How to Calculate Taxable Income from Salary – Step by Step

How to Calculate Taxable Income from Salary – Step by Step

Most salaried employees receive a CTC (Cost to Company) from their employer but are unsure how much of it is actually taxable. The journey from gross salary to taxable income involves several exemptions, deductions, and allowances. This step-by-step guide explains the complete computation.

Components of Salary Income

A typical salary package includes:

Step 1: Calculate Gross Salary

Gross Salary = Basic + DA + HRA + Special Allowance + Other Allowances + Perquisites

Gross salary includes all monetary and non-monetary benefits received from the employer. Perquisites like company car, rent-free accommodation, and stock options are also included.

Step 2: Calculate Exempt Allowances

Under the old regime, certain allowances are partially or fully exempt:

• HRA Exemption – Least of: actual HRA, 50%/40% of salary, or rent minus 10% of salary
• LTA Exemption – Actual travel expenses (domestic only)
• Children Education Allowance – Rs 100/month per child (max 2 children)
• Hostel Expenditure Allowance – Rs 300/month per child (max 2 children)

Step 3: Apply Standard Deduction

After calculating exemptions, apply the standard deduction:

• Old Regime: Rs 50,000
• New Regime: Rs 75,000

Step 4: Deduct Professional Tax

Professional tax paid to the state government (usually Rs 2,400 to Rs 2,500 per year) is deductible under Section 16(iii).

Step 5: Calculate Net Salary Income

Net Salary = Gross Salary - Exempt Allowances - Standard Deduction - Professional Tax

Step 6: Add Other Income

Add income from other sources to get your Gross Total Income:

• Interest from savings accounts and fixed deposits
• Rental income from property
• Capital gains from investments
• Any other income

Step 7: Claim Deductions Under Chapter VI-A

Under the old regime, subtract applicable deductions:

• Section 80C – Up to Rs 1,50,000
• Section 80CCD(1B) – Additional Rs 50,000 for NPS
• Section 80D – Health insurance premiums
• Section 80E – Education loan interest
• Section 80G – Donations
• Section 80TTA – Savings interest up to Rs 10,000

Step 8: Arrive at Taxable Income

Taxable Income = Gross Total Income - Chapter VI-A Deductions

Complete Calculation Example

Mr. Patel works in Mumbai with the following salary structure:

He pays rent of Rs 18,000/month, invests Rs 1,50,000 in PPF, and pays Rs 25,000 for health insurance.

Under Old Regime:

• Gross Salary: Rs 11,50,000 (Basic + HRA + Special + LTA)
• Less: HRA Exemption: Rs 1,56,000 (least of 3L, 3L, or 2.16L - 60K)
• Less: Standard Deduction: Rs 50,000
• Less: Professional Tax: Rs 2,500
• Net Salary Income: Rs 9,41,500
• Less: 80C (PPF): Rs 1,50,000
• Less: 80D (Health Insurance): Rs 25,000
• Taxable Income: Rs 7,66,500
• Tax Payable: Rs 65,800 + Cess Rs 2,632 = Rs 68,432

Under New Regime:

• Gross Salary: Rs 11,50,000
• Less: Standard Deduction: Rs 75,000
• Taxable Income: Rs 10,75,000
• Tax Payable: Rs 57,500 + Cess Rs 2,300 = Rs 59,800

In this case, the new regime saves Rs 8,632.

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