How to Calculate Income Tax According to Tax Slabs?

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Do you want to save on taxes? Who doesn’t?

Before we talk about saving on taxes, let’s have a quick look at calculation of income tax.

How to Calculate Income Tax?

Step 1:

Components involved in Step 1 are: Assessment Year, Category, Gross Taxable Salary, HRA Exemption and Transport Allowance,

Income Calculation:

Assessment Year

2018-2019

Category

Male/Female/Senior Citizen/Super Senior Citizen

Gross Taxable Salary

X

HRA Exemption

Y

Transport Allowance

Z

 

House Rent Allowance (HRA):

(Considering the final value based on the rent paid and basic computation)

The HRA is decided depending on your basic salary. There are several other factors affecting it, including the city in which you reside. If you’re residing in a metropolitan city, then you are entitled to the HRA equivalent to 50% of your salary, whereas for all other cities the HRA comes out to be 40% of the salary.

The salary is described as the sum of basic pay, dearness allowance (if any), and any other commission. If you’re not getting a dearness allowance or any other commissions, then the HRA will be 40%-50% of your basic pay.

The actual House Rent Allowance will be the least of three provisions mentioned below:

  • The sum of money received as the HRA from your employer
  • Your rent minus 10% of your basic pay
  • 50% of your basic pay if you’re living in a metropolitan city and 40% if you’re residing in a non-metro city.

Transport Allowance:

(Maximum exemption Rs. 19,200)

Step 2:

Components involved in Step 2 are: Medical Insurance Premium, Interest Paid on Home Loan u/s80EE (if any), Education Loan u/s 80E (if any), Basic Deductions u/s 80C, Basic Deductions u/s 80CCD and Donations to Charity u/s 80G (if any).

Investment Calculation (IC):

Parameters

Income Tax Section

Maximum Exemption

Insurance Premiums

·         Life Insurance: Under Section 80C

·         Medical Insurance: Under Section  80D

·         Life Insurance: Rs. 1.5 Lakh within the overall limit of the Section 80C

·         Medical Insurance: Rs. 55,000 (below 60 years)* and Rs. 60,000 (60 years and above)

Interest Paid on Home Loans

Section 80EE

Rs. 50,000 per FY on for the first time home buyers.

Education Loan

Section 80E

No limit**

Basic Deductions

Section 80CCD

Rs. 50,000 towards NPS

**The total exemption allowed is the total interest paid during the financial year

 Total Taxable Income = X-(Y+Z+ all the investment calculations in the above table)

Being on the verge of reaching the deadline for submitting proofs of your investment, you must be a little pre-occupied seeking the best investments options, depending on the income tax bracketyou fall into. If you Google it, you will find n number of investment options flooding the Internet. But seeking the best deal for yourself is a really difficult task.

Before we move ahead, let us have a look at the Income Tax Slab Rate for AY 2018-19:

General Category

Senior Citizen

Superior Senior Citizens

(Up to the age of 60 years)

(60 to 80 years)

(Above 80 years)

Income

Tax

Income

Tax

Income

Tax

Up to Rs. 2,50,000

Nil

Up to Rs. 3,00,000

Nil

Up to Rs. 5,00,000

Nil

Rs. 2.5 Lakhs-Rs. 5 Lakhs

5%

Rs. 3 Lakhs -Rs. 5 Lakhs

5%

Rs. 5 Lakhs -Rs. 10 Lakhs

20%

Rs. 5 Lakhs-Rs. 10 Lakhs

20%

Rs. 5 Lakhs -Rs. 10 Lakh

20%

More thanRs. 10 Lakhs

30%

More thanRs. 10 Lakhs

30%

More thanRs. 10 Lakhs

30%

 

 

10% surcharge for incomes between Rs. 50,00,000 and Rs. 1 crore along with marginal relief

15% surcharge for the income above Rs. 1 crores along with marginal relief

# Rebate up to Rs. 2,500 for a taxable income up to Rs. 3.5 lakh

# Education as well as higher education cess of 3%

# - for special cases

Now, let’s see where you should invest your money to save tax depending on the different tax slabs.

Tax Slab 1: Taxable Income up to Rs. 2.5 Lakh:

Calculation of Tax under this Tax Slab:

Particulars

Amount

Basic Pay

X

Non-taxable Income

-

Taxable Income

Nil

 

If you’re falling into this tax slab, then you don’t have to pay taxes. But don’t you need to save or invest? Of course, you do.

Now, the question that comes to your mind is, where should you invest? There are many investment options for you. If you have dependents, then it is advisable to buy a life insurance plan. A life insurance policy is not just a tax saving instrument, it also guarantees financial protection for your dependents when you’re not around. And, if you’re the only bread-winner of your family and fall under this tax slab, then it is high time for you to think of buying a life insurance cover.

Benefits of a life insurance plan for you:

  • Life Risk Cover- A life insurance offers a high life-risk cover, which keeps you and your dependents protected in the case of any unforeseen events.
  • Assured Income Benefits- Your dependents are secure because of the assured income that you provide regularly. This income helps them repay all the loans, rents and other expenses like telephone and electricity bills, house rent, child education etc.
  • Life Stage Planning- Apart from providing protection, a life insurance plan assists you with planning various stages of life, depending on your convenience. Life insurance not only offers financial protection to your dependent in case of your unforeseen demise, but also works for you as a long-term investment.
  • Loan Options- In case you’re in desperate need of money, a life insurance plan offers you the benefit of taking a loan against your policy.
  • Riders- Riders are the extra benefits that you can buy and add to a basic life insurance policy. Such options permit you to amplify your insurance cover.

However, if you do not have dependents, then you can opt for investing in Public Provident Fund (PPF) and Mutual Funds (MFs).

Mutual Funds (MFs):

Mutual funds refer to a kitty of money accrued by various investors who intend to save and make money through investments. The financial corpus, so formed, is invested in several classes of assets, namely, liquid assets, debt funds, etc.

Mutual funds are the best pick for you, as they come with the most important feature- liquidity. If you’re investing in an open-ended fund scheme, then you’re eligible to

cash in the partialor total investment anytime and you can get the current value of your shares. Mutual funds offer you more liquidity than any investments in deposits, bonds and shares. A standardized process is followed for withdrawals and it is smooth and efficient. Therefore, you receive your money well on time and with no delay.

Public Provident Fund (PPF):

The PPF scheme is pretty popular among financial advisors and investors because of its flexible nature. Moreover, the interest received on it makes it lucrative. Though the PPF interest rate has dropped down in the last year, it has continued to be one of the most accepted investment options among individuals with a taxable income of up to Rs. 2.5 Lakh. Also, despite this rate cut, advisors consider PPF to be a good bet.

Taxable Income between Rs. 2.5 Lakh and Rs. 5 Lakh:

Calculation of Tax under this Slab:

Particulars

Amount

Basic Pay

X

House Rent Allowance (HRA)

X*50/100 (for metro cities)

 

X*40/100 (for non-metro cities)

Provident Fund

Employee’s Contribution

Employer’s Contribution

12% towards EPF

3.67% towards EPF

8.33% towards EPS

 

Let’s take an example to understand this:

Annual CTC: Rs. 4,35,000

The salary breakup is as follows:

Earnings

Deductions

Particulars

Amount (in Rs.)

Particulars

Amount (in Rs.)

Basic Pay

21000.00

Provident Fund (PF)

2520.00

House Rent Allowance (HRA)

10500.00

 

 

Transport Allowance (TA)

1600.00

 

 

Special Allowance (SA)

900.00

 

 

Total

33800.00

Total

2520.00

Disclaimer: The figures used in this example are fictitious.

Total taxable income                                      Rs. 4,05,600

Deduct HRA*                                                   Rs. 1,26,000               

Taxable Income                                              Rs. 2,79,600

Stipulated Exemption                                      Rs. 2,50,000

Final Taxable Income                                      Rs. 29,600

Deduct PF Contribution                                   Rs. 30,240 (Rs.2520x12)

Final Taxable Income                                      -Rs. 640

Here the individual has to pay no tax. But if you do not have a similar salary break up and fall under the tax slab between Rs. 2.5 Lakh and Rs. 5 Lakh, then you have two options, namely insurance and investment.

You can buy a life insurance cover and save tax or you can opt to investment in any of the following available options:

  • Unit Linked Insurance Plan (ULIP)
  • Equity Linked Savings Scheme (ELSS)
  • Mutual Funds
  • Systematic Investment Plan (SIP)
  • Public Provident Fund (PPF)

Taxable Income between Rs. 5 Lakh and Rs. 10 Lakh:

Calculation of Tax under this Slab:

Particulars

Amount

Basic Pay

X

House Rent Allowance (HRA)

X* 50/100 (for metro cities)

 

X*40/100 (for non-metro cities)

Provident Fund

Employee’s Contribution

Employer’s Contribution

12% towards EPF

3.67% towards EPF

8.33% towards EPS

 

Let’s take an example to understand this:

Annual CTC: Rs. 6,00,000

The salary breakup is as follows:

Earnings

Deductions

Particulars

Amount (in Rs.)

Particulars

Amount (in Rs.)

Basic Pay

27000.00

Provident Fund (PF)

3240.00

House Rent Allowance (HRA)

13500.00

 

 

Transport Allowance (TA)

1600.00

 

 

Special Allowance (SA)

1100.00

 

 

Total

43,200.00

Total

3240.00

Disclaimer: The figures used in this example are fictitious.

 

Total taxable income                                      Rs. 5,18,400

Deduct HRA*                                                   Rs. 1,62,000               

Taxable Income                                              Rs. 3,56,400

Stipulated Exemption                                      Rs. 2,50,000

Final Taxable Income                                      Rs. 1,06,400

Deduct PF Contribution                                   Rs. 38,880

Final Taxable Income                                      Rs. 67,520

In order to save the remaining amount of Rs. 67,520, you can buy a life insurance cover or invest in the aforementioned investment options.

You can refer the table below to know about the best investment options for you:

S. No.

Investment Options

Maximum Amount

Minimum Amount

Minimum Investment Period

1.

Mutual Fund (SIP)

No limit

As low as 500

Applicable only in the case of ELSS and close-ended schemes

2.

Public Provident Fund

Rs. 1.5 Lakh (one FY)

Rs. 500 (one FY)

15 years

3.

Unit Linked Insurance Plans

No limit

Rs. 1 lakh for plans 45 years and below

45 years and below

4.

Equity Shares

No limit

No limit

Not applicable here

5.

Gold ETF

No limit

No limit

Not applicable here

6.

Real Estate Investments

No limit

No limit

Not applicable here

7.

Post office monthly income account schemes (single)

Rs. 4.5 lakh

Rs. 1,500

5 years

8.

Initial Public Offerings

No limit

Rs. 1 lakh for plans for 45 years and below

45 years and below

9.

Company Fixed Deposits

No limit

As low as Rs. 2,000

12 months

10.

Bonds

No limit

Variable

Variable

 

Taxable Income above Rs. 10 Lakh:

Calculation of Tax under this Slab:

Particulars

Amount

Basic Pay

X

House Rent Allowance (HRA)

X*50/100 (for metro cities)

 

X*40/100 (for non-metro cities)

Provident Fund

Employee’s Contribution

Employer’s Contribution

12% towards EPF

3.67% towards EPF

8.33% towards EPS

 

Let’s take an example to understand this

Annual CTC: Rs. 10,00,000

The salary breakup is as follows:

Earnings

Deductions

Particulars

Amount (in Rs.)

Particulars

Amount (in Rs.)

Basic Pay

49941.00

Provident Fund (PF)

5992.00

House Rent Allowance (HRA)

24970.00

TDS

3908.00

Transport Allowance (TA)

1600.00

 

 

Special Allowance (SA)

3673.00

 

 

Total

80,184.00

Total

9,900.00

Disclaimer: The figures used in this example are fictitious.

Total taxable income                                      Rs. 9,62,208

Deduct HRA*                                                   Rs. 2,99,640               

Taxable Income                                              Rs. 6,62,568

Stipulated Exemption                                      Rs. 2,50,000

Final Taxable Income                                      Rs. 4,12,568

Deduct PF Contribution                                   Rs. 71904

Final Taxable Income                                      Rs. 3,40,664

You may also Like to Read: Section 80D Deduction for A.Y 2017-18

Wrapping it up!

Now that you have an idea of how to save taxes based on your income, don’t waste time, just look for the best investment options for yourself, as per your preferences. You can refer to our website to compare, save,and build better financial corpus for future. Happy saving!

 

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