What Is The Formula To Calculate Income Tax

Introduction 

If you will be filing ITR for the first time in 2020 then you need to know your total taxable income, followed by the computation of income tax as per the applicable tax slab. While calculating income tax manually might appear daunting, it isn’t as complicated if you thoroughly understand the computation process.

Every individual under 60 years of age with an annual income of more than Rs. 2.5 lakhs must file Income Tax Return (ITR) as per the Income Tax Act. For seniors between 60 and 80 years, this limit is above Rs. 3 lakhs, and for super seniors above 80 years, it is above Rs. 5 lakhs. Even people falling under the nil tax bracket are advised to file ITR.

What is Taxable Income?

Taxable income means the income which is chargeable to income tax, and it is calculated to decide how much tax an individual or a company owes to the government in a particular tax year. It is generally described as the gross total income or total income. To arrive at the total income, you have to consider any deductions or exemptions allowed in that tax year.

Taxable income includes salaries, pensions, capital gains, rental income, business income, investment income, and unearned income.

How to Calculate Income Tax?

Income tax can be estimated using an online income tax calculator. However, in the absence of the same, you can also calculate income tax liability manually. Here is how.

We can attempt to calculate income tax by using an example of Ms Menon whose earnings include a basic salary of Rs. 37,500 per month (i.e., Rs. 4.5 lakh per annum) in the financial year 2019-2020.

• Her salary also includes House Rent Allowance (HRA) of Rs. 20,000 per month or Rs. 2.4 lakhs per year.

• The Leave Travel Allowance (LTA) is Rs. 15,000 on an annual basis.

• There is also a special allowance component of Rs. 10,000 per month (i.e., Rs. 1.2 lakh per year).

• Ms Menon lives in Kerala and pays rent of Rs. 15,000 per month, which amounts to Rs. 1.80 lakh per year.

• There is also an EPF component (Ms Menon’s share) that is deducted from her salary per month. This is equivalent to 12% of her basic salary every month, i.e., Rs. (37,500 * 0.12) = Rs. 4,500. On an annual scale, this will amount to Rs. 54,000.

Step 1: Calculating Taxable HRA

The first step is to identify the HRA chargeable to tax. Ms Menon calculates the taxable component of her HRA manually. Here is how.

The lowest value among the following will be exempt from tax:

• 50% of Ms Menon’s annual basic salary = Rs. (4.5 lakh * 0.5) = Rs. 2.25 lakh

• HRA received on an annual basis = Rs. 2.4 lakh

• Rent that is paid more than 10% of annual basic salary = Rs. (1.8 lakh - (0.1 * 4.5 lakh)) = Rs. 1.35 lakh

Therefore, the total taxable HRA = Rs. 2.4 lakh – Rs. 1.35 lakh = Rs. 1.05 lakh

Step 2: Calculating Taxable Income from Salary

The annual gross income from her salary is outlined in the table below:

 

Step 3: Calculating Total Deductions

Here are the investments made by Ms Menon. On an annual basis, consider that she has earned interest of Rs. 9,000 from a savings account. She has also made investments in Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) during the financial year 2019-20. These investments amount to Rs. 50,000 for PPF and Rs. 15,000 towards ELSS. She is also paying a premium worth Rs. 10,000 for a life insurance policy and Rs. 12,500 for a health insurance policy.

Ms Menon can claim a tax deduction for each of these investments, as shown below:

Section	Maximum Deduction Allowed	Investments Eligible for Tax Deduction	Deductions Claimed by Taxpayer
80C	Rs. 1.5 lakh	PPF – Rs. 50,000 (L) ELSS – Rs. 15,000 (M) Life insurance – Rs. 10,000 (N) EPF contribution deducted by employer – Rs. 54,000 (O)	L + M + N + O, up to a maximum limit of Rs.1.5 lakh = Rs. 1.29 lakh
80D	Rs. 25,000 for self and Rs. 50,000 for parents	Health insurance – Rs.12,500	Rs. 12,500
80TTA	Rs. 10,000	Interest from savings account – Rs.9,000	Rs. 9,000

 

Step 4: Calculating Gross Income that is Taxable

The next step is the calculation of the gross taxable income for Ms Menon for the financial year 2019-20.

Gross Taxable Income from Salary	Rs. 6.3 lakh
Income from Other Sources	Rs. 9,000 (from savings account interest)
Gross Total Income	Rs. 6.39 lakh
Deductions under
80C	Rs. 1.29 lakh
80D	Rs. 12,500
80TTA	Rs. 9,000
Gross Taxable Income (Gross Total Income – Total Deductions)	Rs. 4,88,500

 

Step 5: Calculating Income Tax Liability

The final step is to analyse the income tax slabs and identify Ms Menon’s tax liability. The amount of tax she needs to pay is dependent on the tax slab that her income falls under. The tax slabs for the financial years 2019-2020 and 2018-2019 are as shown below. The amount due to be paid by Ms Menon is also indicated in the following table:

Income Slab	Rate of Taxation	Amount to be Paid
Below Rs. 2.5 lakh	No tax	0
Between Rs. 2.5 lakh and Rs. 5 lakh	5%	5% of (Rs. 4,88,500 less Rs. 2.5 lakh) = Rs. 11,925
Between Rs. 5 lakh and Rs. 10 lakh	20%	0
Rs. 10 lakh and above	30%	0
Cess	4% of total tax	11,925 * 0.04 = Rs.477
Total Income Tax Liability	Rs. 11,925 + Rs. 477	Rs. 12,402

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The above tax slabs apply to taxpayers below 60 years of age. Ms Menon is liable to pay the tax for the financial year 2019-2020 and will have to file the income tax returns during the assessment year 2020-2021. 

 

FAQs

1. For which assessment year can I calculate my tax liability?

You can calculate your tax liability for the year 2020-21. 

2. Does everyone have to file their income tax returns?

If the income of an individual is below the basic exemption limit then he is not required to file income tax returns. Those who have income less than Rs 2.5L and want to claim an income tax refund can only claim the refund by filing an ITR. Otherwise, it is mandatory to file income tax returns in any other case.

3. What is the maximum non-taxable income limit?

The maximum limit of non-taxable income for an individual is set at Rs 2.5 lakh. However, you can also get a rebate of Rs 2,500 under section 87A if you have a total income of less than Rs 3.5 lacs for FY 2018-19. From FY 2019-20 onwards, the rebate has been increased to Rs 12,500 for an income less than Rs 5 lakh. So, that means an individual earning less than 5 lakh will not be required to pay any income tax from FY 2019-20 onwards. If you have tax-saving investments under section 80C of up to Rs 1.5 lakh then you will not have to pay any taxes till Rs 6.5 lakhs

End Note

To successfully and accurately file ITR, one should first know his/her total taxable income for the year. The annual income will decide the tax slab an individual falls under and the rate at which the tax will be calculated. One can use an online income tax calculator to gauge the tax liability since it gives instant and accurate results. It also makes it easy to plan your investments. You can access this online calculator anywhere and enter different figures to work out how to save maximum on taxes.