Income From Salary – How To Calculate Income Tax On Salary With Example (AY 2024-25)

You earn your salary every month and when it's time to file your ITR you are confused what includes and excludes salary? Here is our article on calculation of income from salary.

New Income Tax Regime Budget 2023 Onwards

As the filing season begins, salaried classes are in a frenzy about taxes they must shell out for the said financial year. It is important to understand your tax slab and what each of your salary breakup components means. This can help you figure out how to save on taxes. If you want to understand your salary components or want to learn how you can save tax on your salary income, this guide is for you.

SECTION I – Understanding Your Payslip

Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions of your salary, hence the name. For instance, HRA is defined as a percentage (as per the company’s discretion) of this basic salary. Your PF is deducted at 12% of your basic salary. It is usually a large portion of your total salary.

House Rent Allowance (HRA)

Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income tax laws have prescribed a method for computing the HRA that can be claimed as an exemption.

Read more about how to claim HRA exemption.

Also, do note that if you receive HRA and don’t live on rent your HRA shall be fully taxable.

Case Study: Malavika works at an MNC in Bangalore. Her company provides her with a house rent allowance (HRA). But she doesn’t live in rented accommodation as she lives with her parents.

How can Malavika make use of this allowance?

Malavika can pay rent to her parents and claim the allowance provided they own the place they currently live in. All she has to do is enter into a rental agreement with her parents and transfer money to them every month. This way Malavika can make a nice gesture and give back to her parents, and two, save some taxes. But remember, Malavika’s parents will have to show the rent she paid in their income tax returns.

Leave Travel Allowance

Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

Read more about how to claim this exemption.

Bonus

The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

Employee Contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative by the Government of India. Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward the employee’s pension and provident fund. As per the Union Budget 2023, the current EPF interest rate remains unchanged at 8.10%. However, the TDS rate for taxable EPF withdrawals has been reduced to 20% from 30% for non-PAN holders. This is a retirement benefit that companies with over 20 employees must provide as per the EPF Act, 1952.

Standard Deduction

Standard Deduction was reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. The employee can now claim a flat Rs.50,000 (Prior to Budget 2019, it was Rs.40,000) deduction from the total income, thereby reducing the tax outgo.

In the recent Union Budget 2023-24, a standard deduction of Rs.50,000 was introduced under the new tax regime, which was previously available only under the old tax regime.

Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.

SECTION II- Difference between take Home Salary and CTC

Your job may entitle you to some benefits in the form of food coupons or a cab service apart from your salary. The total cost to the company is the sum of all the benefits offered plus your salary.

Below is an example of components of your CTC that is on your offer letter.

This is how your payslip will look for the CTC mentioned above.

Broadly your CTC will include:

a. Salary received each month.

b. Retirement benefits such as PF and gratuity.

c. Non-monetary benefits such as an office cab service, medical insurance paid for by the company, free meals at the office, a phone provided to you and bills reimbursed by your company.

Your take-home salary will include:

a. Gross salary received each month.

b. Minus: Provident fund deduction, Medical insurance deduction

c. Minus: Income taxes payable (calculated after considering Section 80 deductions).

SECTION III – Retirement Benefits

Exemption of Leave Encashment

Check with your employer about their leave encashment policy. Some employers allow you to carry forward some amount of leave days and allow you to encash them, while others prefer that you finish using them in the same year itself. The amount received as compensation for leave days accumulated is referred to as leave encashment, and it is taxable as salary.

Exemption of leave encashment from tax:

It is fully exempt for Central and State government employees. For non-government employees, the least of the following three is exempt.

a. 10 months average salary preceding retirement or resignation (where average salary includes basic and DA and excludes perquisites and allowances).

b. Leave encashment received (this is further subject to a limit of Rs 3,00,000 for retirements after 02.04.1998).

c. Amount equal to salary for the leave earned (where leave earned should not exceed 30 days for every year of service)

The amount chargeable to tax shall be the total leave encashment received minus the exemption calculated above. This is added to your income from your salary.

Relief Under Section 89(1)

You are allowed tax relief under Section 89(1) when you have received a portion of your salary in arrears or in advance or have received a family pension in arrears.

Calculate the Tax Relief Yourself

a. Calculate the tax payable on the total income, including additional salary in the year it is received.

b. Calculate the tax payable on the total income, excluding additional salary in the year it is received

c. Calculate the difference between Step 1 and Step 2

d. Calculate the tax payable on the total income of the year to which the arrears relate, excluding arrears.

e. Calculate the tax payable on the total income of the year to which the arrears relate, including arrears

f. Calculate the difference between Step 4 and Step 5

g. The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note:  The amount at Step 6 is more than the amount at Step 3, no relief shall be allowed.

Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received on voluntary retirement or separation is exempt from tax as per Section 10(10C). However, the following conditions must be fulfilled

a. Compensation received is towards voluntary retirement or separation.

b. Maximum compensation received does not exceed Rs 5,00,000.

c. The recipient is an employee of an authority established under the Central or State Act, local authority, university, IIT, state government, or central government, notified institute of management, or notified institute of importance throughout India or any state, PSU, company, or cooperative society.

d. The receipts comply with Rule 2BA.

No exemption can be claimed under this section for the same AY or any other if relief under Section 89 has been taken by an employee for compensation of voluntary retirement or separation or termination of services.

Note: Exemption can only be claimed in the assessment year the compensation is received.

Pension

Pension is taxable under the head salaries in the income tax return. Pension is paid out periodically monthly usually. You may also choose to take a pension as a lump sum (also called a commuted pension) instead of a periodical payment. At the time of retirement, you may choose to receive a certain percentage of your pension in advance.

Such pension received in advance is called commuted pension. E.g., At the age of 60, you decide to receive in advance 10% of your monthly pension for the next 10 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, 10% of 10000x12x10 = 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70, and post 70 years of age, you will be paid your full pension of Rs 10,000.

Uncommuted pension or any periodical payment of pension is fully taxable as salary. In the above case, Rs 9,000 received by you is fully taxable. Rs 10,000 starting at the age of 70 years is fully taxable as well.

Exemption on Commuted Pension 

 Commuted pension or lump sum received may be exempt in certain cases. For a government employee, a commuted pension is fully exempt. Uncommuted pension or any periodical payment of pension is fully taxable as salary.

In the above case, Rs 9,000 received by you is fully taxable  Rs 10,000 starting at the age of 70 years is fully taxable as well. For a non-government employee, it is partially exempt.

If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received if 100% of the pension was commuted is exempt from the commuted pension, and the remaining is taxed as salary. 

If only the pension is received, gratuity is not received, then ½ of the amount of pension that would have been received if 100% of the pension was commuted is exempt.

Pension received by a family member, though is taxed under ‘Income from other sources‘ in the income tax return. If this pension is commuted or is a lump sum payment, it is not taxable. An uncommuted pension received by a family member is exempt to a certain extent. Rs 15,000 or 1/3rd of the uncommuted pension received – whichever is less is exempt from tax. Pension that is received from UNO by its employees or their families is exempt from tax. Pension received by family members of the Armed Forces is also exempt.

Gratuity

Gratuity is a retirement benefit that employers provide for their employees. The employee is entitled to receive gratuity when he completes five years of service at that company. It is, however, only paid on retirement or resignation. Gratuity received on retirement or death by a central, state or local government employee is fully exempt from tax for the employee or his family. The tax treatment of your gratuity is different, depending on whether your employer is covered by the Payment of Gratuity Act. Check with your company about its status, and then proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the following three is tax-exempt.

• 15 days' salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months.
• Rs 20,00,000
• Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the least of the following three is tax-exempt.

• Half a month’s salary for each completed year of service. While calculating completed years, any fraction of a year shall be ignored.

For example – if you have worked in an organisation for 14 years and 9 months, the number of years of employment shall be considered to be 14 years. Here salary is taken as the average salary of the 10 months immediately before the month in which the person retires.

• Rs 20,00,000
• Gratuity actually received

SECTION IV – Basics of Income Tax

Income Chargeable to Tax

Your income is not equal to your salary. You could earn income from several other sources other than your salary income. Your total income, according to the income tax department, could be from house property, profit or loss from selling stocks or from interest on a savings account or on fixed deposits.

All these numbers get added up to become your gross income.

Tax Rates

Add up all your income from the heads listed above. This is your gross total income. From your gross total income, deductions under Section 80 are allowed to be claimed. The resulting number is the income on which you have to pay tax.

ClearTax’s app lets you determine your tax refund or dues for the year Download the app here.

Your tax is calculated as per the slabs mentioned below.

Income Tax Rates for taxpayers under 60 years of age for FY 2022-23 under old and new tax regimes:

Cess:

• For FY 2023-24 – Health and education cess is 4% of the sum of total income tax and surcharge

Basic Exemption limit for senior citizens (age of 60 years or more but up to 80 years) in the old regime

• For FY 2023-24 is Rs.3 lakh

Basic Exemption limit for super senior citizens (age of 80 years or more)

• For FY 2023-24 is Rs.5 lakh

Rohit’s total taxable income for FY 2023-24 is Rs 8,00,000 under the old tax regime. How will the tax slabs be applied to him?

Skip the steps and use our updated income tax calculator instead.

TDS on Salary

TDS is tax deducted at source. Your employer deducts a portion of your salary every month and pays it to the income tax department on your behalf. Based on your total salary for the whole year and your investments in tax-saving products, your employer determines how much TDS has to be deducted from your salary each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax payment. Your employer will provide you with a TDS certificate called Form 16 typically around June or July showing you how much tax was deducted each month.

Understand your Form 16 better here.

Your bank may also deduct tax at source when you earn interest from a fixed deposit. The bank deducts TDS at 10% on FDs usually. A 20% TDS is deducted when the bank does not have your PAN information.

Form 16

Form 16 is a TDS certificate. The income tax department mandates all employers to deduct TDS from their salary and deposit it with the government. The Form 16 certificate contains details about the salary you have earned during the year and the TDS amount deducted.

It has two parts – Part A with details about the employer and employee name, address, PAN and TAN details, and TDS deductions.

Part B- includes details of salary paid, other incomes, deductions allowed, and tax payable.

Did you know that Form 16 is all you need to e-file your income tax returns on ClearTax?

Form 26AS

Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is provided by the Income Tax Department. It shows details of tax deducted on your behalf by deductors, details on tax deposited by taxpayers, and tax refunds received in the financial year. This form can be accessed from the IT Department’s website.

Annual Information Statement (AIS)

AIS is a summary of all the financial transactions reported with the income tax department it includes information like

1. Income from Salary, Interest on SB/FD/RD
2. Capital gains on the sale of mutual funds or stocks
3. Sale of immovable property as reported by sub-registrar 
4. Purchase of FD, Mutual fund, stocks, Immovable property
5. Foreign remittance 
6. Cash deposits exceeding the limit of Rs. 10 lakhs in a year
7. Credit Card payments exceeding the limit of Rs. 10 lakhs in a year
8. Tax Payment details - Self-assessment tax, Advance tax
9. Tax Refund details

It is very important to verify the details in Form 26AS and AIS before you file your Income tax return. Any mismatch in AIS or Form 26AS against your ITR will lead to a notice.

Deductions

The lower your taxable income, the lower the taxes you ought to pay. So be sure to claim all the tax deductions and benefits that apply to you. Section 80C of the Income Tax Act can reduce your gross income by Rs 1.5 lakh. There are a bunch of other deductions under Section 80, such as 80D, 80E, 80GG, 80U etc., that reduce your tax liability.