Your income changes frequently so that the applicable income tax. But most of us don’t know how to know the tax liability. It becomes further difficult because of the changing tax rates. However, if you understand the steps of tax calculation, you won’t require an expert or tax calculator to find out the tax liability. In this page, I would guide you step by step through the income tax calculation. But before that, it is necessary to learn some important facts.
Important Points To Consider
Calculating correct income tax is very easy if you learn these important points. In fact, Calculation is not difficult only some factual knowledge is required.
Tax on Income of A Financial Year
The tax is calculated on the total income of a financial year. This year starts from 1st April and ends on 31st March of next year. That is why a financial year covers two normal years. The financial year 2018-19 (FY 2018-19) starts from 1st April 2018 and end on 31st March 2019. The income you receive during this period would be taken for income tax of FY 2018-19.
Income Tax Rate Changes
The government often changes the income tax rate. This rate is based on your income. Hence, you should know the income tax slab rate of the concerned financial year. When the government changes the income tax slab rate in the budget, it becomes applicable for the next financial year. The change of income tax slab rate in budget 2018 would be applicable for FY 2018-19.
Also, you should use correct income tax slab rate of the concerned year. If you are calculating tax on the income of 2018-19, the tax slab rate should be of the FY 2018-19. It was declared in the budget of 2018.
Recommended: Know Income Tax Slab of 2018-19
Every type of income is not taxable
The government charges tax on your income but each type of income is not subject to tax. Some types of income have got the relaxation. For example, there would not be any tax if you are earning from the agriculture. Similarly, maturity amount of the PPF is also not taxable.
So when you calculate tax on your income, you should know whether your income is taxable or not. The salary, pension, business and professional incomes are certainly taxable.
Some of the exempted incomes are given below
- Agricultural activities
- Dividend from shares
- Insurance Claim amount
- Gratuity up to a certain limit
- EPF balance if you have been EPF member for more than 5 years.
- Various exempted allowances from employer up to a limit.
Income Up to a Limit is exempted from Income Tax
The government does not start charging tax from the first rupee of your earning. Rather, you are not required to pay tax up to a limit. The income above this limit is taxed on the basis of tax slabs. As of now, income up to 2.5 lakhs is exempted from tax. For senior citizens, this exemption is up to 3 lakhs. The people who are 80 years or older are not charged for tax up to the income of 5 lakhs.
Investments has Separate Income Tax Rate
The income tax is decided on the basis of income tax slab rate. However, this slab rate is always not applicable to the investments. Ther may be separate tax rate capital gains. The profit from the investment is termed as the capital gains. The tax rate for the capital gains also changes on the basis of holding period. To understand, the taxation of investments, you have to learn about the capital gains tax.
Certain Investments Gives tax Deductions
The government gives you a chance to save tax by using tax deductions. When government deducts the taxable income in lieu of certain investments, it is called as the income tax deductions. Mostly, the amount you invest is deducted from your taxable income. It results in reducing the tax outgo.
However, there is a limit to claim income tax deductions. Such as many tax-deductible investments are clubbed under section 80C. This section has an upper limit of 1.5 lakhs. So, you can’t claim more than 1.5 lakhs for deduction under section 80C.
If you want to know about all the available tax deductions you should read my post of Income Tax Deductions.
Steps of Income Tax Calculation
To understand the income tax calculation process better I would take an example along with the details of every step.
Suppose, Suruchi earns 17 Lakh CTC salary in a financial year. From this salary, 4 lakhs are EPF contributions and various allowances. She has invested 1.5 lakhs in EPF, ELSS and PPF. She has also contributed ₹50,000 into NPS.
⇒ Find Out Taxable Income
Your income tax calculation starts with the Gross income. This income includes your EPF contributions, reimbursements and various allowances. But all of this money is not taxable. Often, you employer itself defines the taxable part of your salary. Otherwise, you can deduct the exempted incomes from the gross income. After, this deduction, you reach the income which is eligible for tax.
In the case of Suruchi, out of 17 lakh, 4 lakh is eligible for various exemption as this amount is given in the form of Allowances and some of the amount goes to EPF contribution. Hence, the taxable income of Suruchi would be ₹13 lakh.
⇒ Apply Deductions
You get a further chance to reduces your taxable income. The government gives you the tax deductions on the specified investments. These investments are EPF, PPF, NPS, NSC, Insurance, ELSS etc. There are section 80C, 80D, 80E and 80G which gives you the tax benefit. Note, every section has an upper limit.
From FY 2018-19, there is a standard deduction of ₹40,000 for every salaried taxpayer.
You must deduct these investments from the taxable income, however, the deduction should be within the upper limit.
The Suruchi uses all his tax deduction limit. She has used 1.5 lakh limit of 80C and 50,000 limit of NPS deduction. Hence after standard deduction and all other deduction, the taxable income would come down to 10.6 lakhs.
⇒ Put Taxable income into Tax Slabs
From the taxable amount after deductions, you have to start putting your income in different tax slabs. You must start with the 0%. Some income of every person enjoys the 0% tax.
- According to the income tax slab of 2018-19, The earnings upto 2.5 lakh is exempted from the tax. That is 0% tax.
- Next, you should use the remaining income for the 5% tax. You can use up to 2.5 lakh income for 5% tax rate.
- If you have still some more amount, apply the tax rate of 20%. Only 5 lakh rupees can be used for 20% tax rate.
- The amount which is left after 20% tax rate, is subjected to 30% tax rate. You reach up to 30% tax rate only if your total taxable income exceeds 10 lakh rupees.
Income of Suruchi In different Tax Slabs
|Tax Rate||Income Slab||Tax|
⇒ Consider Rebate and Surcharge
The government gives a rebate to those taxpayers who have an income of 3.5 lakh or less. The rebate is of 2,500 rupees. On the other hand, you have to pay a surcharge on income tax if taxable income exceeds 50 lakh. It is 10% if income is above 50 lakh, it becomes 15% if the income is more than 1 crore.
As Suruchi has taxable income of 10.6 lakh she is not eligible for the rebate. The surcharge is also not applicable to her as she earns less than 50 lakhs. Thus her income tax would remain ₹1,30,500
⇒ Add cess and Get Final Payable Tax
In the next step, you have to calculate the cess. Cess is applied to the tax. Since FY 2018-19, we have to pay 4% cess. Earlier it was 3%. It is called as education and health cess.
After adding this cess, you reach to the final payable income tax.
The cess on income tax of 1,30,500 would be 5,220. So the final payable income tax of Suruchi would be 1,30,500+5,220 = 1,35,720
There are various tax calculators on the public domain. Even I have also made a simple and useful income tax calculator. But, It would be more fulfilling if you find out the tax liability by going through these steps. Because this process also makes you aware of the income tax rules. For further reading, you can also read my article about the income tax.