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how to calculate income tax on salary

Millions of Indians file their tax return every year. Nearly 6.8 crore taxpayers filed their return in 2017-18, which is 26% higher than 5.4 crore people who filed their return in 2016-17. More than 1 crore new taxpayers filed their income tax return for the first time in FY 2017-18. The increasing taxpayer base in India has led to many taxpayers seeking help in calculating their income taxes and tax refund amount correctly. In this article below, we share and how to calculate income tax on salary for working professionals. 

Case Study – Aditi, 29, Salary 15,50,000 per year

Aditi is working in an Indian MNC company earning Rs. 15.5 lakhs per year. She invests Rs. 1.5 lakhs in Employees Provident Fund (EPF) under section 80C. She also pays medical insurance premium of Rs. 25,000 for herself and her family. She has other interest income from bank savings and fixed deposits but we are not taking that into consideration for your case study (to keep it simple). We have also assumed that her gross salary of Rs. 15.5 lakhs is post HRA (House Rent Allowance) and other statutory deductions like Child education allowance, travel allowance, etc.

Calculation of income tax on Aditi’s salary income

Income Slabs Tax Rate Salary & Tax Calculation
Gross Salary from Profession   Rs.15,50,000
Less: Deductions u/s 80C   Rs.1,50,000
Net Salary available for Taxation   Rs.14,00,000
Tax on salary upto Rs.2,50,000 No tax  Nil  (no tax)
Tax on income from Rs.2,50,000 – Rs.5,00,000 5% (Rs.5,00,000 – Rs.2,50,000) Rs.12,500
Income from Rs.5,00,000 – 10,00,000 20% (Rs.8,00,000 – Rs.5,00,000) Rs.60,000
Income more than Rs.10,00,000 30% (Rs.14,00,000 – Rs.10,00,000) Rs.1,20,000
Tax   Rs.1,92,500
Cess 4% of Rs.192,500 Rs.7,700
Total tax in FY 2017-18 (AY 2018-19)   Rs200,200

In the case study above, we have not considered Aditi’s tax savings from medical insurance premium under section 80D. We have also not considered many other Section 80 tax deductions. There are also other sections and tips and tricks to save tax on salary income and other income. Most taxpayers are not aware of sections like 80G,  80TTA, 80E and other sections which can give huge tax savings. The purpose of the above case study is to give a simple example of how tax is calculated on salary income. The purpose is not to be thorough and comprehensive. After reading this article, a taxpayer should be able to basically understand the system how to calculate income tax on salary.

In India, Financial Literacy is at very levels. Even after reading this article, if a taxpayer is not able to understand how income tax is calculated, then it is not their fault. People have never been taught how to understand finance and taxes. That is what we have set out to correct. We will soon write articles on how to calculate income tax on companies’ profits. We shall also cover Senior Citizens and Super Senior Citizens from whom there are special tax slabs available.  We shall also cover tax refund and how to obtain maximum income tax refund. Stay tuned for more articles and content.

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