Income tax deduction from salary refers to the amount that is deducted by your employer before giving you the salary for the month. This deduction is derived from the Income Tax Act of 1961, which serves as the regulatory framework for tax rates and regulations.
Tax deduction from salary is one of the most important aspects of personal finance which every salaried individual in India should be aware of. Moreover, the amount of tax deduction depends on various factors, including your income, applicable tax slab, exemptions, deductions and more. This blog explores how much tax is deducted from salary in India and the factors that influence it.
What Are The Factors Determining The Tax Deduction from Salary
When the salary is paid, the employer will calculate the Tax Deducted at Source (TDS) where a portion of income is deducted as tax by the payer at the time of payment and remitted to the government on behalf of the recipient.
Many elements influence the tax deduction and understanding them will help to manage the finances better and understand how much tax is deducted from salary.
1. Gross Salary: Gross salary includes the total income of an individual, such as basic pay, bonuses, additional payments, and any other work-related benefits.
2. Deductions and Exemptions: Deductions under sections like 80C and 80D, along with exemptions such as House Rent Allowance (HRA), can significantly reduce taxable income.
3. Taxable Income: Taxable income is the amount remaining after subtracting exemptions, like HRA and LTA, and deductions under applicable sections like 80C, 80D, etc.
4. Income Tax Slab: Tax rates depend on the income tax slab the individual falls into. India has two tax regimes, allowing taxpayers to choose the one that best suits their financial needs. The default system is now the new regime.
5. Professional Tax: Professional tax is a state-specific tax, deducted monthly from an individual’s salary, and is applicable based on the state’s regulations.
Understanding Different Types of Tax Slab
There have been changes to the tax slabs with the shift from the old regime to the new regime. It’s important to understand these differences for effective financial planning. With the updated slabs, individuals can determine which tax regime provides more benefits based on their income, deductions, and financial goals. This will help in calculating how much tax is deducted from salary in India.
Old Tax Regime
| Income Slab (In Rs. Lakh) | Tax Slab |
| Up to 2,50,000 | NIL |
| 2,50,000 – 5,00,000 | 5% |
| 5,00,000 – 10,00,000 | 20% |
| 10,00,000 and above | 30% |
New Tax Regime
| Income Slab (In Rs.Lakh | Tax Slab |
| Up to 3,00,000 | NIL |
| 3,00,000 – 7,00,000 | 5% |
| 7,00,000 – 10,00,000 | 10% |
| 10,00,000 – 12,00,000 | 15% |
| 12,00,000 – 15,00,000 | 20% |
| 15,00,000 and above | 30% |
Various Exemptions and Allowances
Exemptions and allowances play a very crucial role in reducing the taxable income of individuals. These benefits are framed to provide financial relief to the individual. There are many types of allowances, which may vary depending on the employer. Here are some common ones:
1. House Rent Allowance: If the individual is living in a rented house, some rent money isn’t taxed if certain conditions are met. Like, the four metro cities of Delhi, Mumbai, Kolkata, and Chennai qualify for 50% of basic salary limit, while all other cities like Bengaluru, Hyderabad, and Pune qualify for 40% of basic salary.
2. Leave Travel Allowance: With the help of this allowance, travel costs in India for individuals and their families can skip tax, within certain limits.
3. Standard Deduction: In the old tax regime, salaried individuals are eligible for a standard deduction of Rs.50,000. Under the new tax regime, this amount has been increased to Rs.75,000.
4. Transport Allowance: This helps disabled workers. They can claim this money as tax-free under this allowance.
What Are The Deductions in Income Tax?
Deductions in income tax are specific expenses or investments that can be subtracted from an individual’s total income to reduce their taxable income. These deductions help decrease the amount of tax an individual needs to pay. Some common deductions in India are:
Section 80 C: Under this section, an individual can get a maximum deduction of Rs.1,50,000 through instruments like the Public Provident Fund, Employee Provident Fund, etc.
Section 80 D: Individuals buying health plans for their families can get a deduction under this section. For a normal individual, the deduction is Rs.25,000, and for senior citizens it goes up to Rs.50,000.
Section 80 E: Under this section, bank loan interest paid for studies is deducted. All study loan interest money helps reduce tax amounts.
Section 24 (B): Home loan interest helps lower taxes too. The highest deduction allowed is Rs.2,00,000 from the interest paid each year.
National Pension Scheme: Money saved in pension plans gives extra tax cuts. Each individual can get a deduction of Rs.50,000 under section 80CCD(1B).
| Deduction/Exemption | Old Regime | New Regime |
| Section 80 C | Available up to Rs.1,50,000 | Not available |
| Section 80 D | Available | Not available |
| Standard Deductions | Rs.50,000 | Rs.75,000 (FY 2024-25) and Rs.50,00 (FY 2023-24) |
| HRA | Available | Not available |
| LTA | Available | Not available |
| Interest on Housing Loan | Available up to Rs.2,00,000 | Not available |
| Section 80E | Available | Not available |
| Transport Allowance | Available | Not available |
Calculation Of Tax Deduction
Tax calculation is the process of determining how much an individual needs to pay to the government based on their income. In India, the tax amount depends on factors such as income level, exemptions, deductions, and the chosen tax regime.
Step 1: Add Your Income
Add up all parts of your salary, like basic pay, allowances, and bonuses. This total will be the gross income.
Step 2: Remove Exemptions
If the individual is eligible for exemptions like HRA or LTA, subtract them from the gross income.
Step 3: Subtract Standard Deduction
All salaried employees can deduct Rs. 50,000 as a standard deduction. Subtract this from your remaining income.
Step 4: Deduct investment and Expenses
You can lower your income further by deducting investments such as LIC premiums or contributions to PPF under Section 80C. Additionally, payments for medical insurance under Section 80D are also eligible for deduction.
Step 5: Calculate Taxable Income
Once all the above steps are done, the income left after removing all exemptions and deductions is your taxable income.
Step 6: Applying Tax Slabs
Finally, after getting the taxable income, use the correct tax rates for your income slab to calculate the taxes.
Step 7: Check for Rebate
If the taxable income is Rs. 5,00,000 or less, then a rebate can be claimed under Section 87A. This will reduce or remove your tax.
Step 8: Add Cess
If the taxable income exceeds Rs. 5,00,000, then a health and education cess of 4% can be added.
Example
Let us understand this with an example and below mentioned sample data:
Annual Salary: Rs.10,00,000
Investments/Deductions:
- Section 80C (PF, PPF, ELSS, etc.): Rs.1,50,000
- Standard Deduction: Rs.50,000
- Section 80D(Medical Insurance Premium): Rs.25,000
Old Tax Regime Calculation
1. Gross salary: Rs.10,00,000
2. Deduction: (Rs. 2,25,000 )
- Section 80C: Rs. 1,50,000
- Standard Deduction: Rs. 500,000
- Section 80D (Medical Insurance): Rs. 25,000
Taxable Income: Rs. 7,75,000 (10,00,000 – 2,25,000 )
3. Tax Slab (Old Regime): Rs. 67,500
- 5% of Rs. 2,50,000 = Rs. 12,500
- 20% of 2,75,000 = Rs. 55,000
4. Health and Education Cess: Rs. 2,700 ( 67,500 * 4% )
5. Total Tax Payable: Rs. 70,200 ( 67,500 + 2,700 )
New Tax Regime Calculation
1. Gross salary: Rs 10,00,000
2. Deduction: ( Rs. 75,000 )
- Section 80C: Not Available
- Standard Deduction: Rs. 75,000
- Section 80D (Medical Insurance): Not Available
Taxable Income: Rs. 9,25,000 (10,00,000 – 75,000 )
3. Tax Slab (New Regime): Rs. 42,500 (on Rs. 9,25,000 )
- Upto Rs. 3,00,000 = Nil
- 5% of Rs. 4,00,000 = Rs. 20,000
- 10% of Rs. 2,25,000 = Rs. 22,500
4. Health and Education Cess: Rs. 1,700 ( 42,500*4% )
5. Total Tax Payable: Rs. 44,200 ( 42,500 + 1,700 )
Conclusion
Understanding taxation doesn’t have to be complicated. While India’s tax system may seem complex, it provides many opportunities to save money. From basic exemptions to smart investments, these rules allow individuals to retain more income while contributing to the country’s growth.
By staying organized with documents, planning investments early, and utilizing available deductions, individuals can manage taxes more effectively. It’s not only about saving money but also about being a responsible taxpayer who contributes to India’s progress.
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