One of the most asked question on my YouTube channel is how to calculate income tax on salary and how to reach taxable income when someone is a salaried employee? It is very important to understand various factors while calculating taxable income which will help us to calculate income tax. Many other queries will be solved in this article – how to calculate income tax for salaried, investment options available to save income tax, can you opt for new tax regime in next financial year, etc.
For salaried employees, we first calculate taxable income by segregating the various deductions such as EPF (Employee provident fund), NPS contribution from employer, HRA deduction and other investment options used by us from our income, in case we are opting for old tax regime. If we are opting for new tax regime, we won’t be able to claim deductions to save income tax so our entire gross income becomes our taxable income.
We will also see whether we should choose Old Tax regime or New Tax regime in case of salaried employee and which one will be beneficial.
Note: You’ll find income tax excel calculator at the bottom of this article
How to Calculate Income Tax on Salary Video
Above video helps you to understand every point you should know while calculating your income tax if you are salaried. We have taken a payslip example to understand the process of calculating income tax and what are the different considerations while doing so.
Old Tax Regime vs New Tax Regime
Let us first start with knowing the various Tax Slabs for Old Tax regime and New Tax regime.
Tax Slab Rates for people below 60 years:
As seen above, for FY 2021-22, there are 2 slab rates based on Old and New Tax Regime.
Old tax rates are greater compared to New Tax rates. But with New tax rates, you won’t be able to claim any deductions available to reduce your taxable income if you want to save income tax.
Further, New Tax rates have 7 slabs under it based on the income bracket you belong to, whereas, old tax rates have 4 slabs based on your income bracket.
In case you are calculating your income tax for the first time, let’s understand how these tax rates work. Let’s say your income is Rs. 11 Lacs in FY 2021-22. This does not mean you pay 30% on entire Rs. 11 Lacs of your income. Assuming that we are not considering any deductions in this case apart from Standard Deduction = Rs. 50,000 and your taxable income is Rs. 11 Lacs:
Old Tax Regime
(with Standard deduction = Rs. 50,000, Taxable Income = Rs. 10.5 Lacs)
- You won’t pay any tax on income up to Rs. 2.5 Lacs
- Between Rs. 2.5 Lacs to Rs. 5 Lacs, 5% Tax is applicable = Rs. 12,500 (5% on Rs. 2.5 Lacs difference)
- Between Rs. 5 Lacs to Rs. 10 Lacs, 20% Tax is applicable = Rs. 1,00,000 (20% on Rs. 5 Lacs difference)
- Between Rs. 10 Lacs to Rs. 10.5 Lacs, 30% Tax is applicable = Rs. 15,000 (30% on Rs. 50,000 difference)
- After adding above taxes = Rs. 1,27,500, 4% cess is applicable which is Rs. 5100
- You total income tax = Rs. 1,32,600 considering taxable income of Rs. 10.5 Lacs after deducting standard deduction = Rs. 50,000
New Tax Regime
(without Standard Deduction = Rs. 50,000, Taxable Income = Rs. 11 Lacs)
- In this case your total income is your taxable income = Rs. 11 Lacs
- No standard deduction will be applicable in this case
- You won’t pay any tax on income up to Rs. 2.5 Lacs
- Between Rs. 2.5 Lacs to Rs. 5 Lacs, 5% Tax is applicable = Rs. 12,500 (5% on Rs. 2.5 Lacs difference)
- Between Rs. 5 Lacs to Rs. 7.5 Lacs, 10% Tax is applicable = Rs. 25,000 (10% on Rs. 2.5 Lacs difference)
- Between Rs. 7.5 Lacs to Rs. 10 Lacs, 15% Tax is applicable = Rs. 37,500 (15% on Rs. 2.5 Lacs difference)
- Between Rs. 10 Lacs to Rs. 11 Lacs, 20% Tax is applicable = Rs. 20,000 (20% on Rs. 1 Lac difference)
- After adding above taxes = Rs. 95,000, 4% cess is applicable which is Rs. 3800
- You total income tax = Rs. 98,800 considering taxable income of Rs. 11 Lacs
As seen above, you pay high income tax with income = Rs. 11 Lacs and if you opt for Old Tax Regime. This is because we have not considered any investment options for deductions to save our income tax. How much income tax can be saved with Old Tax Regime depends on the investments we can make.
Below is the screenshot of above calculations in Excel:
Note: Under investments, we have mentioned Rs. 50,000 as standard deduction. This amount is applicable in Old Tax Regime but not in New Tax Regime.
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How to calculate Taxable Income
Since now you have understood how income tax calculation works in both Tax regime, it is now time to understand how to calculate taxable income.
For Old Tax regime, as we saw above, the entire income you earn is not taxable, since you are allowed to make required investments to be claimed so that you can save income tax. These investment options can be claimed only in old tax regime and not in new tax regime.
Now what are these deductions? Below are some of them:
- EPF – Every month, EPF (Employee Provident Fund) amount is deducted from salary. This amount can be claimed under section 80C and appropriate amount can be deducted from our total income to reach taxable income
- NPS – In case your employer contributes in NPS on your behalf, you can claim this under Section 80CCD to reach your taxable income
- Section 80C – This includes various options including Life insurance, 5 year fixed deposits, ELSS (Equity linked saving scheme), Home loan EMI payments, PPF (Public Provident Fund), etc.
- HRA – House Rent Allowance. If you notice your payslip is having an entry of HRA allowance. This is the allowance you get to pay for rented accommodation you stay in. So if you actually stay on rent, you can claim this HRA allowance to reduce taxable income so that your income tax is saved!
- Section 24 – In case you have taken home loan, the home loan interest amount you pay can be claimed under section 24 to save income tax
So these are some of the deduction options available to save income tax. Watch below video to know more:
Example Salary – Rs. 5 Lacs
Let us now understand how Old and New Tax regime calculates income tax on various income starting from Rs. 5 Lacs in a financial year. Below are the numbers in action with standard deduction applied in investments:
As seen above, you get tax rebate under section 87A, that cancels the income tax and makes your effective income tax = Rs. 0 in both old and new tax regime.
Note: Tax Rebate 87A is applicable when your taxable income is less than or equal to Rs. 5 Lacs.
Example Salary – Rs. 10 Lacs
Below is the screenshot if income – Rs. 10 Lacs with standard deduction applied in investments:
As seen above, you pay less income tax with New Tax regime. Here we have not considered any other deductions apart from standard deduction.
But what if we consider Rs. 1.5 Lacs deduction under section 80C and Rs. 50,000 under section 80CCD(1B) in NPS, which makes total investments = Rs. 2.5 Lacs with standard deduction? Let’ see how the stats looks like:
As seen above, after making required investments, we pay less income tax with old tax regime. This proves that it is very important to check if after making investments, how much tax we will be paying with Old or New Tax regime.
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Choose between Old or New Tax Regime
The most important question is whether to choose Old Tax regime or New Tax regime while calculating income tax?
The simple answer is to use the excel calculator I have provided in order to check income tax using Old and New regime based on your estimated yearly income and investments you are planning to make. This will help you to know which tax regime will help you to pay less income tax. You can also use this instant income tax calculator I have made for you to check your income tax
Conclusion
As seen in examples and video above, it is very important to analyze your income tax based on old or new tax regime if you are a salaried employee. Based on your yearly income and investments, you can reach an estimate of income tax and choose whether you should opt for old tax regime or new tax regime.
Up to a certain limit, old tax regime is beneficial if you are making investments to save income tax. And after this cut off limit, new tax regime will be beneficial since it has reduced tax slab rates. It entirely depends on each individual’s income and investments that they make to choose between Old or new tax regime.
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