One of the biggest reasons why many salaried individuals struggle with income tax calculation is their inability to understand salary components and structure properly. The net CTC offered to you by your employer has several tax-saving components, and to take maximum advantage of these components, you must have a proper understanding of your salary structure.
But before knowing how to calculate the income from salary, you should first check your CTC to understand the taxability of various components. All the components would be classified into 3 categories - Taxable, Potentially taxable and Fully Exempt from tax. -.
For instance, let us take the example of Rocket Singh who earns INR 12 lakh annually.
In this case:
- Fully taxable allowance includes: Basic salary & special allowance
- Potentially taxable allowance includes: House Rent Allowance (HRA) & Leave Travel Allowance (LTA)
- Fully Exempt allowance includes: Food Allowance & Telephone Allowance
(If you want to know more about allowance in detail: read here)
Now that we know the taxability of the components of his salary structure, let's understand how he can reduce his tax liability by claiming maximum benefits from his CTC
Income Tax Calculation (Old vs. New Tax Regime)
| Deduction & Exemption (INR) | Explanation | |
|---|---|---|
| a) Annual Income | 12,00,000 | |
| b) HRA | -3,00,000 | Actual HRA is INR 3,00,000 annually 50% of Basic in INR 3,00,000 annually Actual Rent Paid - 10% of Basic is INR 4,14,000 annually (INR 4,20,000 - INR 6,000) Therefore, INR 3,00,000 is the lowest and hence it is used for tax exemption To read more about HRA - click here. |
| c) Leave Travel Allowance | -28,000 | Mr. Rocket Singh had travelled to Jammu along with his family this year. The total cost of the flight that he incurred was INR 28,000. Therefore he can claim an exemption for the same as it was the shortest distance to the destination. To read more about LTA - click here. |
| d) Food Allowance | -24,000 | Meal Coupons like Sodexo or Ticket are tax-free subject to Rs 50 per meal and 2 meals per day. A sum of Rs 24,000 can be availed as a deduction by Rocket Singh annually. |
| e) Telephone Reimbursement | -24,000 | As a thumb rule, official expenses on telephones, including mobile phones paid by the employer on behalf of the employee, are not taxable. |
| f) Total | 3,76,000 | |
| Net Taxable Income (a-f) | 8,24,000 |
The Taxable income is now reduced from INR 12,00,000 to INR 8,24,000 but this is not the end. You can further reduce the taxable income by deducting the standard deduction and by claiming other tax deductions available to you under Chapter VI. You can read more about these deductions here. However, in the case of the New Regime, no such deductions are available.
Further to know more about Rocket Singh’s journey and how he reduced his tax liability - check our course- Understanding CTC and Salary Structure.
We have also discussed in brief part 2 of this article where we discuss more tax deductions - you can check it here.