As soon as the deadline to file IT returns approaches, most people immediately run to their CAs.
This leaves no time for proper tax planning for the future.
With accurate knowledge of income tax system in India, you can calculate your income tax and find ways to save tax.
Income tax in India is calculated in slabs, i.e., ranges of income.
The latest Indian income tax slabs for FY 2017-2018, applicable for both men and women, are given below:
|
Income Slab
|
Income Tax Rate
|
|
Below 2.5 Lakhs
|
No Tax
|
|
Between 2.5 Lakhs and 5 Lakhs
|
5%
|
|
Between 5 Lakhs and 10 Lakhs
|
20%
|
|
Above 10 Lakhs
|
30%
|
These are incremental tax slabs. This means no matter which slab your income falls in, the tax will be calculated first for all lower slabs and then for the main slab.
If your income is above 10 lakhs, your main slab is the 4th slab.
First 2.5 lakhs (first slab) are totally tax-free.
On the next 2.5 lakhs, you will pay Rs. 12,500 as tax from the second slab.
On the next 5 lakhs, you will pay Rs. 1, 00, 000 as tax from the third slab.
Anything above 10 lakhs falls in the fourth slab. You will pay 30% of the amount exceeding Rs. 10 lakhs as tax from the fourth slab.
Your final tax liability will then be a sum of tax from all slabs.
For income between 50 Lakhs and 1 Crore, you have to pay additional 10% of the tax liability as the surcharge (on the tax amount, not on the income).
For income above Rs. 1 Crore, this surcharge becomes 15% of the tax liability.
Educational cess and surcharge are also applied when we calculate the tax. They are discussed in the next section.
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About Educational Cess
A cess tax is a “tax on tax”. This amount is calculated on the tax liability, not on your income.
Currently, you have to pay 2% Education cess and 1% of Secondary and Higher Education Cess.
A total of 3% of income-tax is also added to your tax liability.
If you are paying the surcharge as well, this 3% is calculated jointly on the income tax + surcharge.
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Example on Income-tax, Surcharge, and Cess
Let’s understand through an example how to calculate income tax for salaried individuals. Let’s assume Mr. Loyson takes home an annual salary of Rs. 58 Lakhs.
Don’t calculate a flat 30% of this 58 Lakhs – this is the most common mistake made during income tax calculation.
The right way to calculate income tax on Rs. 58 Lakhs is:
|
Income Slab
|
Taxable Amount
|
Income Tax Rate
|
Tax Amount
|
|
Below 2.5 Lakhs
|
Nil
|
No Tax
|
Nil
|
|
Between 2.5 Lakhs and 5 Lakhs
|
Rs. 2.5 Lakhs
|
5%
|
+ Rs. 12,500.
|
|
Between 5 Lakhs and 10 Lakhs
|
Rs. 5 Lakhs
|
20%
|
+ Rs. 1,00,000.
|
|
Above 10 Lakhs
|
Rs. 48 Lakhs
|
30%
|
+ Rs. 14,40,000.
|
So, gross tax amount is
Rs. 12, 500 + Rs. 1, 00, 000 + Rs. 14, 40, 000
= Rs. 15, 52, 500.
After adding the 10% surcharge, the net tax amount is:
Rs. 15, 52, 500 + (0.1 * 15, 52, 500)
= Rs. 17, 07, 750
After adding the 3% cess tax, the final tax liability for Mr. Loyson is:
Rs. 17, 07, 750 + (0.03 * 17, 07, 750)
= Rs. 17, 58, 982 / plus 50 paise
About Income Tax Rebate under Section 87A
There’s also a concept of tax rebate, i.e., discount on taxes. For the FY 2017-18, this tax rebate is set to 100% or Rs. 2,500 (whichever is lower) if you earn up to 3.5 Lakhs in the year.
Based on the slabs give above, consider following examples:
|
Annual Income
|
Taxable Income
|
Tax Amount
|
Rebate under Sec 87A
|
Final Tax Liability
|
| Rs. 3,50,000 |
5% of Rs 1,00,000 |
Rs. 5,000 |
Rs. 2,500 |
Rs. 2,500
|
| Rs. 3,25,000 |
5% of Rs 75,000 |
Rs. 3,750 |
Rs. 2,500 |
Rs. 1,250
|
| Rs. 3,00,000 |
5% of Rs 50,000 |
Rs. 2,500 |
Rs. 2,500 |
Nil
|
In conclusion
The Indian Income-tax code is slightly complex. There are enough provisions made for low and middle-class families to save taxes.
You will need the help of a CA eventually, but you should do some basic calculation beforehand. You can then proactively participate in your tax planning process.
It is advisable to declare your investments at the beginning of the year and it will help your employer to make the required tax deductions.
It is important to know how much tax is deducted from your salary as holding on to more of the money is a key to build your wealth.
