The gross total income that you earn forms the basis of the tax that you pay annually to the government of India. It is good to be aware of the various aspects surrounding tax in order to know how income tax is calculated. The calculation of income tax is guided by the provisions contained in the Indian Income Tax (I-T) Act. Every year, during the yearly Union Budget, the government comes up with different income tax slabs to help citizens calculate their tax liability. As per the I-T Act, an individual, a Hindu Undivided Family, a corporation, a body of individuals and an association of persons, all come in the tax ambit. The final tax to be paid is calculated after applying the rates for each slab in that particular financial year and then deducting the tax paid in the form of TDS or Tax Deducted at Source. Before getting to understand how income tax is calculated, let us understand the difference between assessment year and financial year.
What is Assessment Year and Financial Year
A financial year is the year in which an income is earned. The assessment year falls immediately after a financial year and is the year in which an income is evaluated for taxation. Both assessment year and financial year begin on the first day of April and end on the last day of March. From the perspective of income tax, an assesses’ income is earned in the financial year and evaluated in the assessment year.
Here are certain basic guidelines that will help you understand how income tax is calculated. Your official age is important for this calculation because the income tax slab is based on the age of a person. There are three relevant tax slabs for calculating the income tax. They are 0 – 60 years, 60 – 80 years and 80 and above. Thus, determining the correct tax slab as per the age of a taxpayer is very important.
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Income Tax Slab for Financial Year 2024-25 or Assessment Year 2025-26:
- General Category (Less than 60 years):
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 2,50,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 2,50,001 – Rs. 5,00,000 | 5% above Rs. 2,50,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001-Rs. 10,00,000 | Rs. 12,500 + 20% above Rs. 5,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% above Rs. 10,00,000 | Rs. 10,00,00 – Rs. 12,00,000 | 15% |
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
- Senior Citizens (60 years and above but below 80 years):
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 3,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 3,00,001 – Rs. 5,00,000 | 5% above Rs. 3,00,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001-Rs. 10,00,000 | Rs. 10,000 + 20% above Rs. 5,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,10,000 + 30% above Rs. 10,00,000 | Rs. 10,00,00 – Rs. 12,00,000 | 15% |
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
- Very senior citizens (80 years and above):
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 5,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 5,00,001 – Rs. 10,00,000 | 20% above Rs. 5,00,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Above Rs. 10,00,000 | Rs. 1,00,000 + 30% above Rs. 10,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Rs. 10,00,00 – Rs. 12,00,000 | 15% | ||
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
Note:
- Between Rs. 50 Lakh to Rs. 1 Crore – A surcharge of 10% of the income tax has to be paid as well.
- Between Rs. 1 Crore to Rs. 2 Crore – A surcharge of 15% of the income tax has to be paid as well.
- Between Rs. 2 Crore to Rs. 5 Crore – A surcharge of 25% of the income tax has to be paid as well.
- Above Rs. 5 Crore – A surcharge of 37% (under old regime) and 25% (under new regime) of the income tax has to be paid.
- Maximum rate of surcharge on income from dividends or income under the provisions of Sections 111A, 112A and 115AD is 15%
- 4% of the income tax has to be paid as Health and Education Cess by all taxpayers irrespective of the slab they fall into
Choosing the Head of Income
The income of a person can accrue from one or more of five sources of income. Here are the five heads of income under which tax is charged :
- Income from salary
- Income from business and profession
- Income from house property
- Income from other sources
- Income from capital gains
Every head of income consists of various provisions, all of which guide how the income from each source will be determined. A detailed study under each head of income will reveal how income is determined and how certain deductions are made.
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Steps involved in calculating income Tax
- Aggregating the income from all heads
Once the assessee has determined his/her income under each head, he/she will need to make an aggregate of all of these incomes before proceeding. Together, all the income from these five heads will constitute the gross income of the assessee. After this he/she can go for deductions like HRA and LTA.
- Providing deductions under Section 80 C – 80 U
After an assesses has arrived at the figure of gross income, he can make certain deductions from such income which are termed as deductions under section 80 C – 80 U of the Indian Income Tax Act. Each section which falls under this range, provides for a deduction from the gross income of the assessee, which is meant to give him a form of relief in the form of reducing his total income, thus reducing his income tax liability. These deductions include reductions such as payment for house construction, payment towards education loan, payment for the treatment of a disabled person, payment for any recognised contributions, income from royalty, income from interest on savings bank account, income from industry located in special economic zone and much more.
- Arriving at total income
Once the assessee has determined his quantum of deductions, he can subtract them from his gross total income and arrive at the figure of total income. This is the income on which income tax is charged.
- Reduction of advance tax and prepaid taxes
Once the assessee has calculated the amount of income tax payable by him on the amount of total income, he shall reduce the amount of such tax by any pre paid taxes and advance taxes paid by him. Then the calculation of income tax shall be made as per the applicable tax slab.
- Adding taxes for other incomes
Apart from this calculation, an assessee may also be under an obligation to pay taxes on various other incomes such as casual income, which is taxed at a flat rate of 30%. This income is not added to the normal income and is treated separately for the purpose of calculating income taxes. Similarly, income from shares and equity oriented schemes are also subject to taxes at a rate, other than the normal rate of tax.
Here is a quick example on how income tax can be calculated:
| Nature | Old Regime | New Regime |
| Basic Salary | 500000 | 500000 |
| House Rent Allowance | 200000 | 200000 |
| Transport Allowance | 19200 | 19200 |
| Special Allowance | 75000 | 75000 |
| Leave Travel Allowance | 40000 | 40000 |
| (a) Gross Income from Salary | 834200 | 834200 |
| Long term (LT) capital gain from immovable property | 500000 | 500000 |
| Total Income | 1334200 | 1334200 |
| Deductions in salary income | Standard Deduction: 50000 | |
| House Rent Allowance exempted | 190000 | – |
| Transport Allowance | 19200 | – |
| Leave Travel Allowance | 40000 | – |
| (b) Total deductions from Salary Income | 249200 | 50000 |
| Investments to save income tax under following sections- | ||
| (C) Section 80C, where maximum deduction is allowed upto Rs. 150,000.00 | 150000 | – |
| (d) Section 80D, where maximum deduction is allowed for Rs. 25000 when Medical insurance premium is paid for self. | 25000 | – |
| (e) Total Tax saving Investements (c+d) | 175000 | – |
| (f) Total deductions & exemptions (b+e) | 424200 | 50000 |
| Net Taxable Salary Income (a-f) | 910000 | 1284200 |
| Tax on Salary Income | 85500 | 106840 |
Note: Tax Calculations are without Surcharge and Cess