How to calculate Income Tax on Salary?

One more financial year is over and now all of us will think of taxation after the HR department gives the ultimatum to produce the investment proof next year! Actually, tax planning time is this, the beginning of the financial year.

How to calculate “Income Tax on Salary”? Is it so complicated that only a CA can do this?  Not at all. If you can spend some time, you can easily become an expert in this.

Income Tax on Salary – How to Calculate?

If Mr. A is having a CTC of Rs. 7 lakhs, don’t think that he has to pay tax for the full amount. Let us see the break-up of his CTC.

Basic Pay: Rs. 2,80,000

Special Pay: Rs. 2,01,400

HRA: Rs. 1,20,000

Medical: Rs. 15,000

LTA: Rs. 50,000

PF: Rs. 33,600

Please note that Rs. 33,600 is the company’s contribution to the Provident Fund, which is a retirement savings for him. He will get this only on retirement or in the case of an early exit. If he submits the Medical bill and claims Rs. 15,000, it is tax free. If he doesn’t submit the bills, this will be given to him after deducting the tax. Similarly, if he submits the bill for LTA and claims Rs. 15,000, it is tax free. But, if he is not claiming LTA, it will be given to him after deduction of tax.

How tax liability on HRA is calculated? Is HRA exempted from tax?

Mr. A is getting HRA of Rs. 1,20,000 annually and he is staying in a rented house in Delhi and pays a monthly rent of Rs. 15,000.

He will get certain amount as an exemption. The exemption is the least of the following 3:

1. Rent paid in excess of 10% of the Basic Salary
2. Actual HRA received
3. 40% of your Basic Pay, if you are staying in a non-metro city / 50%, if you are in a metro city

In our example, let us calculate all the above 3:

  Basic Pay = Rs. 2,80,000.  10% of it is Rs. 28,000;

Annual Rent paid = Rs. 15,000 x 12 = Rs. 1,80,000

1. Rent paid in excess of 10% of the Basic Salary: Rs. 1,80,000 – Rs. 28,000 = Rs. 1,52,000
2. Actual HRA received: Rs. 1,20,000
3. 50% of the Basic Pay: Rs. 1,40,000

Out of the above 3, the least is the actual HRA received. So, he will be eligible for an exemption of Rs. 1,20,000 on account of HRA. In this case, his full HRA is exempted. This may not be the case always.

In his case, if he claims LTA and Medical by submitting the bills, his taxable salary will be Rs. 2,80,000 + Rs. 2,01,400 = Rs. 4,81,400.

Now, let us see, how you can reduce your Tax liability

There are certain provisions in the Income Tax Act, which allows you to reduce your tax liability. We will discuss the important aspects here.

1.   Section 80C

You can deduct up to Rs. 1 lakh from your taxable income, if you have made certain savings/expenses listed below:

• Public Provident Fund
• Life Insurance Premium
• Employees’ Provident Fund
• National Savings Scheme (NSC)
• Equity Linked Savings Scheme (ELSS)
• 5-Year Fixed Deposits with Bank or Post Office
• Home Loan Principal Repayment
• Tuition Fees paid for Children’s Education (up to 2 children)

 2.   Section 80D

You can deduct up to Rs. 15,000 in a year for Health Insurance premium paid for a policy covering you and your immediate family. You can also claim up to Rs. 5,000/- for preventive health check-up within this Rs. 15,000 limit. You can claim another Rs. 15,000 for Health Insurance premium paid for your parents. This limit is Rs. 20,000, if either of your parents are senior citizens.

3.   Section 80DD

If you have spent on the maintenance of a handicapped dependant, you can claim tax benefits. This is eligible for amount spent on dependant spouse, children, parents, brothers and sisters. The extent of disability should be 40% to be eligible for this. You can claim this, if you have spent on treatment or on any benefit scheme for the benefit of the handicapped dependant like the specified scheme of LIC.

The amount of deduction is Rs. 50,000 irrespective of the actual amount spent. This limit is Rs. 1 lakh, if the percentage of disability is 80% or above.

4.   Section 80DDB

If you have spent on treatment of specified illnesses like Neurological disorder, Cancer, Renal failure etc, you will get tax benefit up to Rs. 40,000 in a year. For senior citizen, this limit is Rs. 60,000. This is available for treatment of self, dependant spouse, children, parents, brothers and sisters. Employer cannot give this exemption, so you have to file the return and demand refund of income tax.

5.   Section 80E

The interest paid on Education Loan taken for the higher education of self/spouse/children can be claimed as deduction. There is no upper limit in this deduction. You can claim the actual amount spent.

6.   Section 80G

You will get deduction in respect of donations made in the year. Depending on the type of institution to which the donation is made, you are eligible for 50% or 100% exemption for your donation. Please note that only donations to approved organisations will qualify for this.

 7.   Section 80U

If you are suffering from a permanent disability or mental retardation as specified in the Persons with Disabilities Act or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, you will be allowed a deduction of Rs. 50,000. In case of severe disability, the deduction is Rs.1 lakh.

8.   Section 24

You can deduct the interest paid on a Housing Loan. This is limited up to Rs. 1,50,000 for the self occupied house. If you go for a joint home loan with your spouse, then both of you can avail this deduction separately. The limit of Rs. 1.5 lakhs is applicable in case of self occupied house. In the case of a second house, you can claim the actual interest paid.

9.   Section 80CCG

If you are earning less than Rs. 12 lakhs and if you are a first time investor in equity, you can invest Rs. 50,000 in the approved shares and mutual funds and get deduction of 50% of the amount invested under Section 80CCG. This scheme is popularly called Rajiv Gandhi Equity Savings Scheme (RGESS).

Now, let us see the Income Tax slab rates for the Financial Year (FY 2013-14).

Now, let us calculate the Income Tax liability for Mr. A, whose CTC is Rs. 7 lakhs. He managed to get reimbursement of the LTA and Medical. He got exemption of Rs.  1,20,000 from HRA also. So, his taxable salary is Rs. 4,81,400/- for the FY 2013-14.

He paid an amount of Rs. 35,000 towards Life Insurance premium and another Rs. 12,000 as Health Insurance premium. He has invested Rs. 20,000 in ELSS Mutual Funds. His contribution to EPF is Rs. 33,600 for this FY. He is paying an annual interest of Rs. 30,000 towards an Educational Loan. He also paid Rs. 60,000 as interest towards a Home Loan, while Rs. 5,000 was repaid as Principal. Let us calculate his tax liability.

Gross taxable income: Rs. 4,81,400

Less:

Deductions under Section 80C:

1. Life Insurance Premium: Rs. 35,000
2. Investment in ELSS: Rs. 20,000
3. Contribution towards PF: Rs. 33,600
4. Principal repayment of Home Loan: Rs. 5000

Total Deductions under Section 80C: Rs. 93,600  

Deduction under Section 80E (Educational Loan Interest): Rs. 30,000

Deduction under Section 24 (Interest on Home Loan): Rs. 60,000

Deduction under Section 80D (Health Insurance Premium): Rs. 12,000

Total Deductions = Rs. 93,600 + Rs. 30,000 + Rs. 60,000 + Rs. 12,000 = Rs. 1,95,600.

Net Taxable Salary = Rs. 4,81,400 – Rs. 1,95,600 = Rs. 2,85,800

Though his CTC is Rs. 7 lakhs, he is liable to pay tax only on Rs. 2,85,800, after all permissible deductions.

Let us calculate his tax liability as per the tax slabs given above.  He comes under the lower slab of 10%.

Tax up to Rs. 2 Lakhs – Nil

Tax for Rs. 85,800 – 10% of the amount in excess of Rs. 2 Lakhs = 10% of Rs. 85,800 = Rs. 8,580.

He is eligible for the Rs. 2,000 tax credit announced in the budget for FY 2013-14. So, the tax is reduced to Rs. 6,580.

In addition to the above rates, there is a 2% Education cess and another 1% Higher Education cess, to be calculated on the tax. This comes to a total 3% on the tax of Rs. 6,580. This will work out to Rs. 197.

So, including the cess, the Income Tax liability of Mr. A for the FY 2012-13 is Rs. 6,777 (6580 + 197= 6777).

Now Mr. A is clear on how to calculate Income Tax on Salary. Why to pay for a CA this year? You can also master the art of how to calculate Income Tax on Salary.