several qualifying investments and approved spending, then you can follow the previous slab structure to avail tax exemptions.

The following table demonstrates the difference between the existing slab structure and the latest income slabs.

Total Income (in Rs.) Tax rates as per the new slab structure Tax rates as per the existing slab structure
Up to Rs. 2,50,000 Nil Nil
Rs. 2,50,000 to Rs. 5,00,000 Nil 5%
Rs. 5,00,001 to Rs. 7,50,000 10% 20%
Rs. 7,50,001 to Rs. 10,00,000 15% 20%
Rs. 10,00,001 to Rs. 12,50,000 20% 30%
Rs. 12,50,001 to Rs. 15,00,000 25% 30%
Rs. 15,00,000 and above 30% 30%

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 (if he chooses the existing tax regime), 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 4% cess tax on this amount, the total tax comes to Rs. 148200.

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.

To know more about Aegon Life’s life insurance products like term insurance plans and other products like health insurance, visit our home page.

II/Oct 2018/4490


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