Math of Income Tax: How it is calculated?

Calculating tax is not exactly as tough as it may sound to you. You just need to move step by step. But before you go on to calculate tax, you first need to understand ‘income.’ An individual’s income can be broadly divided under 5 different categories, namely the salary income, income from house property, professional/ business income, capital gains and other income. These different income categories are taxed according to the specific Income Tax rules governing them.

Salary and Income Tax Calculation

Let us understand Salary Income and how its tax is calculated. Salary Income can be defined as the remuneration paid by an employer to his/her employee for the services rendered from him/her during that particular period of time. It has 5 components: basic salary; fees, commission and bonus; allowances; perquisites; and retirement benefits. Salary Income is taxed either on due basis or receipt basis.

The fixed component of the Salary Income is known as the Basic Salary and it is agreed upon according to the terms of the employment or according to the graded system of salary. Another taxable part of your salary are the incentives and bonus you receive. The incentive is the part of the salary that an employee receives depending on the percentage of turnover they have achieved or it can be fixed too.

Tax Slabs for Normal Citizens :

Income 0 – 2,50,000                         Tax : Nil

Income 2,50,001 – 5,00,000           Tax : 10%

Income 5,00,001 – 10,00,000        Tax : 20%

Income 10,00,001 and above       Tax : 30%


Tax Slabs for Senior Citizens :

Income 0 – 3,00,000                         Tax : Nil

Income 3,00,001 – 5,00,000           Tax : 10%

Income 5,00,001 – 10,00,000        Tax : 20%

Income 10,00,001 and above       Tax : 30%



Income Exempted from income Tax:

  • Investments under section -80C (upto 150000)
  • Home Loan Interest (upto 200000)
  • Medical Insurance Premium Paid (upto 15000)
  • Different Allowances given by employer

The fixed amounts paid to an employee by his/her employer in order to take care of their personal expenses or for performing their professional duties are known as allowances. While some allowances are fully taxable, others are partly and yet other fully exempt.

  • The fully taxable allowances include: Dearness Allowance, City Compensatory Allowance, Overtime Allowance and Other Allowances (such as servant and deputation allowances).
  • The partly taxable allowances include: House Rent Allowance (completely taxable in case the employee lives in his/her own house), Entertainment Allowance (exempted for central and state government employees), Special Allowance (such as research, travel and uniform allowances) and Special Allowances to meet personal expenses (such as Children Education and Children Hostel allowances).
  • HRA(House Rent Allowance under section 10(13A) (Based upon actual rent paid and HRA received)
  • The fully exempt allowances include: Foreign Allowance, Allowances given to High Court and Supreme Court Judges, and Allowances given to UNO employees.
  • Gratuity paid by employer upto certain extent

Retirement benefits are the benefits offered either during the period of service or at the time of retirement. Different benefits are differently taxed. Pension is awarded for the services rendered by the employee and are taxed depending on the category of the employee and on the method of disbursement (monthly or lump sum payment). As appreciation of part performance, an employee is given Gratuity that is exempted to a certain extent and depends on the type of the employee. Leave Salary is taxable depending on the category of the employee and how the employee chooses to use this benefit. Provident Fund is taxed depending on the type of Provident Fund maintained by the employer.

There are a few deductions allowed to be made from the salary of an employee. These deductions include: Entertainment Allowance and Professional Tax. For State and Central government employees, the entertainment allowance is first included in the salary and later allowed as a deduction. The deduction amount is 20% of the employee’s basic salary/ INR 5000/ entertainment allowance actually received. Professional tax is the tax on employment that, too, is first paid to the employee and later allowed as a deduction. After these deductions, you reach the Net Salary. Now, as per the mentioned tax slabs, you can count your Income Tax.

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