How to calculate income tax on salary?

What is an Income Tax Calculator?

In India, if you earn income in a financial year and the income exceeds the minimum threshold limit specified by the income tax department, you are required to pay income tax on the income earned. Paying income tax is a legal obligation and a civic responsibility mandated by various acts like the Income Tax Act . There are specified income tax slabs and rates, and you have to pay tax based on the total income earned in a year.

There is a detailed process to calculate income tax. The process includes various steps. Small errors can lead to incorrect tax calculations. To make things simpler, you can use the income tax calculator to calculate income tax.

An Income Tax Calculator is a tool designed to help you calculate income tax based on your income. It’s a tool that can be used by individuals, Hindu Undivided Families (HUFs), businesses, cooperative societies, trusts, and other entities to ensure they comply with the income tax rules.

The Income Tax Calculator helps you easily determine your taxable income and the tax liability for the given financial year. For example, for FY 2025-26, you just need to enter basic details such as your age, residential status, income, investments in tax-saving instruments, and income from other sources. Then, after you choose the tax regime under which you want to file returns, the calculator will calculate income tax and show you the tax liability.
 

How to Calculate Income Tax for Salaried Individuals

Here’s a step-by-step process on how to calculate income tax on salary –
 

Step 1: Assess Your Gross Salary

The first step is to find your gross salary income. Gross salary is the total salary you receive from the employer, without deducting any taxes, deductions, or exemptions.
 

Step 2: Calculate Your Gross Total Income

If, besides the salary income, you have other sources of income, take them into your calculation to find the gross total income. For instance, if you have investments and you have earned interest or dividends from them, they would be included in your gross total income. Similarly, if you have let out a property and received rent or if you have sold a capital asset and made a profit, these would be clubbed in your total income. So, calculate your gross total income by factoring in income from the following sources -

• Income from salary
• Income from business or profession
• Income from capital gains
• Income from house property
• Income from other sources
   

Step 3: Factor in Standard Deduction and Applicable Exemptions

Once you know the gross total income, the next step is to factor in the standard deduction and applicable exemptions from your salary.

The standard deduction is available to all salaried individuals. If you choose the old tax regime, you can claim a standard deduction of ₹50,000, while under the new regime, the limit is ₹75,000¹. Depending on the tax regime you choose, deduct the standard deduction from your salary.

Furthermore, check the components of your salary income to find out which are exempt from tax. For instance, the old tax regime allows tax exemptions for House Rent Allowance (HRA), Leave Travel Allowance (LTA), food allowance, etc². Under the new regime, you can claim exemptions on perquisites for official purposes, employer’s contribution to the National Pension System, etc.
 

Step 4: Account for Eligible Deductions

Again, depending on the tax regime chosen, you can claim eligible deductions to reduce your taxable income further. For instance, under the Old Tax Regime, you can claim deductions under Section 80C, Section 80D, etc.
 

Step 5: Arrive at Your Taxable Income

After deducting the deductions and exemptions from the gross total income, you would be left with the net taxable income. This will be the income on which the tax calculation will be done.
 

Step 6: Apply the Relevant Income Tax Slab

Depending on the tax regime that you choose, apply the income tax slab aligning with your income level and find your tax liability.
 

Step 7: Include Rebate, Cess, and Surcharge If Applicable

Tax rebates are allowed under both the old and new tax regimes. Check if you are eligible for tax rebates, the rebate limits and claim the rebates to minimise your tax liability.

However, if you are not eligible for a rebate, check if you qualify for a cess and surcharge. If you are, factor them in and add them to the tax liability to find the total tax payable.
 

Types of Income Considered in Tax Calculation

Here are the heads of income explained to understand how to calculate income tax for a salaried individual -
 

1. Income from salary

   For salary tax calculation, there are various components such as:

   • Basic salary
   • HRA
   • Special Allowance
   • Transport Allowance
   • Any other allowance.

   Certain salary components, such as telephone bill reimbursements and leave travel allowances, are tax-exempt. If you receive HRA and live in rented accommodation, you can claim an exemption on the HRA amount. Use an HRA Calculator to determine the exempt portion when you calculate income tax.
   
   

2. Income from House Property:

   Income from house property or land is taxable under this head. It includes rental income from properties you own. There are three categories:

   • Self-Occupied Property
   • Let-Out Property
   • Deemed Let-Out Property
     
     

3. Income from Capital Gains:

   Capital gains arise when you sell or transfer assets like real estate, stocks, mutual funds, gold, etc. These gains are classified as:

   • Short-term Capital Gains
   • Long-term Capital Gains

   Each type of gain has different tax rates based on how long the asset was held.
    

4. Income from Business Profits or Profession:

   Income from any business or profession is taxable under this head. You can deduct your business expenses to determine the taxable income. This includes:

   • Profits from selling a specific license
   • Profit earned by an individual in a given assessment year
   • Profit earned by an organisation from its operations
   • Cash received from exporting under a government scheme
   • Benefits received by a business
   • Earnings, bonuses, or salary received by an individual through a partnership with a firm.
      

5. Income from Other Sources:

   This category covers any income not mentioned in the other heads, as per Section 56(2) of the Income Tax Act. It includes:

   • Dividends
   • Interest income
   • Rent on plant and machinery
   • Lottery, rewards from sports, etc.
      

Income Tax Slabs for FY 2025-26: Old vs New Tax Regime

The income tax slabs depend on the regime that you choose for salary tax calculation. Here are the income tax slabs for FY 2025-26 for both the old and the new tax regimes² –
 

Old tax regime – For individuals aged below 60 years

For individuals aged 60 years and above but less than 80 years

For very senior citizens aged 80 years and above

New tax regime – A single tax slab is applicable for individuals of all ages

Common Tax Deductions and Exemptions for Salaried Individuals

There are common income tax deductions and exemptions that salaried individuals can claim from salary tax calculation under different regimes. The exemptions available when calculating income tax are as follows² –

Components of Salary for Income Tax Calculation

There are different components of salary income, and each has its tax implications when you calculate income tax on salary. Some of the common salary components and their tax implications are as follows –

Benefits of Income Tax Calculator

Using an online Income Tax Calculator provides several advantages, including:

• Accuracy

  The Income Tax Calculator ensures precise tax calculations, eliminating manual errors.

• Quick and Simple

  Calculate your tax liability in seconds, anytime and anywhere.

• User-Friendly

  Easily enter your income and deductions to determine your tax liability.

• Better Financial Management

  Knowing your tax liability in advance helps in smart financial planning and tax-saving investments.

  An online income tax calculator ensures accuracy and helps you explore deductions and exemptions to lower your tax liability.
   

Key takeaways

• Salaried employees are required to pay tax on their salary income
• Besides salary income, you should also consider other income that you earn from house property, business/profession, capital gains, or other sources
• You can claim eligible exemptions and deductions to bring down your tax liability
• The income tax calculator helps you find the applicable tax payable on your total income, depending on the regime that you choose
• The calculator is quick and offers instant results for efficient tax filing.
   

Conclusion

Calculating income tax for salaried individuals is simple if you track your income, deductions, and exemptions accurately. Using an income tax calculator can make this easier. Stay informed about income tax slabs and deductions to plan your finances better and avoid surprises during tax season.

FAQs

1. What is an Income Tax Calculator?

   An Income Tax Calculator is a tool that helps individuals calculate their tax liability based on their income, exemptions, deductions, and applicable income tax slabs. It simplifies the process of determining how much tax you need to pay.

2. How do I use the Income Tax Calculator?

   To use the calculator, visit the e-filing portal, select "Income and Tax Calculator," and enter details like your income, age, residential status, and applicable deductions. The tool will then calculate your tax liability for the given financial year.

3. What components of salary are included in income tax calculations?

   Income from salary includes basic salary, HRA, special allowances, transport allowance, and other allowances. Some components, like telephone bill reimbursements and leave travel allowances, are tax-exempt, and HRA exemptions can be calculated using an HRA calculator.

4. How is income from house property taxed?

   Income from house property includes rental income from self-occupied, let-out, or deemed let-out properties. This income is taxable and should be reported under the "Income from House Property" head.

5. What is the difference between short-term and long-term capital gains?

   Capital gains arise when you sell assets like real estate, stocks, or gold. Short-term capital gains are taxed at higher rates if assets are sold within a short period, while long-term capital gains have lower tax rates when assets are held for a longer duration.

6. Why should I use an Income Tax Calculator?

   Using an Income Tax Calculator ensures accurate tax calculations, saves time, and helps with better financial planning by allowing you to explore exemptions and deductions to reduce your tax liability.

7. What is included in salary for income tax calculation?

   Your salary includes your basic pay, dearness allowance, HRA, LTA, special allowances and all other allowances and perquisites that your employer grants.

8. How do I calculate the HRA exemption for rented accommodation?

   HRA exemption is allowed as the lowest of the following³ –

   Actual HRA received

   Rent paid – 10% of the salary

   50% of the basic salary for all employees who live in metro cities and 40% of the basic pay for employees in non-metro cities.

9. Can I switch between old and new tax regimes every year?

   You can change your tax regime while filing your ITR⁴.

   Salaried individuals can switch between the old and new tax regimes every assessment year. From FY 2023-24, the new tax regime is the default option.

   Individuals with professional income or in any business can not switch between old and new tax regimes every year . Once they opt out of the new regime, they get only one chance to switch back to it. To move back to the old tax regime, they must file Form 10-IEA as per Income Tax rules.

10. How is taxable income calculated after deductions?

    The taxable income, after factoring in the eligible deductions and exemptions, is called the net taxable income. This income is subject to tax at applicable tax slab rates depending on the regime that you choose.

11. How often should I update my tax deductions during the financial year?

    It is better to update your tax deductions regularly so that your employer can deduct the right TDS and you get an optimised in-hand salary after TDS.