A Comprehensive Guide to Calculating Income Tax on Salary (AY 2025-26)

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Are you a salaried individual who finds it challenging to determine what to include and exclude while filing your Income Tax Return (ITR)? This article will guide you through the process of calculating income from salary.

Salary is a comprehensive term encompassing various elements, and its interpretation often varies from person to person. However, under Section 17 of the Income Tax Act, salary is clearly defined, detailing the components included and excluded. Taxpayers must assess their income level and available deductions to select the most suitable tax regime. Understanding your tax slab and the breakup of your salary components can significantly assist in optimizing tax savings.

Recent Update

The rebate limit under Section 87A has been raised to Rs. 12 Lakhs under the New Tax Regime for FY 2025-26.

This means that if you are a salaried individual with an income of up to Rs. 12,75,000, your tax liability will be “Zero” after considering the standard deduction of Rs. 75,000 and the rebate of Rs. 12 Lakhs.

SECTION I – Components of Salary

Basic Salary

This is the core and fixed component of your salary, forming the foundation for other salary elements. For example, allowances such as House Rent Allowance (HRA) are calculated as a percentage of the basic salary, determined by company policy. Additionally, deductions such as Provident Fund (PF) are calculated at 12% of the basic salary. Basic salary typically constitutes a substantial portion of the overall salary package.

House Rent Allowance (HRA)

Employees living in rented accommodations can claim HRA to reduce their taxable income. Depending on specific conditions, HRA may be partially or fully tax-exempt. However, under the new tax regime, HRA exemptions are not permitted.

Illustration

Rohan works at a multinational company in Hyderabad. His employer includes HRA in his salary structure. However, Rohan stays with his parents and does not pay rent.

Can Rohan claim HRA exemption?

Ordinarily, no. Since Rohan does not pay rent, his HRA will be fully taxable.

Pro Tip: Rohan can enter into a rental agreement with his parents (provided they own the property) and pay them rent. By transferring rent to their account monthly, Rohan can claim HRA exemption while ensuring his parents declare this rental income in their tax returns. This allows Rohan to save on taxes and also provide financial support to his parents.

Leave Travel Allowance (LTA)

LTA offers tax exemptions for travel expenses incurred during domestic trips. This benefit is limited to travel costs and can only be claimed for journeys undertaken with immediate family members, such as a spouse, children, or parents. Trips with other relatives are not eligible for this exemption. To claim LTA, employees must provide travel expense proofs to their employers. Note that the exemption is valid only for the actual travel expenses incurred.

Bonus

Bonuses are additional payments made periodically, such as annually or bi-annually. Regardless of its nomenclature—performance bonus, variable pay, etc.—it is fully taxable. Performance bonuses are generally linked to appraisal outcomes or individual achievements and are governed by company policies

Employee Contribution to Provident Fund (PF)

The Provident Fund is a social security measure initiated by the Government of India under the EPF Act, 1952. Both employer and employee contribute an amount equivalent to 12% of the employee’s basic salary monthly. These contributions accumulate in the employee’s provident fund and pension accounts. Currently, the EPF interest rate is 8.25%. Taxable EPF withdrawals without a PAN attract a TDS of 20%.

Standard Deduction

Standard deduction is a fixed reduction allowed on salary income without any prerequisites. Under the old tax regime, a deduction of Rs. 50,000 is applicable, whereas the new tax regime offers a standard deduction of Rs. 75,000 under Section 115BAC.

Professional Tax

Professional tax is a state-specific tax levied on employment, similar to the centrally administered income tax. Each state prescribes its own rates, with a maximum annual limit of Rs. 2,500. Employers usually deduct this tax from salaries and remit it to the state government. Under the old tax regime, professional tax payments are deductible from salary income.

Understanding the Difference Between Take-Home Salary and CTC

When starting a new job, you may notice that the salary details in your offer letter include several components, many of which you may not receive as cash in hand. This difference is due to the distinction between your Take-Home Salary and Cost to Company (CTC). Let’s break it down.

What is CTC?

Cost to Company (CTC) is the total amount an employer spends on an employee annually. It includes:

Salary: The amount paid monthly, including basic pay, allowances, and bonuses.
Retirement Benefits: Contributions to Provident Fund (PF), gratuity, or other retirement schemes.
Perks and Non-Monetary Benefits: Office-provided cab services, meal coupons, medical insurance, or mobile bill reimbursements.

Components of a Typical CTC:

Here’s an example of a CTC breakdown as presented in an offer letter:

CTC Components	Amount (INR)
Basic Salary	3,00,000
Special Allowance	1,00,000
House Rent Allowance (HRA)	80,000
Medical Insurance	5,000
Provident Fund (12% of Basic)	36,000
Performance Bonus	75,000
Total CTC	5,96,000

What is Take-Home Salary?

Take-Home Salary, also known as Net Salary, is the actual amount credited to your bank account after deductions. These deductions include contributions to retirement funds, taxes, and other mandatory withholdings.

Example of Take-Home Salary Calculation:

For the CTC example above, the take-home salary can be calculated as follows:

Taxable Salary Components	Amount (INR)
Basic Salary	3,00,000
Special Allowance	1,00,000
House Rent Allowance (HRA)	80,000
Medical Insurance	5,000
Performance Bonus Received	1,75,000
Total Salary	6,55,000
Less: Provident Fund (12% of Basic)	36,000
Less: Income Tax Payable*	25,480
Take-Home Salary	6,14,250

(*Tax calculations will vary based on applicable deductions and exemptions under Section 80 of the Income Tax Act.)

Key Differences:

CTC Includes Non-Cash Benefits:
- Medical insurance, gratuity, and meal coupons are part of your CTC but not part of your take-home salary.
Take-Home Salary Deducts Taxes and Contributions:
- Provident Fund and income tax deductions reduce the actual amount you receive.
Variable Components:
- Bonuses and incentives may vary, affecting your monthly take-home amount.

Summary:

While the CTC gives a comprehensive view of the employer’s expenditure on you, the take-home salary is what you should plan your monthly expenses around. Understanding the components and deductions will help you manage your finances effectively.

SECTION IV – Basics of Income Tax

Income Chargeable to Tax

Your income encompasses more than just your salary. It includes earnings from various sources such as property, profits from stock sales, interest on savings accounts, and fixed deposits.

All these components collectively constitute your gross income.

Head of Income	Description
Income from Salary	Earnings from employment contracts.
Income from House Property	Earnings from owning property (self-occupied or rented).
Income from Business and Profession	Profits or losses from business activities, including freelancer income.
Income from Capital Gains	Profits from selling capital assets like shares, jewelry, mutual funds, and property.
Income from Other Sources	Miscellaneous earnings such as interest from fixed deposits and savings accounts.

Tax Rates

Income Tax Rates for FY 2024-25:

Combine all income under the heads above to calculate your gross total income. Deduct eligible amounts under Chapter VI-A to arrive at the taxable income

Tax Slab	Old Regime	Tax Slab	New Regime
Up to Rs 2,50,000	No tax	Up to Rs 3 lakhs	No tax
Rs 2,50,000 – Rs 5 lakhs	5%	Rs 3 lakhs – Rs 7 lakhs	5%
Rs 5 lakhs – Rs 10 lakhs	20%	Rs 7 lakhs – Rs 10 lakhs	10%
Above Rs 10 lakhs	30%	Rs 10 lakhs – Rs 12 lakhs	15%
NA	NA	Rs 12 lakhs – Rs 15 lakhs	20%
NA	NA	Above Rs 15 lakhs	30%

Cess:

A 4% health and education cess applies to the total income tax and surcharge.

Senior Citizens’ Basic Exemption Limit (Old Regime):

For individuals aged 60–80 years: Rs. 3 lakh
For individuals above 80 years: Rs. 5 lakh

Example Tax Calculation (Old Regime)

Rohit’s taxable income is Rs. 8,00,000:

Particulars	Amount
Income up to Rs. 2,50,000	Nil
Income from Rs. 2,50,000 – Rs. 5,00,000	Rs. 12,500
Income from Rs. 5,00,000 – Rs. 8,00,000	Rs. 60,000
Total Tax	Rs. 72,500
Education Cess (4%)	Rs. 2,900
Total Payable	Rs. 75,400

TDS on Salary

Tax Deducted at Source (TDS) involves employers deducting taxes monthly and depositing them with the government. The employer issues Form 16, detailing monthly deductions and annual salary.
Banks deduct TDS (typically 10%) on fixed deposit interest. If PAN details are unavailable, the rate increases to 20%.

Form 16

This TDS certificate is divided into two parts:

Part A: Employer and employee details (e.g., PAN, TAN).
Part B: Salary, income, deductions, and tax liabilities.

Form 26AS

This document summarizes taxes deducted and deposited by the taxpayer. It includes TDS, tax refunds, and more. It is accessible via the Income Tax Department’s website.

Annual Information Statement (AIS)

AIS is a comprehensive summary of financial transactions reported to the Income Tax Department. It includes:

Salary income and bank interest
Capital gains
High-value transactions (e.g., large cash deposits, credit card payments)
Tax payments and refunds

Verify AIS and Form 26AS before filing your returns to avoid discrepancies.

Deductions

Lower taxable income by claiming deductions such as those under Section 80C (up to Rs. 1.5 lakh) and other sections like 80D (health insurance), 80E (education loan interest), and 80GG (rent).

Conclusion: Understanding the different income heads and applicable deductions is crucial for optimizing tax savings. Select a tax regime—old or new—based on your income structure and available deductions to minimize tax liability.

FAQ's

What is included in "Income from Other Sources"?

Income from other sources includes any earnings that do not fall under salary, house property, business/profession, or capital gains. Examples are interest from fixed deposits, savings accounts, dividends, and gifts above the exemption limit.

What is the difference between the old tax regime and the new tax regime?

The old tax regime offers multiple exemptions and deductions (e.g., Section 80C, 80D) to reduce taxable income. The new tax regime has lower tax rates but fewer exemptions and deductions, allowing for simplified tax filing. Taxpayers can choose between the two based on their financial structure.

What is Form 16, and how is it used?

Form 16 is a TDS certificate issued by employers. It contains details about salary earned, tax deducted, and deposited with the government. It is essential for filing income tax returns as it summarizes an employee's tax liability for the financial year.

What is the basic exemption limit for senior citizens?

For individuals aged 60–80 years, the basic exemption limit is ₹3,00,000 under the old tax regime. For super senior citizens (80 years or older), it is ₹5,00,000.

What is the difference between Form 26AS and the Annual Information Statement (AIS)?

Form 26AS: A summary of taxes deducted on your behalf, taxes paid, and refunds received.
AIS: A detailed financial statement summarizing all income, investments, and transactions reported to the tax department, such as mutual fund purchases or high-value transactions.

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