Smart savings: Your guide to how to calculate income tax

Karan is a salaried individual and is eager to figure out the basics of income tax and save money this year. He's on a mission to understand the ins and outs of how to calculate income tax and find strategies for smart tax planning. In this intricate financial landscape, it's crucial for people like Karan to know the basics, discover possible deductions, and make informed tax-saving choices. 

Let us understand the basics of income tax, your salary and its components, tax saving investment options and how to calculate income tax so that you can save money on tax this year. 

What is income tax, and why is it important?

Income tax is a direct tax, which is levied directly on income and is usually calculated as a percentage of the taxable earnings. It is a crucial part of a country's finances, providing funds for government operations. It's a required payment based on what individuals and businesses earn, supporting public services and programs. Understanding the importance of income tax helps people see the link between their earnings and national development. The amount of income tax paid is directly proportional to one's salary, emphasising the connection between personal income and the overall economy. 

Salary components and their contribution towards taxable income
 

Before knowing how to calculate income tax, understand your salary components and their respective contributions toward taxable income. Here is a general overview - 

• Gross salary

It constitutes a fixed portion of your paycheck and serves as the guaranteed pay from your employer, exclusive of other salary perks. The basic salary is subject to taxation and should not be more than 40% of the total cost to the company. However, setting the basic salary too low may adversely affect the proportions of other salary components. The table below shows the latest income tax slabs for individuals under the old and new tax regime - 

Note - In the Interim Budget 2024, Finance Minister Nirmala Sithraman addressed that income tax rates and slabs will remain unchanged. 

• Allowances
  

• Dearness Allowance (DA) - A certain percentage of basic salary is paid to employees to mitigate economic uncertainties. Only government employees and pensioners are entitled to DA. Under the Income Tax Act, DA is fully taxable, and it must be declared when filing income tax returns.
• House Rent Allowance (HRA) - It is a portion of the salary provided to employees to cover rental expenses. This allowance offers tax advantages to employees, allowing them to claim exemptions for the amount spent on accommodation annually. Individuals staying on rent can seek a tax exemption, either partially or entirely, as per Section 10(13A) of the Income Tax Act.
• Standard deduction- In the Union Budget 2018, a standard deduction was introduced, replacing transport and medical allowance. The standard deduction is a uniform deduction of ₹ 50,000 from gross salary and is claimed as an exemption.
• Leave Travel Allowance (LTA) - Employers provide LTA to cover employees' travel expenses during leave. This amount is tax-exempt under Section 10(5) of the Income Tax Act, 1961. LTA applies to only domestic travel via air, railway, or public transport.

• Gratuity -
  
  

  Gratuity is a lump-sum benefit given to employees retiring from an organisation, exclusively granted to those completing five or more years of service. The gratuity amount expresses gratitude for the individual's services during their employment tenure. As per the Payment of Gratuity Act, 1972, the gratuity calculation equals 4.81% of the basic pay. Under Section 10(10) of the Income Tax Act, gratuity amounts lesser than ₹ 20 lakhs are exempted from tax. 

• Employee Provident Fund (EPF) - 
  
  

  The EPF is a savings scheme with monthly contributions from both employers and employees. A minimum of 12% of the employee’s basic salary is automatically deducted. Withdrawals are allowed a month after service cessation or upon retirement. EPF withdrawals are tax-free if the amount is withdrawn after five years of continuous service. 

• Perquisites - 
  
  

  Perquisites, also known as fringe benefits, are additional non-cash advantages that employees receive as a result of their official position. For instance, a personal-use car, rent-free accommodation, and premiums on personal accident policies. The monetary value of these benefits is added to the salary, subjecting the employee to taxation. As per the Finance Act of 2005, the government taxes perquisites at a rate of 30% on the total value of the provided fringe benefits.

Tax saving investment options to look out for
 

If you're looking to minimise your tax liability, explore these tax saving investment options to optimise your tax-planning strategy -
 

How to calculate income tax accurately?
 

Now that you have gained insights into various salary components and tax saving investment schemes, let us guide you on how to calculate income tax, ensuring you make informed decisions for better tax planning. Here is how to calculate income tax on salary -

 
How to file an Income Tax Return (ITR) accurately?
 

ITR is a form used to declare gross taxable income, deductions, exemptions, and taxes paid in a fiscal year. According to the Income Tax Act of 1961, individuals under sixty must file if their income is taxable or exceeds ₹ 5 lakhs. Filing ITR is mandatory for those who've paid advance tax, and it determines your net income tax liability based on applicable tax slabs.

After knowing how to calculate income tax, let us find out how to file an ITR accurately - 

• Document gathering -
  
  

  Collect Form 16, bank statements, investment proofs, and relevant income-related documents.

• Choose ITR form -
   

  Select the appropriate ITR form (ITR-1 to ITR-7) based on income sources and residential status.

• Calculate taxable income -
  
  

  Calculate total income, including salary, business, rental, and capital gains, deducting eligible exemptions.

• Fill ITR form -
  
  

  Accurately complete the selected ITR form with personal and income details, deductions, and tax payments.

• Submit ITR -
  
  

  Submit the filled ITR form online after ensuring all details are correct to avoid discrepancies.

Reduce your tax liability with these income tax rebates
 

A tax rebate is a refund granted when the taxes you've paid exceed your actual tax liability. For instance, if your tax liability is ₹ 15,000, but the bank remits ₹ 25,000 as Tax Deducted at Source (TDS) to the government on your behalf, you qualify for a tax rebate. Here are a few income tax rebates available in India - 

• Section 87A -
  
  

  Individuals with a total income not exceeding ₹ 5 lakhs are eligible for a rebate under Section 87A of the Income Tax Act. The rebate amount can go up to ₹ 12,500.

• Section 80C -
  
  

  Section 80C allows individuals to claim a rebate on investments in specified financial instruments such as EPF, PPF, NPS, ELSS, and life insurance premium payments. The maximum rebate permissible under this section is ₹ 1.5 lakhs.

• Section 80D -
  
  

  Under Section 80D, individuals can avail of a rebate on health insurance premiums paid for themselves, their spouses, children, and parents. The rebate amount varies based on the age of the insured and the coverage selected.

• Section 24(b) -
  
  

  It provides a rebate on the interest paid on home loan repayments. Individuals can claim a maximum rebate of ₹ 2 lakhs per financial year for the interest component.

• Section 80E -
  
  

  For those repaying education loans for higher studies, Section 80E allows a rebate on the interest paid. The entire interest amount can be claimed as a deduction for a maximum of eight years.

• Section 80G -
  
  

  Donations made to specified charitable organisations qualify for a rebate under Section 80G. The percentage of rebate varies depending on the organisation and is subject to certain limits.

Smart savings with strategised tax planning 
 

Knowing how to calculate income tax is crucial for salaried individuals. Understand your salary, explore deductions, and consider tax saving investment options. Take advantage of exemptions and allowances to reduce taxable income. File accurate returns and make the most of available rebates for effective tax planning. 

With the IDFC FIRST Bank Savings Account, you have the opportunity to earn an interest rate of up to 7% p.a. Additionally, you can benefit from deductions under Section 80TTA of the Income Tax Act, aiding in the reduction of your taxable income and ultimately lowering your tax liability. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.