How to calculate income tax on salary with example
How to Calculate Income Tax on Salary: A Simple Guide
In this post, we will discuss what income tax is, the latest Budget 2025 updates, salary components, and how to calculate your income tax step by step with an example.
Let’s look at each section in detail:
What is Income Tax?
As per the Income Tax Act, 1961, every salaried person has to pay a part of their salary to the government as income tax. This is the tax we pay on the money we earn from our job. The Act includes many rules and sections that clearly explain how to calculate this tax, what deductions you can claim, and how much tax you need to pay in the end.
You can reduce your tax by claiming deductions under sections 80C to 80U. After using all the eligible deductions, the remaining amount is what you pay as income tax on your salary.
Budget 2025 Updates on Income Tax
The 2025 Budget brought some good news for taxpayers. Here are the main updates in simple words:
- Rebate increased: Earlier, you didn’t have to pay tax if your income was up to ₹7 lakh. Now, under the new regime, there’s no tax if you earn up to ₹12 lakh, thanks to the increased rebate of ₹60,000 (earlier it was ₹25,000).
- TDS on rent: If you’re paying rent, TDS will now be cut only if your rent is more than ₹50,000 per month (this limit was lower before).
- Senior citizens: The interest deduction limit for senior citizens has been doubled from ₹50,000 to ₹1 lakh. A good relief for retirees.
- TCS on foreign remittance: The limit under RBI’s LRS (Liberalised Remittance Scheme) has gone up from ₹7 lakh to ₹10 lakh. Plus, no TCS will be collected on education loans taken from approved financial institutions.
Slab Rates Under New and Old Regime
There are two types of income tax regimes in India now; old and new. The main difference between them is how the slab rates are applied.
Old Tax Regime:
In the old regime, tax slabs changed based on your age. There are 3 age groups:<
- Below 60 years
- Between 60 to 80 years (Senior Citizens)
- Above 80 years (Super Senior Citizens)
Here are the slab rates under the old system:
| Income Slab (in ₹) | Below 60 years | 60–80 years | 80+ years |
| Upto ₹2,50,000 | Nil | Nil | Nil |
| ₹2,50,001 – ₹3,00,000 | 5% | Nil | Nil |
| ₹3,00,001 – ₹5,00,000 | 5% | 5% | Nil |
| ₹5,00,001 – ₹10,00,000 | 20% | 20% | 20% |
| Above ₹10,00,000 | 30% | 30% | 30% |
New Tax Regime:
| Tax Slab | Applicable Tax Rate |
| Up to ₹4 Lakhs | Nil |
| ₹4 Lakhs – ₹8 Lakhs | 5% |
| ₹8 Lakhs – ₹12 Lakhs | 10% |
| ₹12 Lakhs – ₹16 Lakhs | 15% |
| ₹16 Lakhs – ₹20 Lakhs | 20% |
| ₹20 Lakhs – ₹24 Lakhs | 25% |
| Above ₹24 Lakhs< | 30% |
Major Components of Salary
1. Basic Salary
This is the main part of your salary. Other things like PF, pension, and gratuity are calculated based on this. It usually stays the same every month and forms the base of your pay.
2. House Rent Allowance (HRA)
HRA helps you manage your house rent. A part of it can be tax-free, depending on how much rent you pay and where you live.
3. Dearness Allowance (DA)
This allowance is mainly for government employees. It helps deal with the rising cost of living due to inflation. It keeps getting revised from time to time.
4. Conveyance Allowance
This is given to cover your travel between home and office. It is tax-free up to a certain limit.
5. Medical Allowance
Given to help with your medical expenses. It’s not taxable if you show proper bills. Without bills, it gets taxed.
6. Leave Travel Allowance (LTA)
LTA covers travel costs during your holidays within India. You can claim tax benefits on it, but only under some set rules.
7. Bonus
Bonus is extra money given for good performance. It can be fixed or depend on how well you, your team, or the company performs.
8. Provident Fund (PF)
Both you and your employer put a certain percentage of your basic salary into PF. This amount grows over time and you can use it after retirement or in special situations.
9. Special Allowance
This is for anything not covered under the above heads. It’s fully taxable.
10. Performance Incentives
These are rewards for doing great work. The amount can change depending on your or your team’s performance.
How to Calculate Income Tax on Salary with an Example
Follow these steps to calculate your income tax liability:
1. Calculate your Gross Salary
- Basic Salary
- Allowances
- Bonuses
- Other taxable components
2. Identify and Subtract Exemptions
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Standard Deduction (₹50,000)
3. Claim Deductions under Income Tax Sections
- Section 80C – Investments in PPF, Life Insurance, ELSS, etc.
- Section 80D – Premiums paid for Health Insurance
- Section 24(b) – Interest paid on home loans
4. Determine Your Taxable Income
Taxable Income = Gross Salary – (Exemptions + Deductions
5. Know Your Income Tax Slab and Calculate Tax
Apply the relevant tax slab rates to your taxable income. Calculate the tax for each slab and add them.
6. Apply Rebate if Applicable
- ₹5,00,000 (Old Regime)
- ₹7,00,000 (New Regime)
7. Add Health and Education Cess
Example: Tax Calculation under New Regime
| Category | Amount |
| Salary Income | ₹18,00,000 |
| Standard Deduction | ₹75,000 |
| Net Salary after Standard Deduction | ₹17,25,000 |
| Income from Other Sources | ₹35,000 |
| Total Taxable Income | ₹17,60,000 |
Applicable Tax Rate under the New Regime
| Tax Slab | Applicable Tax Rate | Tax Amount |
| Up to ₹4 Lakhs | Nil | ₹0 |
| More than ₹4 Lakhs and up to ₹8 Lakhs | 5% | ₹20,000 |
| More than ₹8 Lakhs and up to ₹12 Lakhs | 10% | ₹40,000 |
| More than ₹12 Lakhs and up to ₹16 Lakhs | 15% | ₹60,000 |
| More than ₹16 Lakhs and up to ₹20 Lakhs | 20% | ₹32,000 |
| Total Income Tax | * | ₹1,52,000 |
| Health & Education Cess (4%) | * | ₹6080 |
| Total Tax Payable | * | ₹1,58,080 |
With that, we conclude this post. Please use the space below to ask questions or provide feedback; we will gladly answer.
FAQs
Q. What is the gross salary?
Ans: Gross salary is the full amount you earn before any taxes or deductions are taken out. It includes your basic pay, allowances, bonuses, and other perks.
Q. How is income tax taken from salary?
Ans: Every month, your employer takes out a part of your salary as income tax and sends it to the tax department for you. They calculate this tax (called TDS) based on your yearly salary and any tax-saving investments you’ve made.
Q. Does everyone need to file income tax returns?
Ans: If you want to claim the tax rebate under Section 87A, filing an ITR is a must. Starting next year, if your income is above ₹4 lakh but below ₹12 lakh, you won’t get the Section 87A rebate automatically unless you file your ITR.
Q. Does the income tax calculator also calculate TDS?
Ans: No, the income tax calculator only figures out your tax liability for a particular year. It doesn’t calculate TDS.
