Income Tax Calculator for FY 2024-25; Know How, Here a Step-by-Step Guide
The tax system of India provides two income tax regimes: old regime and the new regime to taxpayers which offers flexibility. Each tax regime has its own set of tax brackets, rules and advantages that allow individuals to choose the best which fits according to their financial needs.
Here is a step by step guide that help you calculate your income tax under both tax regimes.
Understand Tax Slab
The new tax regime was introduced in Budget 2020 to simplify the taxation process. This regime is a simplified alternative that provides lower tax rates but offers less deductions.
The standard deduction which is a fixed deduction under income tax under the ‘salaries’ category from taxable income. It doesn’t require additional disclosures or proofs of investment for taxpayers to get benefit of it. The maximum amount deduction is of Rs. 75000.
Tax slab under this regime:
While on the other hand, the other tax regime i.e. Old tax regime offers higher tax rates but at the same time gives taxpayers to claim various deductions and exemption.
Furthermore, the old tax regime opted taxpayers can claim a rebate of Rs. 12,500 under Section 87A with income up to Rs. 5 lakh, nullifying their tax liability.
Tax slab under this regime:
How to calculate your income tax?
Step 1: Calculate your Gross Income
The very first step in calculating your income tax is determining the gross income. Gross income is the total income earned before deduction any taxes or deductions. It basically includes:
- Components of Salary: This includes your House Rent Allowance (HRA), Leave Travel Allowance (LTA), and any special allowances such as reimbursements or food coupons.
- Other Income Sources: This include interest earned from savings accounts, rental income from properties rented, or any other earnings like from freelancing.
For making things simple for taxpayers, the Income Tax Act of 1961, has divided these different sources of income into five heads.
Step 2: Subtract Exemptions and Deductions
Once you have gross income in your hand, the next step is to subtract eligible exemptions and deductions.
Standard Deduction
- Old regime: Standard deduction of Rs. 50,000 is available.
- New regime: Standard deduction of Rs. 75,000 is provided.
Section 80C Deductions
Deduction under Section 80C for Investments and payments can reduce the taxable income by up to Rs. 1.5 lakh. Taxpayers can avail themselves of the deduction under section 80C if they opt for the old tax regime. However, an individual who opt for the new tax regime is not eligible to avail of these deduction. Examples include:
- Public Provident Fund (PPF)
- Employees’ Provident Fund (EPF)
- Equity-Linked Savings Schemes (ELSS)
- Life insurance premiums
Other deduction
- Section 80CCD(1): Investment in National Pension Scheme (NPS) allow deductions of up to Rs. 50,000.
- Section 80D: Health insurance premiums are eligible for deduction.
- Section 80TTA: Interest earned on savings accounts which is up to Rs.10,000 can be claimed as a deduction.
Step 3: Determine Taxable Income
After subtracting all exemptions and deductions from gross income, only the amount of taxable income is left. For example, let sat your gross income is Rs. 10 lakh and total deductions (including Section 80C and HRA exemptions) are Rs. 2 lakh, then taxable income will be Rs. 8 lakh.
Step 4: Apply the Tax Slabs
On the basis of your taxable income and chosen tax regime, calculate the tax liability according to relevant tax slabs.
- Under the new regime, Rs. 3 lakh of taxable income will not be taxed, while the next Rs. 7 lakh will attract a 5% tax.
- Under the old regime, the calculation of tax changes depending on claimed deductions and higher tax rates for various slabs.
Step 5: Add Cess and Surcharge
The final step of the calculation includes adding cess and surcharge to the calculated tax liability. A surcharge is applicable to those individuals whose income is more than Rs.50 lakh. Its applicable on the amount of tax payable and not on the total income. While on the other hand, the cess is a levy and a form of tax imposed on income tax to raise funds for specific purposes such as health and education.
- Health and Education Cess: Flat 4% of the tax liability.
- Surcharge: Applicable for high-income earners
- 10% for incomes between Rs.50 lakh and Rs. 1 crore.
- 15% for incomes between Rs. 1 crore and Rs.2 crore.
Tax Calculation
Let’s understand it with an example. Suppose the taxpayer has a taxable income of Rs. 11 lakh.
Old Tax Regime:
- Tax for Rs. 2.5 lakh to Rs. 5 lakh at 5% = Rs. 12,500.
- Tax for Rs. 5 lakh to Rs. 10 lakh at 20% = Rs. 1,00,000.
- Tax on Rs. 1 lakh at 30% = Rs. 30,000
- Total tax = Rs. 1,42,500 + cess (4%) = Rs. 1,48,200.
New Tax Regime:
- Tax for Rs. 3 lakh to Rs. 7 lakh at 5% = Rs. 20,000.
- Tax for Rs. 7 lakh to Rs. 10 lakh at 10% = Rs. 30,000.
- Tax on Rs. 1 lakh at 15% = Rs. 15,000
- Total tax = Rs. 65,000 + cess (4%) = Rs. 67,600.
