Tax Calculation under New & Old Regimes

1. How to Calculate Income Tax of a Salaried Employee??

The following are the steps to calculate the income tax on salary:

Calculate your Gross Income

The following are the steps to calculate the gross income:

1. The gross salary includes House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Special Allowance, such as mobile reimbursements and food coupons
2. Minus the exemptions from the salary component

1. HRA can be claimed only if you submit valid rent receipts as proof in case you live in a rented house
2. HRA is fully taxable if you stay your own accommodation or live with your parents
3. The lowest of the following amount is calculated as tax exemption under HRA:
   1. Actual rent paid less than 10 % of the basic monthly salary
   2. Employer provides the HRA
   3. If the taxpayer is living in a metro city, 50% of the basic salary
   4. If the taxpayer is living in a non-metro city, 40% of the basic salary

1. Add other income apar from HRA to calculate the gross income

Remove Deductions and Determine your Next Taxable Income

The following are the deduction that can be availed by the taxpayer by investing in various savings schemes:

1. Standard Deduction of Rs.50,000 can be availed by all without investing in any scheme for FY 2024-25. If you have opted for the new regime then you can claim a deduction of up to Rs.75,000 for FY 2025-26.
2. Some other tax deductions are applicable under Section 80C, such as:

1. Taxpayers can claim up to Rs.1.50 lakh on various investment
2. Investments applicable under Section 80C are EPF (Employees’ Provident Fund), Sukanya Smriddhi Yojana, ELSS (Equity Linked Savings Scheme), PPF (Public Provident Fund), Mutual Funds, etc.

Determine the Net Taxable Income

Depending on the applicable tax slab, you need to pay the tax on your total income which is determined by subtracting the eligible deductions from the gross taxable income.

The following is the tax rate for individual taxpayers less than 60 years old:

Note: 

1. The tax rate is nil for net income up to Rs.3 lakh for taxpayers above 60 years of age.
2. Tax rate is nil for net income up to Rs.5 lakh for taxpayers over 80 years of age.

Calculate the Taxes Imposed

Tax is calculated on your taxable income which is zero for the first Rs2.50 lakh and 5.00% for the next Rs.2.50 lakh. While the tax rates are 20% and 30% for the next Rs.5 lakh and above Rs.10 lakh, respectively.

Consolidate your Net Tax

If an individual is earning below a specified limit, then the government provides tax incentive in the form of tax rebate. Health and education cess of 4.00% can be added to your tax amount if total taxable income is above Rs.5 lakh. The surcharge amount added is 10% and 20% if the income falls between the range of Rs.50 lakh to Rs.1 crore and Rs.1 crore to Rs.2 crore, respectively.

Example:

A person X earns a total gross salary of Rs.15 lakh and the net salary comes to Rs.12.50 lakh after removing all the exemptions, such as standard deductions and HRA (House Rent Allowance).

Here is the tax calculation: 

Tax on amount Rs.5 lakh to Rs.9.85 lakh is 20% which is Rs.97,000.

2. How to Calculate Income Tax on Salary with an Example

1. The total of the basic wage, the HRA, the special allowance, the transport allowance, and any other benefits is income from salary. Your income may include tax-free benefits such leave travel expenses and phone bill reimbursement.
2. Renters who receive HRA are eligible to make an HRA exemption claim. By using our HRA Calculator, you can determine the HRA's exempt portion.

In addition to these exemptions, the 2018 budget also included a standard deduction of Rs. 40,000. This was raised to Rs 50,000 in the budget for 2019 and to Rs 50,000 more in the budget for 2023. During the Union Budget 2024, the maximum deduction one can claim if opted for New Regime is Rs.75,000.

A standard deduction of Rs 50,000 is also available in the event of a new administration. You won't be able to make use of these exemptions if you choose the new tax system.

Given below is an example of how tax calculation works under the New regime when compared to the old regime:

Example:1 (Assumptions)

Basis Salary: Rs.100,000 per month

HRA: Rs.50,000 per month

Special allowance: Rs.21,000 per month

Leave Travel Allowance: Rs.20,000  per year

Rent that is Paid: Rs.40,000 per month

In order to calculate income tax, the below-mentioned details must be included:

1. Salary.
2. Rental income or interest that is paid for a home loan.
3. Income from your profession, business, or freelancing.
4. Income that is generated from selling shares or a house.
5. Interest that is generated from a fixed deposit account, savings account, or bonds.

Under the new tax regime, several exemptions such as telephone bill reimbursement, investments made in savings instruments such as PPF, NPS, EPF, etc., and HRA are not available.

If you receive Rs.8,000 in interest from your savings account and Rs.12,000 in interest from your fixed deposit each year. To reduce your income tax, you can make several investments. Rs.50,000 invested in a PPF, Rs.20,000 in during the year.

If you then invested Rs.8,000 as LIC premium and Rs.12,000 has been paid as medical insurance, then following will be the tax deductions you will be eligible to enjoy. 

3. Calculation of Gross Taxable Income under New Regime

 The calculation of the gross taxable income under the new regime and the old regime are mentioned below:

This is how income tax will be calculated under New Regime for FY 2023-24

This is how income tax will be calculated under New Regime for FY 2024-25

4. Calculation of Gross Taxable Income under Old Regime

5. What are the Sources of Income?

As per the rules and regulations stated by the Income Tax Department of India, an individual is allowed, at all points of time, to have 5 sources namely:

1. Salary Income
2. Capital Gains
3. House Property Income
4. Business Income, and Income from other sources.

Generation of any kind of income will be taxable, provided you (the tax-assessee) categorises each income under the aforementioned sources.

Income from Salary

The Income Tax Department of India lists 5 sources of income under which each person can designate their income. One such source is your income from salary. You can make efficient use of your income tax calculator to evaluate the entire value.

Your income from salary can be calculated by using the TDS certificate, that is a part of Form 16. Note that, your employer is supposed to provide you with a Form 16. This can be achieved in the following ways:

1. Gather all your salary slips and the essential Form 16 of the ongoing financial year. Add up all your stipends and allowances (this includes your basic salary, TA, DA, HRA, DA on TA, reimbursements) that is listed in your payslip and the Form 16 (Part B). Once this is done, add your bonus.
2. The total value that you get after computing all this will be termed as your gross income.
3. Make the following deductions from your gross income - HRA exemption and allowance for transportation (the exemption limit is Rs.19200 p.a.)
4. The total result will act as your net income.

Income from Capital Gains

The nature and number of transactions usually determine the computation of income from capital gains. It can be attained in the following manner:

1. Calculate your long-term capital gains from your total sales of assets.
2. Calculate your short-term capital gains from the total sales of capital assets.
3. Deductions are to be claimed after this.

Income from House Property

Income from house property is that which the assessee receives every month in the form of rental payment. In case, the tax-assessee has the possession of only one house, and that too is self-occupied then also he has to compute his income through property.

Calculate the GAV (Gross Annual Value) of your rented house property in the following ways:

1. Take into consideration the Fair Market Value (FMV) and the valuation estimated by municipal authorities (Municipal Valuation). Take the amount that is higher in value and this shall be your expected rent.
2. Compare the rent you receive (the Actual Rent) with the aforementioned expected rent and you have your Gross Annual Value for the house.
3. You can compute the Net Annual Value (NAV) by deducting the already paid municipal taxes during the GAV year. Deduct the same from the NAV to comprehend the loss or income from your housing property. 30% of NAV - Interest paid annually on the loan amount (if taken to buy the said house

6. Steps for Income Tax Calculation

Step 1: First and foremost, ascertain your adjusted gross income.

Step 2: Thereafter, compute your federal taxable income and the consequent tax. This encompasses establishing your itemized deductions, calculating the said deductions and then finally subtracting them.

Step 3: Compute your final tax and exemptions by first calculating the gross exemptions that you are eligible for and your gross income tax for the financial year in question, then exclude any credits that you are eligible for.

There are a thousand different components in each of these steps. It is always advisable to conduct thorough research before one starts calculating his/her tax.

7. Exemption on Total Income Tax

1. Section 87A: For income below Rs.5 lakh, a tax exemption of up to Rs.12,500 is permissible.
2. Section 80CCD(1B): If you invest in the national pension system, then you can claim a tax exemption of up to Rs.2 lakh.
3. Section 80C: If you invest in any tax saver scheme, ULIP, PPF, national savings certificate, ELSS, etc. then you can claim a tax deduction of up to Rs.1.5 lakh on your interest income.

1. Section 80D: You can claim a tax exemption of up to Rs.20,000 on your medical insurance. If you are a senior citizen, then you can claim up to Rs.50,000.
2. Section 80E: 100% rebate on education loan for up to 8 years.
3. Section 80G: Any donation made to any charitable organisation is exempt from being taxed.
4. Section 80TTA and Section 80TTB: Interest accrued from savings account will be exempted from being taxed for amounts up to Rs.10,000. Senior citizens will not be required to pay any tax for amounts up to Rs.50,000.
5. Section 80GG: Income spent towards the payment of house rent is exempted from being taxed.