How to Calculate Taxable Income on Your Salary FY 2025-26?

1. The income tax regulations allow individuals to derive income from five sources, viz. Income from Salary, Income from Business or Property, Income from Capital Gains, Income from House Property, and Income from Other Sources.
2. Each income derived by an individual must fall under one of the aforementioned categories.

Following is the procedure for the calculation of taxable income on salary:

1. Calculate Gross Salary
   1. Add up all the salary components, along with Form 16 for the previous fiscal year and add every emolument.
2. Deduct Non-taxable Portion of Allowances
   1. Subtract the non-taxable portion of partially taxable allowances, such as HRA and LTA. For HRA, use the formula provided by the Income Tax Department to determine the exemption amount. 
3. Deduct Professional Tax and Standard Deduction
   1. Subtract the professional tax and the standard deduction from your salary. The standard deduction for salaried individuals is Rs. 52,500.
4. Include other Income
   1. If you have any other sources of income, such as interest, fees, commission, rental income, or capital gains, add them to the total amount.

1. Calculate Gross Total Income
   1. The sum arrived at after step 4 is known as the gross total income.
2. Deduct Tax Deductions
   1. From the gross total income, deduct the eligible tax deductions, such as investments under Section 80C, 80D, etc.
3. Calculate Net Taxable Income
   1. The result after step 6 is your net taxable income. This is the amount on which you will be liable to pay income tax.

Once your net income has been calculated, the following tax slabs will be applicable:

For individuals who are under 60 years of age (Old Tax Regime)

For individuals who are under 60 years of age (New Tax Regime for FY 2023-24)

However, in addition to the tax slabs mentioned above, the Finance Minister of India, Nirmala Sitharaman has announced a new optional tax slab for individuals. The new income tax slab is an alternative and can be used instead of the existing system. The new tax slab can be summed up as follows:

New Income Tax Slabs for Individuals in FY 2024-25

Note: The tax slabs mentioned above are optional and can be used instead of the existing tax slabs. Individuals can also file their taxes on the basis of the previous income tax slabs.

Given below is an example of how income tax is calculated under the new regime (optional):

Note: The calculation in this table is based on the new optional tax regime which has been announced on 23 July 2024.

If an individual decides to file his or her taxes according to the new income tax regime, the following things are to be kept in mind:

1. An individual can claim deduction of up to Rs.75,000 from the earlier Rs.50,000.

That said, the calculation of the taxable income as per the new income tax regime will be very straight-forward and will be calculated as a direct percentage of the income earned by an individual.

Calculating Tax Deductions

The next step involves considering various deductions available under Chapter VI A of the Income Tax Act from your gross taxable income. For instance, section 80C allows deductions of up to Rs. 1.5 lakh against investments and expenses. This includes payments for:

1. LIC Premium
2. EPF and PPF Contributions
3. ELSS Investments
4. NPS Investments
5. Tax-saving FD Investments

1. Sukanya Samriddhi Yojana Investments
2. ULIP Investments
3. Approved Superannuation Fund Contributions
4. Tuition Fees for Colleges, Schools, etc.
5. Senior Citizen Saving Scheme Investments

1. Housing Loan Principal Repayments

Contributions to pension funds under section 80CCC and NPS under 80CCD (1) also fall under the Rs. 1.5 lakh deduction limit. There are other deductions as well:

1. Medical insurance premiums and medical expenditure under section 80D
2. Expenses on disabled dependents under section 80DD
3. Expenditures on specific diseases under section 80DDB

1. Expenditures on higher education-related under section 80E
2. Interest on Electric Vehicle Loan under section 80EEB
3. Donations under section 80G
4. Interest on Home Loans under sections 80EE and 80EEA

After making all the applicable deductions, you will arrive at your taxable income from your salary. The income tax rate will be based on the tax slab applicable for the assessment year. You can use a Tax Planning calculator to determine the amount of tax you need to pay based on your investments and income. You can conveniently ensure timely tax payments, as many banks simplify the process through Net Banking.

You can log in to your Net Banking account to pay various taxes. Please be mindful that deductions and tax rates may differ depending on the tax regime you select, either the existing tax regime or the new tax regime. For expert guidance on investment and tax-related matters, consult your financial advisor to maximise the benefits of available tax-saving opportunities.

What is Salary Income?

Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual salary.

Dictionary meaning: Usually a form of earning or profit, provided by an employer to his/her employee. This generally comes in the form of an incentive in addition to the regular pay. This amount of money, defined as salary is the right of an employee for rendering his/her services to the employer.

Meaning as per the guidelines of the Income Tax Department: Section 17 (2) of the Income Tax Act, 1961, defines salary as the worth of an accommodation that is free of rent, from an employer to an employee.

1. Salary includes:
   1. Basic Salary or the fixed component of salary as per the terms of employment.
   2. Fees, Commission and Bonus that the employee gets from the employer
   3. Allowances that the employer pays the employee to meet his personal expenses. Allowances are taxed either fully, partially or are exempt.
2. Fully taxable allowances are:
   1. Dearness allowance paid to the employees to meet expenses due to inflation.
   2. City Compensatory allowance paid to those who move to big metros like Mumbai, Delhi, Chennai, where the standard of living is higher.
   3. Overtime allowance paid to the employee who works over the prescribed hours.
   4. Deputation allowance and servant allowance.
3. Partly taxable allowances are:
   1. House Rent Allowance: If the employee stays in his own house then the allowance is fully taxable. The allowance exemption is the least of
   2. The actual house rent allowance
   3. If he pays additional rent above 10% of his salary
   4. If the rent is equal to 50% of his salary (metros) or 40% (other areas).
   5. Entertainment allowance (except for Central and State Government employees).
   6. Special allowances like uniform, travel, research allowance etc.
   7. Special allowance to meet personal expenses like childrens education allowance, children hostel allowance etc.
4. Fully exempt allowances are:
   1. Foreign allowance given to employees posted abroad.
   2. Allowances of High Court and Supreme Court Judges.
   3. United Nations Organisation employees allowances.
5. Perquisites are payments received by employees over their salaries. They are not reimbursement of expenses. Some perquisites are taxable for all employees, they are:
   1. Rent free accommodation
   2. Concession in accommodation rent
   3. Interest free loans
   4. Movable assets
   5. Club fee payments
   6. Educational expenses
   7. Insurance premium paid on behalf of employees
6. Retirement benefits are given to employees during their period of service or during retirement.
   1. Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the category of the employee.
   2. Gratuity is given as appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
   3. Leave salaries tax depends on the category of the employee. The employee may make use of the leave or encash it.
   4. Provident fund is contributed by both employee and employer on a monthly basis. At the retirement, employee gets the amount along with interest. Tax treatment is based on the type of provident fund maintained by the employer.

Are Allowances Fully Taxable?

Most often than not, salaried individuals are faced with the dilemma of determining which allowances will be taxable and which will not be taxable, and also consider the kind of implications that the tax liability might bring in. Companies and organizations often provide allowances to their employees that are of a specified nature or for a specific cause. The primary and the most important thing to do here is to check the nature of the allowance offered.

Salary Income Deductions

There are a handful of deductions that are allowed under salaried income. These vary in nature from perquisites and profits.

Earlier, under Section 16 of the Income Tax Act, 1961, a standard deduction was allowed to salaried professionals. However, it was discontinued from the assessment year 2005-06.

Allowance for Entertainment

A deduction of Rs.5000 is offered as an entertainment allowance while computing the gross salary of an individual. It is one of the primary elements that is taken into consideration while gross salary is calculated. However, this provision can only be enjoyed by Government officials.

Section 16(ii) of the Income Tax Act, 1961

According to Section 16(ii) of the Income Tax Act, if an employee is receiving an entertainment allowance, the amount will first be dished out along with the basic salary of the person. Thereafter, will it be considered for deduction. This particular allowance will occupy one-fifth of the person's salary and will be totally exclusive of other allowances and benefits.

Payment of Professional Tax by the employer: The Central and State Government levies a certain tax, known as professional tax, on individuals having salaried incomes, trades, employment and callings. This professional tax amount does not surpass Rs.2500 in a year.

According to Section 16(ii) of the Income Tax Act, 1961, a taxpayer has complete authority to claim a tax deduction with respect to the professional tax that he/she is paying to his/her employer. However, this deduction will only be allowed on the same year as the taxpayer pays the tax. An overdue professional tax cannot be considered for deduction, whatever the case may be.

How to Calculate an Employee's Net Pay?

Net Pay: The portion of money received by an employee after the total amount has been withheld for state and federal tax deduction is fundamentally what ''net pay'' stands for. Therefore, to put it in layman's terms, the amount of money that comes in an individual's paycheck is what net pay is.

Given below are the steps to calculate employee's net pay:

• Begin with your gross salary: Gross salary is essentially a salaried employee's total yearly pay divided by the number of periods.
• Federal Income Tax Deduction: The tax bracket under which the employee falls and his/her status of filing are the two elements that determine the withholding of the federal income tax of the employee.
• Local and State withholding deductions: Consider all the sources of your income because this part is a little tricky. Since each state operates by their own standards and norms, you may have to deduct income tax for multiple states (according to their rates), if you have income coming in from multiple states.
• FICA taxes are to be withheld
• Take into consideration any other deduction that you may be allowed before computing your total net salary.

Taxable Income for Salaried Employees

The amount of your income that will be subjected to Income Tax deductions is essentially what taxable income stands for. Although most of the incomes are taxed according to the tax bracket that the individual falls under, it is important to note that sometimes certain incomes are partially taxable or not taxable at all.

Allowances that are wholly taxable - Dearness allowance, city compensatory allowance (only concerns people moving to or living in metros like Delhi, Mumbai, Chennai and Kolkata), and OA (overtime allowance)

Allowances that are partially taxable - These include House Rent Allowance (HRA), other allowances and entertainment allowance.

Allowances that are tax-free - This category comprises of foreign allowances (concerning personnels operating from a different country altogether), allowances enjoyed by supreme and high court judges and so on.

Given below is an example of a structure of a salary to grasp a better understanding of taxable and non-taxable income.

Deductions on Income from Salary

The following deductions are available on the income from salary:

1. Entertainment tax is allowed as deductions for the State and Central Government employees. The amount is the least of either Rs.5,000, entertainment allowance received by the employee or 20% of the basic salary.
2. Professional Tax is the tax on employment which is deducted from the income every month. It is imposed at the state level for every salaried individual.

Please note that the standard deduction is not available for salary income from Assessment Year 2006-2007.

Computation of Net Salary of an Employee

For computing Total income from various sources, the incomes are classified into:

• Salaries
• Income or loss from property
• Profit and gain from business
• Income from capital gains
• Income from other sources

This gives you an aggregate income. All the eligible deductions, allowance and reliefs are calculated on each heads.

Gross Total Income= A+B+C+D+E

Total Taxable Income= Gross Total Income- Deductions allowed from income

Total Tax Payable= Tax on Total Income- Rebates and relief allowed under Income Tax Act.

What Kind of Income is Subject to Income Tax?

The Income Tax Act, 1961, has classified income into five heads. They are as follows:

1. Income from salary
2. Income from capital gains
3. Income from profession or business
4. Income from house property
5. Income from other sources