Tax cuts on employees’ salaries are influenced by their income, tax slabs, and the tax regime they choose to follow (either old or new).
The old tax regime, a familiar and trusted system, allows for deductions and exemptions, such as House Rent Allowance (HRA) under Section 80C, alongside various investment options.
This regime empowers taxpayers with the knowledge of how to maximize their savings. In contrast, the new tax regime has lower tax rates but fewer exemptions.
Filing an income tax return is a powerful tool for addressing tax-related issues, providing taxpayers with reassurance and confidence.
It’s a process through which taxpayers can claim refunds if applicable, further reinforcing their financial security.
How is actual tax calculated? What deductions can taxpayers claim, and how do these deductions impact their salary? These are questions and keys to unlocking a deeper understanding of your finances. Let’s explore these questions together.
Tax Regimes in India
Old Tax Regime: The old tax regime includes options to claim various deductions and exemptions, such as House Rent Allowance (HRA) under Section 80C.
New Tax Regime: The new tax regime offers lower tax rates but provides fewer deductions. Filing an income tax return can help you resolve any tax issues you may have, and you can also claim refunds if applicable.
How is Income Tax Calculated?
To understand how income tax is calculated, it’s essential to know the deductions taxpayers can claim and how these affect their salary.
a) Income Tax Slabs in India: India follows a progressive tax system, meaning higher-income groups pay higher taxes. The tax rates differ based on the chosen tax regime. The new tax regime was introduced in the 2020 budget. Here’s a breakdown of the tax slabs:
Old Tax Regime (including exemptions and deductions)
- Up to ₹2.5 lakh: No tax
- ₹2,50,001 to ₹5 lakh: 5%
- ₹5,00,001 to ₹10 lakh: 20%
- More than ₹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%
- More than ₹15 lakh: 30%
Taxpayers can choose between these two regimes based on their situations.
b) Salary Components: Salary consists of several components; some are taxable, while others are exempt. Here are the main components:
- Basic Salary: Fully taxable.
- HRA: Partially or fully exempt depending on the city of residence and rent paid.
- Special Allowances: Generally taxable, although some exemptions may apply (e.g., for travel or medical reimbursements).
- Bonuses and Incentives: Fully taxable.
- Provident Fund Contributions: Under Section 80C, employee contributions up to ₹1.5 lakh are exempt. Contributions exceeding this limit are taxable.
c) Calculating Tax on Salary: The process for calculating tax involves several steps:
- Gross Salary: Begin with your total salary, including allowances, bonuses, and other income.
- Deductions: Subtract deductions, including HRA, leave and travel allowances, and those under Section 10.
- Chapter VI-A Deductions:
- Section 80C: Deductions up to ₹1.5 lakh for investments in ELSS, PPF, etc.
- Section 80D: Deductions for health insurance premiums.
- Section 80E: Deductions for interest paid on education loans.
The amount remaining after exemptions and deductions is considered your taxable income.
Application of Tax Slabs: Calculate your tax based on the applicable tax slab from the chosen regime.
d) Tax Deducted at Source (TDS): Your employer deducts TDS from your monthly salary according to your applicable tax slab.
The TDS is calculated based on your projected annual income and is deposited with the Income Tax Department. You can find details of TDS deductions in Form 16, which your employer provides at the end of the financial year. This form is essential for filing your Income Tax Return (ITR).
e) Reducing Tax Liability: You can legally reduce your tax liability by claiming various exemptions and deductions, including:
- Section 80C Investments: Save up to ₹1.5 lakh by investing in life insurance premiums, EPF, PPF, NSC, ELSS, etc.
- HRA: Claim HRA deductions if you live in a rented house.
- Health Insurance: Deduct the premium paid for health insurance under Section 80D.
- Home Loan Interest: Deduct the interest paid on home loans under Section 24(b).
- NPS Contributions: Save an additional ₹50,000 by contributing to the National Pension Scheme (NPS) under Section 80CCD(1B).
f) Tax Filing and Refunds: After TDS is deducted, you must file your income tax return at the end of the financial year. If you have overpaid tax compared to your actual liability, you can claim a refund while filing your return.
Understanding the tax structure and utilizing available deductions effectively can help you save money and reduce your tax liability.