Understanding how to calculate your taxable income is essential for any salaried employee looking to manage their tax liability. Taxable income is the portion of your total income that is subject to taxation after applying all deductions, exemptions, and allowances. By calculating your taxable income accurately, you can determine how much tax you owe and identify opportunities to reduce your tax liability through eligible deductions.
Here’s a step-by-step guide on how to calculate your taxable income as a salaried individual in India:
Step 1: Understand Your Gross Salary
Your gross salary is the total income you earn before any deductions, exemptions, or tax-saving investments. It includes all the components of your salary such as:
- Basic Salary: The fixed part of your salary.
- House Rent Allowance (HRA): An allowance provided by the employer for housing expenses.
- Special Allowances: Any additional allowances (e.g., travel allowance, medical allowance).
- Bonus/Incentives: Any performance-related bonuses or incentive payments.
- Gratuity: If applicable, a lump sum payment made by the employer after completing a certain number of years of service.
- Commissions: Any commissions earned based on sales or targets met.
Gross Salary = Basic Salary + HRA + Special Allowances + Bonus/Incentives + Other Benefits
Step 2: Deduct Exemptions
Certain components of your income are eligible for exemptions under the Income Tax Act. These exemptions reduce your total taxable income. Common exemptions include:
House Rent Allowance (HRA)
HRA is partially exempt from tax, and the amount exempt depends on various factors like rent paid, salary, and city of residence. The exemption is calculated using the following formula:
Exempt HRA = Minimum of:
- Actual HRA received
- Rent paid in excess of 10% of basic salary
- 50% of basic salary (for metro cities) or 40% (for non-metro cities)
Leave Travel Allowance (LTA)
LTA is exempt for travel expenses incurred within India, subject to certain conditions and limits. It is exempt only for actual travel costs and is applicable for two trips in a block of four years.
Special Allowances
Some special allowances, like mobile reimbursements, conveyance allowance, and uniform allowance, may be exempt under certain conditions. These allowances reduce your taxable income.
Step 3: Apply Tax Deductions
Tax deductions help you reduce your taxable income. These deductions can be claimed under various sections of the Income Tax Act, such as Section 80C, Section 80D, Section 80E, etc.
Common Deductions Under Section 80C:
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Tax-saving Fixed Deposits (FDs)
- Life Insurance Premiums
- Principal Repayment on Home Loan
The total limit for deductions under Section 80C is Rs. 1.5 lakh.
Section 80D:
Deduction for premiums paid on health insurance for yourself, your family, and your parents. The maximum deduction is Rs. 25,000 for self and family, and Rs. 50,000 for senior citizens.
Section 80G:
Donations to registered charities and relief funds may qualify for tax deductions under Section 80G.
Other deductions include:
- Section 24(b): Interest on home loan for self-occupied property (up to Rs. 2 lakh).
- Section 10(14): For any special allowances (e.g., children’s education allowance).
Step 4: Calculate Your Net Taxable Income
After applying all the exemptions and deductions, you’ll have a clearer picture of your net taxable income. To calculate this:
- Gross Salary (Step 1)
- Less Exemptions (Step 2)
- Subtract any HRA exemptions, LTA, or special allowances.
- Less Deductions (Step 3)
- Subtract deductions under Section 80C, 80D, 80E, and others.
This gives you your net taxable income.
Formula: Taxable Income = Gross Salary – Exemptions – Deductions
Step 5: Apply the Income Tax Slabs
Once you have your taxable income, you can calculate the tax liability by applying the applicable income tax slabs. The tax slabs for individual taxpayers under the old regime (as of the financial year 2024-2025) are as follows:
Income Tax Slabs for Individual Taxpayers Below 60 Years (Old Regime)
| Income Range | Tax Rate |
| Up to Rs. 2.5 lakh | Nil |
| Rs. 2.5 lakh to Rs. 5 lakh | 5% |
| Rs. 5 lakh to Rs. 10 lakh | 20% |
| Above Rs. 10 lakh | 30% |
- A Cess of 4% on the total tax payable is applicable.
Rebate Under Section 87A:
If your total taxable income is below Rs. 5 lakh, you can claim a rebate of Rs. 12,500 under Section 87A, which reduces your tax liability.
Step 6: Account for Other Taxes or Levies
- Health and Education Cess: A 4% health and education cess is applicable on the total tax payable.
- Additional Taxes: If you have any additional income subject to tax (like capital gains or business income), it will be added to your total income, and the tax calculation will be adjusted accordingly.
Example Calculation
Let’s go through a simplified example to understand the process better:
- Gross Salary = Rs. 8,00,000
- Less Exemptions:
- HRA Exemption = Rs. 80,000
- LTA Exemption = Rs. 20,000
- Less Deductions:
- Section 80C (PPF, EPF, etc.) = Rs. 1,50,000
- Section 80D (Health Insurance) = Rs. 25,000
- Net Taxable Income:
- Rs. 8,00,000 – Rs. 80,000 – Rs. 20,000 – Rs. 1,50,000 – Rs. 25,000 = Rs. 6,25,000
- Income Tax Calculation:
- For income between Rs. 2.5 lakh and Rs. 5 lakh: 5% of Rs. 2,50,000 = Rs. 12,500
- For income between Rs. 5 lakh and Rs. 6,25,000: 20% of Rs. 1,25,000 = Rs. 25,000
- Total tax = Rs. 12,500 + Rs. 25,000 = Rs. 37,500
- Cess = 4% of Rs. 37,500 = Rs. 1,500
- Total Tax Payable = Rs. 37,500 + Rs. 1,500 = Rs. 39,000
