How to Calculate Your Income Tax in India: Step-by-Step Guide

How to Calculate Your Income Tax. As a taxpayer in India, it’s crucial to understand how to calculate your income tax accurately. With the introduction of new tax regimes and changes in tax slabs, the process may seem daunting.

However, by following this step-by-step guide, you’ll be able to navigate the Indian income tax system with ease and ensure that you’re paying the correct amount of tax.

Also Read-Understanding Income Tax in India: A Comprehensive Guide

How to Calculate Your Income Tax.

Step 1: Determine Your Total Income.

The first step in calculating your income tax is to determine your total income from all sources during the financial year. This includes:

1. Salary income.
2. Income from house property.
3. Income from business or profession.
4. Capital gains.
5. Income from other sources (such as interest, dividends, etc.).

Add up all these sources of income to arrive at your gross total income.

Step 2: Claim Applicable Deductions and Exemptions.

Once you have your gross total income, you can reduce your taxable income by claiming applicable deductions and exemptions under various sections of the Income Tax Act. Some common deductions include:

1. Section 80C: Investments and expenses up to Rs. 1.5 lakh (e.g., PPF, EPF, life insurance premium, tuition fees)
2. Section 80D: Health insurance premium (up to Rs. 25,000 for self and family; additional Rs. 25,000 for senior citizen parents)
3. Section 80TTA: Interest earned on savings account (up to Rs. 10,000)
4. Section 24: Interest paid on home loan (up to Rs. 2 lakh for self-occupied property)

Subtract these deductions from your gross total income to determine your net taxable income.

Step 3: Choose Between the Old and New Tax Regimes.

From the financial year 2020-21 onwards, taxpayers have the option to choose between two tax regimes: the old tax regime and the new tax regime.

Old Tax Regime: Under the old tax regime, taxpayers can claim various deductions and exemptions to reduce their taxable income. However, the tax rates are higher compared to the new regime.

New Tax Regime: The new tax regime offers lower tax rates but does not allow most deductions and exemptions. Taxpayers opting for this regime can only claim a few specific deductions.

Compare the tax liability under both regimes and choose the one that results in a lower tax outgo.

Step 4: Determine Your Tax Slab and Calculate Tax.

Based on your net taxable income and the tax regime you’ve chosen, determine the tax slab applicable to you. For the financial year 2023-24 (Assessment Year 2024-25), the income tax slabs are as follows:

Old Tax Regime:

New Tax Regime:

Calculate your tax liability based on the applicable tax slab rates. For example, if your net taxable income under the new tax regime is Rs. 8 lakh, your tax calculation would be:

• First Rs. 3 lakh: Nil
• Next Rs. 3 lakh (Rs. 3 lakh to Rs. 6 lakh): 5% of Rs. 3 lakh = Rs. 15,000
• Remaining Rs. 2 lakh (Rs. 6 lakh to Rs. 8 lakh): 10% of Rs. 2 lakh = Rs. 20,000

Total tax liability = Rs. 15,000 + Rs. 20,000 = Rs. 35,000

Step 5: Add Applicable Surcharge and Cess.

If your net taxable income exceeds certain thresholds, you may be liable to pay a surcharge on your tax amount. The surcharge rates for the financial year 2023-24 are:

After adding the surcharge, if applicable, you must also add a 4% Health and Education Cess on the total tax amount (including surcharge).

Step 6: Deduct TDS and Advance Tax Paid.

From the total tax liability calculated in Step 5, deduct any Tax Deducted at Source (TDS) and advance tax paid during the financial year. TDS is the tax deducted by your employer or other sources of income, while advance tax is the tax you pay in installments if your estimated tax liability exceeds Rs. 10,000 in a financial year.

Step 7: Determine Your Tax Payable or Refundable.

After deducting TDS and advance tax paid, if there is any remaining tax liability, you must pay the balance amount before filing your income tax return. If the total TDS and advance tax paid exceed your total tax liability, you are entitled to a refund, which you can claim when filing your return.

Income Tax Deductions and Exemptions.

To reduce your taxable income and, consequently, your tax liability, it’s essential to understand the various deductions and exemptions available under the Income Tax Act. Here are some of the most common ones:

Section 80C Deductions.

Section 80C allows a deduction of up to Rs. 1.5 lakh for investments and expenses such as:

• Public Provident Fund (PPF)
• Equity Linked Savings Scheme (ELSS)
• National Savings Certificate (NSC)
• Life insurance premium
• Tuition fees for children
• Principal repayment of home loan
• Employee Provident Fund (EPF) contributions

Section 80D Deductions.

Section 80D provides a deduction for health insurance premiums paid for self, spouse, children, and parents. The deduction limits are:

• Rs. 25,000 for self, spouse, and children
• Additional Rs. 25,000 for senior citizen parents (aged 60 years or above)
• If both taxpayer and parents are senior citizens, the total deduction can be up to Rs. 1 lakh

Section 24(b).

• Interest on Home Loan: Up to ₹2,00,000 for self-occupied property.

Section 80E.

• Interest on Education Loan: For higher education of self, spouse, or children.

Section 80G.

• Donations to Charitable Institutions: Deductions vary from 50% to 100% of the donated amount.

Section 80TTA and 80TTB Deductions.

Section 80TTA allows a deduction of up to Rs. 10,000 for interest earned on savings accounts. For senior citizens, Section 80TTB provides a higher deduction limit of Rs. 50,000 for interest income from deposits (savings, fixed, and recurring deposits).

House Rent Allowance (HRA) Exemption.

Salaried individuals who receive HRA as part of their salary can claim an exemption for the same. The exemption is the lowest of:

1. Actual HRA received
2. 50% of basic salary + dearness allowance (for metro cities) or 40% (for non-metro cities)
3. Actual rent paid minus 10% of basic salary + dearness allowance

Standard Deduction for Salaried Employees.

Salaried employees and pensioners can claim a standard deduction of Rs. 50,000 from their gross salary income. This deduction is available irrespective of any investments or expenses incurred.

Income Tax Filing Process.

Once you have calculated your income tax liability, the next step is to file your income tax return (ITR). Here’s a brief overview of the ITR filing process:

1. Determine the appropriate ITR form based on your sources of income and tax regime chosen.
2. Gather all necessary documents, such as Form 16, investment proofs, bank statements, and TDS certificates.
3. Fill out the applicable ITR form, either online through the Income Tax Department’s e-filing portal or offline using the ITR utility software.
4. Verify the ITR using Digital Signature Certificate (DSC), Aadhaar-based OTP, or by sending a signed physical copy of ITR-V to the Central Processing Centre (CPC) in Bengaluru.
5. Upon successful verification, you will receive an acknowledgment from the Income Tax Department.

It’s crucial to file your ITR before the due date to avoid penalties and interest. For salaried individuals and those with income from other sources, the due date is usually July 31 of the assessment year.

Conclusion

Calculating your income tax in India may seem complex, but by following this step-by-step guide and understanding the available deductions and exemptions, you can ensure that you pay the correct amount of tax and avoid any penalties. Remember to keep track of your investments, expenses, and income throughout the financial year to make the tax filing process smoother.

As tax laws are subject to change every year, it’s essential to stay updated with the latest amendments and seek professional advice from a tax expert if needed. By being proactive and diligent in managing your taxes, you can contribute to the nation’s growth while ensuring your financial well-being.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.