Preparing For The Tax Season: How To Calculate Your Taxable Income
Calculating your taxable income is a crucial part of the tax filing process-it gives you knowledge of the various exemptions and deductions you can avail of to reduce your tax liability
With the end of FY25 approaching, it will soon be time to file your taxes. If you are a salaried employee, a part of your income will be taxed based on the slab you fall under. Calculating your taxable income is a crucial part of the tax filing process-it gives you knowledge of the various exemptions and deductions you can avail of to reduce your tax liability. Do note that these deductions and exemptions are only applicable under the old tax regime and not the new regime. To better equip you for the tax-filing process, here the basic steps you must follow to calculate your taxable income.
Step 1: Find out your total income
Your total income constitutes the grand total of all your earnings during a financial year. To calculate your gross income, add up all sources of income, such as the following:
- Your basic salary or wages, including your basic salary, bonuses, and allowances like house rent, special allowance, etc.
- Any income, including profits, earned as a business owner or professional.
- Income from other sources, such as interest earnings from savings accounts and fixed deposits, dividends, and rental income from property.
Step 2: Apply eligible deductions
After you have calculated your gross income, subtract the applicable deductions from it. The Income Tax Act contains various sections that offer several tax deductions to help lower your taxable income and tax liability. Following are some of the most-used deductions that are available:
- Section 80C: Deductions up to Rs.1.5 lakh allowed for investments like Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), life insurance premiums, ELSS investments, and tax-saving fixed deposits.
- Section 80CCD: For contributions to National Pension Scheme (NPS).
- Section 80D: Deductions for premiums paid on health insurance policies for yourself, your spouse, children, and parents.
- Section 24(b): Deduction of up to Rs.2 lakh per financial year for interest paid on a home loan taken for purchasing or constructing a self-occupied house.
- Section 80E: Deduction for interest payable towards education loans.
- Section 80G: deduction for donations to charitable organizations
Review your debts and income before starting the tax filing process so you know the deductions you may be eligible for.
Step 3: Apply eligible exemptions
To further reduce your taxable income, you can also claim tax exemptions that you may be eligible for. Given below are some common exemptions availed:
- House Rent Allowance (HRA): This exemption, subject to fulfilment of certain conditions, is available to tax payers living in a rented accommodation. The exemption amount you are entitled to will be computed based on your salary, the city you live in, and your rent.
- Gratuity: When retiring or resigning, salaried private sector employees are entitled to gratuity, a part of which is exempt from tax in the hands of the receiver.
- Leave Travel Allowance (LTA): Exemption on travel expenses you have paid for yourself and your family, subject to certain conditions.
Step 4: Apply available rebate
Section 87A of the Income Tax Act offers tax rebates to salaried taxpayers following the new and old regime. The maximum rebate available is Rs.25,000 for income up to Rs.7 lakh under the new regime and Rs.12500 for income up to Rs.5 lakh, under the old regime.
Step 5: Calculate taxable income
Now that you know your total income, apply the exemptions and deductions available to you, which will give you your taxable income. Let’s understand this with the following example illustrating the taxable income of a salaried employee earning Rs.8 lakh per annum and eligible for deductions under Sec 80C, 80G, and more.
Taxable income under the new regime (AY 25-26)
Note: Calculation assumes taxable income to be Rs.7,25,000, wherein a standard deduction of Rs.75,000 applicable on total income.
Tax slab |
Tax rate |
Tax payable |
Rs.0-3L |
0% |
Nil (Rs.3L) |
Rs.3-7L |
5% |
Rs.20,000 (5% of Rs.4L) |
Rs.7-10L |
10% |
Rs.2500 (10% of Rs.25,000) |
Rs.10-12L |
15% |
0 |
Rs.12-15L |
20% |
0 |
Rs.15L and higher |
30% |
0 |
Total tax |
Rs.22,500 |
|
Cess @4% |
Rs.900 |
|
Total tax payable |
Rs.23,400 |
Taxable income under the old regime
The calculation assumes the following:
- Taxable income - Rs.8 lakh
- Total deductions: Rs.4,84,000 (Standard deduction of Rs.50,000, R.1.5 lakh under Sec 80C, Rs.3 lakh for home loan interest repayment, insurance premiums, NPS, and charitable donations).
- Taxable income: Rs.3,16,000
Tax slab |
Tax rate |
Tax payable |
Rs.0-2.5L |
0% |
Nil (on Rs.2.5L) |
Rs.2.5-5L |
5% |
Rs.3,300 (5% of Rs.66,000) |
Rs.5-10L |
20% |
0 |
Rs.10L and beyond |
30% |
0 |
Total tax |
Rs.3,300 |
|
Cess @4% |
Rs.132 |
|
Total tax payable |
Nil |
In the table above, the final taxable income is below Rs.5,00,000, which is not taxable under the old regime.
Tax planning is an important part of financial planning. Knowing how to calculate your taxable income can help you maximise available deductions and exemptions. This, in turn can help you plan investments strategically while also enabling you to choose a tax regime that aligns with your financial goals.
(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)