The amount of tax deducted from your salary depends on your earnings, tax slab, and the tax regime (old or new) you choose. The old regime offers deductions and exemptions like HRA and investments under Section 80C, while the new regime has lower tax rates but fewer exemptions. Filing an income tax return helps reconcile your tax and claim refunds if applicable.
The amount of tax deducted depends on your income, tax slab, and the tax regime you choose.
Let’s break down how tax is calculated, what deductions you can claim, and how it all affects your salary.
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1. Understanding income tax slabs in India
India follows a progressive tax system where higher-income earners are taxed at higher rates. The income tax rates differ based on whether you choose the old tax regime or the new tax regime introduced in Budget 2020.
Old tax regime (with exemptions and deductions):
- Up to ₹2.5 lakh: No tax
- ₹2,50,001 to ₹5 lakh: 5%
- ₹5,00,001 to ₹10 lakh: 20%
- Above ₹10 lakh: 30%
New tax regime (without exemptions and deductions):
- Up to ₹2.5 lakh: No tax
- ₹2,50,001 to ₹5 lakh: 5%
- ₹5,00,001 to ₹7.5 lakh: 10%
- ₹7,50,001 to ₹10 lakh: 15%
- ₹10,00,001 to ₹12.5 lakh: 20%
- ₹12,50,001 to ₹15 lakh: 25%
- Above ₹15 lakh: 30%
Both tax regimes provide different benefits, and taxpayers are allowed to choose between the old and new regime depending on which one offers them better savings.
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2. Components of salary income
Your salary consists of several components, and some of these may be taxable while others may be exempt. Common components include:
Basic salary: Fully taxable
House Rent Allowance (HRA): Partly or fully exempt depending on rent paid and city of residence
Special allowances: Generally taxable unless specific exemptions apply (e.g., travel or medical reimbursement)
Bonuses and incentives: Fully taxable
Provident Fund (PF) contributions: Employee’s contribution is exempt up to ₹1.5 lakh under Section 80C, but the employer’s contribution is taxable if it exceeds certain limits.
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3. How is tax calculated on salary?
The process of calculating the tax on salary involves several steps, including:
Gross salary: Start with your total income, including basic salary, allowances, bonuses, and any other earnings.
Deductions and exemptions: Subtract eligible exemptions like HRA, leave travel allowance (LTA), and any Section 10 exemptions.
Deductions under Chapter VI-A: This includes deductions under various sections such as:
Section 80C: Up to ₹1.5 lakh for investments in ELSS, PPF, etc.
Section 80D: Health insurance premium deductions.
Section 80E: Interest on education loans.
Taxable income: After exemptions and deductions, the remaining amount is your taxable income.
Apply tax slabs: Based on the taxable income and the chosen regime (old or new), calculate the tax liability using the applicable tax slab.
TDS deduction: Your employer deducts TDS (Tax Deducted at Source) from your monthly salary based on the estimated annual tax liability.
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4. How much TDS is deducted?
TDS is deducted from your salary every month as per your income tax slab. Employers estimate the annual tax liability based on your projected annual income and deduct the corresponding amount in equal instalments. The TDS is then deposited with the Income Tax Department.
You can view the TDS deductions on Form 16, which is provided by your employer at the end of the financial year. This form is used to file your income tax return (ITR).
5. How to reduce tax liability legally
There are several ways to reduce your tax liability by claiming deductions and exemptions:
Section 80C investments: Save up to ₹1.5 lakh in tax by investing in instruments like EPF, PPF, NSC, ELSS, and life insurance premiums.
House Rent Allowance (HRA): Claim HRA exemption if you live in rented accommodation.
Health insurance: Deduct premiums paid for health insurance under Section 80D.
Home loan interest: Deduct interest paid on a home loan under Section 24(b).
NPS contributions: Save an additional ₹50,000 by contributing to the National Pension Scheme (NPS) under Section 80CCD(1B).
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6. Tax filing and refunds
After your employer deducts TDS, you must file an income tax return (ITR) at the end of the financial year to reconcile your total tax liability. If you’ve paid more tax than your actual liability, you can claim a refund while filing your ITR.
By understanding the tax structure and utilizing available deductions wisely, you can minimize your tax liability and boost your savings.
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