How to calculate taxable income on salary?

When calculating your taxable income, there are five heads of income under which you have to classify your incomes.

They are –

1. Income from salary

2. Income from house property

3. Income from business or profession

4. Income from capital gains

5. Income from other sources

You can use an online income tax calculator to calculate the same, but you surely need to understand the components first. For salaried employees, their taxable income majorly consists of income from salary. When calculating your tax liability, you have to calculate the taxable income under all heads. When it comes to calculating income on salary, there might be some confusion because salary income consists of different components and the tax treatment of different components is different.

So, let’s understand how taxable income on salary is calculated, which an income tax calculator uses –

The details of your salary and its components would be available in your salary slip. Moreover, the TDS deducted by your employer would be furnished in Form 16. Collect all these documents to calculate the actual taxable liability on your salary.

Your salary income comprises mainly of the following –

1. The basic salary which is also called your basic wage

2. Fees, bonus or commission which you receive

3. Allowances paid by your employer

Allowances have a different tax treatment which is as follows –

1. Dearness Allowance, city compensatory allowance, overtime allowance, etc. are fully taxable

2. House Rent Allowance, uniform allowance, entertainment allowance, etc. are partly taxable

3. Foreign allowance, allowance paid to High Court and Supreme Court judges and UNO employees’ allowance are fully tax-free

Moreover, your employer might also offer you perquisites which are payments over and above your basic salary. These perquisites can also be taxable or tax-free in nature. Taxable perquisites include rent-free accommodation, interest-free loans, payment of club membership fees, education expenses, etc. Alternatively, leave travel concession, staff welfare schemes, payment of health insurance premiums are tax-free perquisites.

To calculate your taxable salary, whether manually or through an income tax calculator, you need to add up all the salary components that you receive from your employer. Then, claim deductions for the following tax-free allowances and perquisites –

1: HRA deductions If you live in a rented house, you would be able to claim HRA deduction. The maximum deduction which can be claimed would be lower of the following three –

Actual HRA which forms a part of the salary

Excess of rent paid over 10% of (Basic salary + Dearness Allowance)

50% of (Basic salary + Dearness Allowance)if you live in for metro city or 40% of (Basic salary + Dearness Allowance) for non-metro city

2: Leave Travel Allowance If you have taken a journey in India as a vacation then you can claim a deduction on the expenses incurred on travelling

3: Reimbursement of phone bills If your employer reimburses you for your phone bills you can submit those bills and claim tax exemption on such reimbursement

4: Professional tax The State Government charges a professional tax on your salary income up to a maximum of INR 2500. This professional tax is deducted by your employer and deposited with the Government. You can claim a full tax exemption on the professional tax that has been paid

5: Standard Deduction

You also avail a flat deduction of INR 50,000 from your salary income which is called a Standard Deduction. This deduction reduces your taxable salary income.

Once all these deductions and exemptions are claimed, you get the net taxable salary income which would be taxed. Let’s understand with the help of an example –

Example – Rahul lives in Delhi in a rented apartment where the rent is INR 40,000/month. His salary structure is as follows

His taxable salary income would be calculated as follows –

So, this is how you can calculate your taxable income.

You can also take the help of income tax calculators to calculate your income instantly. Online income tax calculators are available which make the whole process of calculation of taxable salary easy and convenient. You need to just feed your salary details and you would be able to calculate your taxable salary. So, find out what is your taxable salary so that you can assess your tax liability.