According to the budget for the financial year 2020-2021, an individual with an annual income up to Rs.2.5 lakh will be exempted from paying income tax. On the other hand, individuals with a yearly income above Rs.2.5 lakh will be taxed as per the income tax slab as decided in the Union Budget.
Computing income tax manually is a tedious tax. Still, with the help of an online income tax calculator, one can easily estimate the tax burden and proceed to pay the same. In turn, it provides taxpayers with a fair idea about how they are taxed.
How is income tax calculated?
Under the new tax regime introduced in 2020’s Union Budget, taxpayers can opt for lower tax rates. However, to do so, they must not claim any deduction or exemption that they used to avail previously. Regardless, deductions under section 80CCD (2) are still available to taxpayers.
In case of the old tax regime, taxpayers are entitled to a basic exemption limit under which income up to a specific threshold is not subject to taxes. Notably, this basic exemption limit varies among taxpayers based on their annual income and age.
For example, suppose an individual’s annual income in the fiscal year 2020-2021 is Rs.15 lakh. In the same year, the individual’s employer has deposited Rs.55000 into an NPS account, which will be eligible for tax deduction under Section 80CCD (2). As per the general rule, the net taxable income will be –
(Annual income – employer’s contribution towards NPS account)
= Rs.(15 lakh – 55000)
Those who intend to compute their tax liability under the old tax regime need to find out all their eligible tax exemptions and deductions. For instance, those who have availed housing credit must determine the home loan tax exemptions and benefits to arrive at accurate results and also to claim them accordingly. Also, they should become familiar with the components of an income tax calculator to use it accurately.
Components of the tax calculator
These are among the essential components of the income tax calculator 2020 –
- Assessment year: The year for which taxable income is being calculated
- Salary: It includes – HRA, leaves travel assistance, NPS, etc.
- Housing property: It is inclusive of municipal taxes and interest on a home loan.
- Contribution to the PPF: Any contribution by an employee towards the PPF account
- Employee contribution to the provident fund: It is the portion of salary that is withheld monthly and contributed towards the employee’s provident fund
- LIC and medical insurance premium: The amount of money paid to keep the insurance policy active.
- ELSS: Equity Linked Savings Scheme, which entitles individuals to claim deductions of up to Rs.1.5 lakh per year
- Tuition fee: The fees paid to provide full-time education to spouse or children in a school or university in India.
- Standard deduction: Includes transport allowance and medical reimbursement.
- Income from housing property and salary: Income generated from two housing properties is exempted from taxes. Also, the cash and taxable profits generated through employment.
- Income from capital gains: It is the earnings generated through transfer or conversion of capital assets. Depending on the length of holding, the profits can be classified as long-term or short-term capital gains.
- Income from other sources: Earnings that are not categorised under the header of – salary, capital gain, house property, profession and business venture. Example – interest on a savings account, dividends, lottery income, etc.
- Taxable income: Income on which tax will be calculated after all applicable deductions and exemptions have been accounted for.
Steps to use an online tax calculator
By following these steps, one can easily use the online tax calculator –
Step 1 – Visit the official website of Income Tax India.
Step 2 – Select the financial year from the ‘Assessment Year’.
Step 3 – Select taxpayer type, age group and residential status.
Step 4 – Enter net taxable income to find out tax liability under the old tax regime.
Conversely, in case a taxpayer wishes to find out tax liability under the new tax regime, he/she must enter their gross salary without deducting any exemptions.
Step 5 – Enter income generated from all sources.
In case, a taxpayer is calculating tax liability under the old tax slab, he/she has to provide details of tax saving investment, which fall under Section – 80C, 80D, 80E, 80G and 80TTA.
Step 6 – Click on the ‘Calculate’ button.
Individuals computing taxes under the old regime should also mention details of exemptions like – HRA exemption, exemption on the interest paid on joint home loan and educational loan if any. Advanced income tax calculators will show you a clear demarcation between the tax liability under the old and new income tax slab.
Despite not availing deductions on housing credit, borrowers can still save on their home loan, by availing it from a leading financial institution that extends the loan value at an attractive rate of interest.
Also, borrowers can benefit significantly from the pre-approved offers that are extended by such financial institutions. Typically, several lucrative offers accompany financial products like home loans and loan against property. Check your pre-approved offer online by sharing your name and contact details.
Income tax calculator users should be careful at every step of computation to ensure the accuracy of the outcome. Also, they should use a reliable online tax calculator for more accurate and detailed results.