The government has given taxpayers the option to choose between two income tax regimes: the old regime and the new regime. The tax slab, rules and benefits of each regime are different. Therefore, people can choose the option according to their financial needs. Here we are presenting to you the necessary information to assess income tax under both the regimes.
Understand your tax slab
The new tax regime has a simpler system and lower tax rates, but the provision of exemptions is minimal. Under this, exemption is available under standard deduction and to avail this benefit, taxpayers are not required to present proof of investment or make any additional disclosure.
Tax slabs under this regime:
Under this regime, an exemption of Rs 75,000 is available through standard deduction and this is a big benefit. On the other hand, the old tax regime has higher tax rates but allows taxpayers to claim a number of exemptions and deductions.
Slab in the old regime:
Apart from this, under the old regime, taxpayers can reduce their tax amount to zero by claiming a rebate of Rs 12,500 on income up to Rs 5 lakh under Section 87A.
How to calculate your income tax?
Step 1: Calculate your gross income
The first step in calculating your income tax is to determine your gross income. Gross income is income before any taxes or discounts are applied. This includes:
– Salary components: This includes your House Rent Allowance (HRA), Leave Travel Allowance (LTA) and any special allowances, such as reimbursement or food coupons.
– Other sources of income: For example, interest from savings accounts, rental income from properties or any freelance earnings.
In order to make things easier for taxpayers, Income Tax 1961 has divided three different sources of income into 5 parts.
Exemption under HRA
If you live in a rented house, there is also a part of HRA in your salary, then a part of it can get tax exemption. The amount of exemption will be the minimum of:
1. The amount obtained by subtracting 10% of your basic salary from the rent amount paid.
2. HRA received from the company
3. 50% (for metro cities) or 40% (for non-metro cities) of basic salary.
For example:
– Basic monthly salary: Rs 50,000 per month.
– Rental payment: Rs 20,000 per month.
– HRA received: Rs 15,000 per month.
Calculation:
– Actual rent paid- 10% of basic salary: Rs 20,000-5,000=Rs 15,000
– HR given: Rs 15,000
– 50% of basic salary (metro city): Rs 25,000
The HRA exemption will be Rs 15,000, as it will be the lowest amount among the three.
Step 2: Subtract Exemptions and Deductions
Once you have calculated your gross income, the next step is to apply eligible exemptions and deductions.
standard deduction
– Old regime: Standard deduction of Rs 50,000 is available.
– New regime: Standard deduction of Rs 75,000 available.
Exemption under section 80C
You can reduce your taxable income up to Rs 1.5 lakh through investments and payments under Section 80C. If you have opted for the old tax regime, you can avail exemption under 80C. However, those opting for the new tax regime will not be able to avail the benefit of this deduction.
Step 3: Estimate taxable income
The income that remains after deducting all exemptions and deductions from your gross income is called taxable income. For example, if your gross income is Rs 10 lakh and your total exemption is Rs 2 lakh, then your taxable income will be Rs 8 lakh.
Step 4: Apply for tax slab
You can estimate your tax liability by applying the relevant tax slab based on your taxable income and choice of tax regime:
– Under the new regime, there will be no tax on your taxable income of Rs 3 lakh, while the next Rs 7 lakh will be taxed at 5%.
– Under the old regime, it varies depending on various exemptions and deductions.
Step 5: Add cess and surcharge
Ultimately, cess and surcharge are added to your tax liability. The surcharge is applicable to those whose income is more than Rs 50 lakh. It is not imposed on the total income but on the outstanding amount of tax. On the other hand, cess is a type of levy and it is imposed on income tax to raise funds for purposes like health and education.