Category : New to Investing December 19, 20235 minutes read
Income tax is not merely a fiscal obligation. For a country, it’s a cornerstone of economic success. As citizens of India, we are obliged to pay taxes on any income that we generate. But how is income tax calculated in India? Understanding the different types of taxes in India is a starting point to comprehend how to file taxes in the country. In this article, we will cover everything from the meaning of taxable income to types of direct taxes in India, types of indirect taxes in India, salary after tax in India and the old and new tax regimes.
To manually calculate your income tax in India, follow these steps:
Calculate your gross income (income from all sources).
Identify eligible deductions and subtract them from the gross income to arrive at your taxable income.
Determine the applicable tax slab and rate based on your taxable income.
Calculate the tax amount using the tax rate.
If you’re eligible for a rebate (e.g., Section 87A), subtract it from the calculated tax.
·Add applicable cess and surcharge to get the net tax amount.
TDS stands for Tax Deducted at Source. It’s a mechanism where a payer deducts a certain percentage of tax before making payments for specified transactions. The deducted tax is then deposited to the government. TDS is applicable to various transactions like salary, rent, professional fees, interest, etc.
The TDS limit for FY 2023-24 is Rs. 15,000 annually.
Exemptions are certain categories of income that are not included in the total income for taxation purposes. These can be partial or complete exemptions. Examples include agricultural income and certain allowances like House Rent Allowance (HRA).
Under the old tax regime, the exemption limit is Rs. 2,50,000. Under the new tax regime, the exemption limit is Rs. 3,00,000.
Introduction
At its core, income tax is the financial contribution the citizens of a country make to support government functions and public services. In India, this contribution is determined through a progressive taxation system, meaning the rate of tax increases with higher income levels.
According to the Income Tax Act, 1961, the central government taxes all income or earnings that citizens of the country generate. This is the main source of income for the Indian government. The government uses taxes to meet its financial obligations to run the country, including development and defence, job creation, and infrastructure.
As citizens, we may wonder, how is income tax calculated in India? To answer this, we first need to understand the types of taxes in the country, including types of direct taxes in India and types of indirect taxes in India. After you grasp this, you can understand aspects of salary after tax in India, tax on entrepreneurial income and the differences between the old and new income tax regimes. In this article, we will cover all of these, plus old regime tax slab, new regime income tax slabs, exemptions under old tax regime, new tax regime exemptions and other important aspects.
Income tax is a direct tax levied by the government on an individual’s earnings and profits. It is a significant source of revenue for the government and plays a crucial role in funding various public services and developmental projects. In India, the Income Tax Act, 1961, governs the regulations and provisions related to income tax.
To understand income tax, you must understand taxable income. Taxable income refers to the total income on which tax is levied after accounting for various exemptions, deductions, and allowances. The Income Tax Act, 1961, allows for various deductions and exemptions to reduce the tax liability of an individual or a business.
The Indian tax system has three levels: local, state, and central. Indian taxes are usually direct or indirect. Let’s look at different types of taxes in India.
Types of Direct Tax in India
Direct taxes are those taxes that are imposed directly on individuals or organizations. These taxes are proportionate to the income, profits, or gains of the taxpayer. Here are the different types of direct taxes in India:
Income Tax:
Income tax is levied on the income earned by individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities. The tax rates vary based on the income level and the tax slab applicable to the taxpayer.
Corporate Tax:
Corporate tax is imposed on the profits earned by companies and corporations.
Capital Gains Tax:
Capital gains tax is levied on the profits earned from the sale of capital assets such as real estate, stocks, bonds, or other investments.
Securities Transaction Tax (STT):
STT is levied on the purchase or sale of equity shares and equity-oriented mutual funds on recognized stock exchanges.
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Types of Indirect Tax in India
Indirect taxes are charges imposed by the government on the production, sale, or consumption of goods and services. These taxes are collected by intermediaries, and then passed on to the consumers as part of the cost of goods or services.
The different types of indirect taxes in India include Goods and Services Tax (GST), customs duty and central excise duty.
This article will primarily look at direct taxes, specifically how is income tax calculated in India.
To accurately understand the calculation of income tax in India, citizens must understand the different types of taxes. Taxes can broadly be divided into two categories:
- Direct Tax: Income tax, corporate tax, capital gains tax, Securities Transaction Tax.
- Indirect Tax: Goods and Services Tax (GST), customs duty and central excise duty.
Before 2020, there was only one income tax regime in India. In the Budget of 2020, the Indian government introduced a new tax regime. These are referred to as ‘Old Tax Regime’ and ‘New Tax Regime’. Income tax payers in India are given a choice between the two.
The old tax regime involves a system of old regime tax slabs and rates that determine the income tax liability of individuals and Hindu Undivided Families (HUFs). There are more than 70 exemptions and deductions under the old tax regime, which make it a popular option. So, how is income tax calculated in India under the old tax regime?
First, let’s look at the old regime tax slabs:
| Income Tax Slab | Tax Rates |
| Up to Rs 2,50,000* | Nil |
| Rs 2,50,001 – Rs 5,00,000 | 5% |
| Rs 5,00,001 – Rs 10,00,000 | 20% |
| Above Rs 10,00,000 | 30% |
Now let us understand how is income tax calculated in India under the old tax regime. Once you determine your old regime tax slab, which depends on the total income you generate, you can then compute different deductions under the old tax regime.
For instance, there is a Rs. 50,000 standard deduction under the old tax regime. Also, you can claim certain exemptions and deductions on investments that you make. The most popular deductions under the old tax regime include deductions under Section 80C of the Income Tax Act. This allows for up to Rs. 1,50,000 annual deduction from your taxable income.
Some of the other deductions and exemptions under old tax regime includes:
- Investment in PPF, EPF, 5-year FDs, and ELSS, and others up to Rs. 1,50,000 under Section 80C
- House Rent Allowance
- Leave Travel Allowance of LTA tax exemption limit of twice in four years
- National Pension System or NPS exemption in old tax regime
- Deduction on interest paid on home loan
For those who have sufficient deductions and exemptions, under the old tax regime, claiming them can be very beneficial. Also, if you have long-term investment objectives such as saving for retirement, then utilizing old tax regime benefits can help you meet your financial and tax goals.
The old tax regime involves a system of old regime tax slabs and rates that determine the income tax liability of individuals and Hindu Undivided Families (HUFs). Individuals can calculate income tax under the old regime by determining their income tax slab and computing deductions under the old tax regime.The remaining amount is the taxable income of an individual
The new tax regime was introduced by the Indian government to make filing taxes simpler. The government hoped that the new tax regime would increase compliance due to its simplicity. While the new tax regime exemptions are lower compared to exemptions under the old tax regime, it is still beneficial.
Here is an overview of new tax regime income tax slabs:
| Income Tax Slab | Tax Rates |
| up to Rs 3,00,000 | Nil |
| Rs 3,00,001- Rs 6,00,000 | 5% |
| Rs 6,00,001- Rs 9,00,000 | 10% |
| Rs 9,00,001- Rs 12,00,000 | 15% |
| Rs 12,00,001- Rs 15,00,000 | 20% |
| Above Rs 15,00,001 | 30% |
As you can see, the new tax regime income slabs are more attractive. Earlier, the new tax regime did not have standard deduction. Now, the government has introduced the Rs. 50,000 new tax regime standard deduction, making it even more attractive.
However, there is no HRA in the new tax regime or some of the other deductions under Section 80C in the new tax regime. There are some new tax regime exemptions that you can claim:
- Specially-abled people can claim transport allowances
- Conveyance allowance for employment travel
- Exemption on voluntary retirement, gratuity and leave encashment
- Interest on home loan on property on rent
- Gifts up to Rs 50,000
- Employer’s contribution to NPS
If you do not plan to claim any deductions for health insurance premium, NPS investments or other deductions under the old tax regime, then the new tax regime income tax slabs can prove to be better for you, especially if you are in the income bracket between Rs 5,00,000 – Rs 15,00,000. New tax regime for senior citizens can also be a good choice.
The new tax regime was introduced by the Indian government to make filing taxes simpler. There is a standard deduction of Rs. 50,000 under the new tax regime the. New tax regime income tax slabs can prove to be better for you, especially if you are in the income bracket between Rs 5,00,000 – Rs 15,00,000.
Before getting into an explanation of how income tax is calculated in India, let’s walk though taxable income meaning and what is net taxable income. Taxable income refers to the portion of an individual’s or entity’s total income that is subject to taxation. It is calculated by subtracting allowable deductions, exemptions, and allowances from the total income.
Net taxable income is the final income amount after deducting allowable deductions and exemptions from the total income. It’s the income on which tax calculations are based.
Now, let’s move on to how is income tax calculated in India. You can use the steps below:
Step 1: Calculate Gross Income:
Gross income is the total income earned before any deductions or exemptions. It includes income from all sources, such as salary, business profits, rent, interest, etc.
Step 2: Identify Net Taxable Income:
Net taxable income is the income on which tax calculations are based. It’s the taxable income after deducting the basic exemption limit, deductions, and exemptions applicable to an individual.
Step 3: Calculate Tax on Net Taxable Income:
Tax is calculated on the net taxable income using the applicable tax slab rates. Depending on whether you choose the old tax regime or the new tax regime, you can apply this.
Step 4: Check for Rebate:
A rebate is a reduction in the total tax liability provided by the government. Sometimes, if you have paid extra taxes in advance, the government will refund the excess taxes. Tax rebate under the new tax regime and old tax regime are similar.
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To better understand how is income tax calculated in India, here’s a simple example.
Let’s assume Ms. A gets an annual salary of Rs. 6,00,000. Apart from this, she gets rental income of Rs. 1,20,000 and income from investments of Rs. 80,000. First, she would have to calculate gross income.
Gross Income = Income from salary + Interest income + Income from other sources
= Rs. 6,00,000 + Rs. 80,000 + Rs. 1,20,000
= Rs. 8,00,000
Next, we would have to compute taxable income. Whether she chooses the old tax regime or the new one, there will be a standard deduction applicable. Also, let’s assume that she has made certain investments under Section 80C and hence, chooses to go with the old tax regime.
Taxable Income = Gross Income – Deductions
Taxable Income = Rs. 8,00,000 – Rs. 2,00,000 = Rs. 6,00,000
Next, we would calculate the net taxable income. It’s the taxable income minus the basic exemption limit. In the case of Ms. A, the basic exemption limit is Rs. 2,50,000.
Net Taxable Income = Taxable Income – Basic Exemption Limit
Net Taxable Income = Rs. 6,00,000 – Rs. 2,50,000 = Rs. 3,50,000
Based on this, her old tax regime tax slab would be 5%.
Tax = Net Taxable Income * Tax Rate
Tax = Rs. 3,50,000 * 5% = Rs. 17,500
Let’s assume that Ms. A has paid an advance tax of Rs. 7,000. Therefore, her final tax liability will be calculated as follows:
Final Tax Liability = Tax calculated before rebate – Rebate
Final Tax Liability = Rs. 17,500 – Rs. 7,000 = Rs. 10,500
You may also wonder, what happens if your advance tax is more than your tax liability? In that case, you will receive a refund. The next question could be, is income tax refund taxable in the next year? No, it is not because you have already paid tax on it.
Note: The above instance is just for illustration purpose and the same may or may not be sustained.
The step-by-step process of calculating income tax is as follows:
- Calculate Gross Income
- Identify Net Taxable Income
- Calculate Tax on Net Taxable Income
- Check for Rebate
Through this guide, you should have a comprehensive understanding of how is income tax calculated in India. Here are the key points you need to remember:
- Income tax is a type of direct tax in India that is levied on any income that an individual, HUF or company generates.
- Indians can choose from two tax regimes – the old tax regime and the new tax regime.
- There are four old regime tax slabs. There are also 70+ deductions and exemptions under the old tax regime.
- There are seven new tax regime income tax slabs. While new tax regime exemptions are lower, it is easier to compute and has many advantages.
