Income Tax Calculation: The government has given taxpayers the option to choose between two income tax regimes: the old regime and the new regime. Each regime has different tax slabs, rules and benefits. So, people can choose the option according to their financial needs. Here we are presenting you the necessary information to assess income tax under both the regimes
Income Tax Calculation: The government has given taxpayers the option to choose between two income tax regimes: the old regime and the new regime. Each regime has different tax slabs, rules and benefits. So, people can choose the option according to their financial needs. Here we are presenting you the necessary information to assess income tax under both the regimes.
Understand your tax slab
The new tax regime has a simpler system and lower tax rates, but the provision of exemptions is minimal. Under this, exemption is available under standard deduction and to avail this benefit, taxpayers do not need to submit proof of investment or make any additional disclosure.
Tax slabs under this regime:
Under this regime, exemption of Rs 75,000 is available through standard deduction and this is a big benefit. On the other hand, the old tax regime has higher tax rates, but taxpayers get the facility to claim many types of exemptions and deductions.
Slabs in the old regime:
Apart from this, taxpayers in the old regime can reduce their tax amount to zero by claiming a deduction of Rs 12,500 on income up to Rs 5 lakh under section 87A.
How to calculate your income tax?
Step 1: Calculate your gross income
The first step towards calculating your income tax is to determine your gross income. Gross income is the income before applying any kind of tax or exemption. It includes:
- Salary components: This includes your house rent allowance (HRA), leave travel allowance (LTA) and any special allowances, such as reimbursements or food coupons.
- Other sources of income: Such as interest earned from savings accounts, rental income from properties or any freelance earnings.
To make things easier for taxpayers, the Income Tax Act 1961 has divided the three different sources of income into five components.
Exemptions under HRA
If you live in a rented house and your salary also includes HRA, then a part of it can be exempted from tax. The amount of exemption will be the lowest of:
1. The amount obtained by deducting 10% of your basic salary from the rent paid.
2. HRA provided by the company
3. 50% of basic salary (for metro cities) or 40% (for non-metro cities)
For example:
– Basic monthly salary: Rs 50,000 per month.
– Rent paid: Rs 20,000 per month.
– HRA received: Rs 15,000 per month.
Calculation:
- Actual rent paid- 10% of basic salary: 20,000-5,000=Rs 15,000
- HR paid: Rs 15,000
- 50% of basic salary (metro cities): Rs 25,000
- HRA exemption will be Rs 15,000, as it is the lowest of the three.
Step 2: Subtract exemptions and deductions
If you have assessed the gross income, the next step is to apply the eligible exemptions and deductions.
Standard Deduction
– Old regime: A standard deduction of Rs 50,000 is available.
– New regime: A standard deduction of Rs 75,000 is available.
Exemptions under Section 80C
You can reduce your taxable income by up to Rs 1.5 lakh through investments and payments under Section 80C. If you have opted for the old tax regime, you can avail the exemption under 80C. However, those who have opted for the new tax regime will not be able to avail this deduction.
Step 3: Assess Taxable Income
The income that remains after deducting all exemptions and deductions from your gross income is called taxable income. For example, if your gross income is Rs 10 lakh and your total exemptions are Rs 2 lakh, your taxable income will be Rs 8 lakh.
Step 4: Apply for tax slab
- Based on your taxable income and choice of tax regime, you can calculate your tax liability by applying the relevant tax slab:
- Under the new regime, your taxable income of Rs 3 lakh will be tax-free, while the next Rs 7 lakh will be taxed at 5 per cent.
- Under the old regime, this varies according to various exemptions and deductions.
Step 5: Add cess and surcharge
Finally, your tax liability is subject to cess and surcharge. Surcharge is applicable for those whose income is more than Rs 50 lakh. It is not applicable on the total income but on the outstanding tax amount. On the other hand, cess is a kind of levy and is levied on income tax to raise funds for purposes like health and education.
