How to Calculate Income Tax?

To find out how much tax you have to pay, you need to first calculate total taxable income. Once you know your taxable income, you can easily find out how much tax you have to pay, by applying the applicable tax rates.

As you may know, I shared with you the income tax rates for the financial year 2008-09 in my earlier article. I received hundreds of requests from readers to explain the method of income tax calculation in an easier way. And even they requested for Income Tax calculator to calculate the tax liability on their own. Therefore, I am trying to explain the methods of calculating Income tax in an easier way. I am also giving you a link to access the Income Tax Calculator which we developed at IndianMoney.com to calculate your tax liability.

First of all, I would like to brief about the status of different categories of Individuals for the purpose of calculating Income tax. Income Tax Act has categorized all Income Tax Payers (Individuals) into 3 different types:

1. Ordinary Individuals
2. Female Citizens
3. Senior Citizens

 1. Ordinary Individuals: as per the applicable tax laws, the Income tax rates for ordinary individuals are:

Annual Income	Income Tax rates for FY 2008-09
Up to 150000	Nil
150000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Mr. Rajan is 35 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 150000	Nil	Nil
Tax on Income between 150000-300000	10%	15000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		145000
Educational Cess	3% of the total tax	4350
Net Tax Payable		149350

Example 2: Mr. Avinash 40 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 150000	Nil	Nil
Tax on Income between 150000-300000	10%	15000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		265000
Surcharge	10% of the Income Tax	26500
Total		291500
Educational Cess	3% on the total tax including surcharge	8745
Net Tax Payable		300245

2. Female Citizens: as per the applicable income tax laws, the income tax rates for female citizens are:

Annual Income	Income Tax rates for FY 2008-09
Up to 180000	Nil
180000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Ms. Rachana is 35 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 180000	Nil	Nil
Tax on Income between 180000-300000	10%	12000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		142000
Educational Cess	3% of the total tax	4260
Net Tax Payable		146260

Example 2: Ms. Savitha 40 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 180000	Nil	Nil
Tax on Income between 180000-300000	10%	12000
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		262000
Surcharge	10% of the Income Tax	26200
Total		288200
Educational Cess	3% on the total tax including surcharge	8646
Net Tax Payable		296846

 3. Senior Citizens: as per the applicable tax laws, the Income tax rates for Senior Citizens are:

Annual Income	Income Tax rates for FY 2008-09
Up to 225000	Nil
225000 – 300000	10%
300000 – 500000	20%
500000 and above	30%

*A surcharge of 10 per cent of the total tax liability is applicable where the total income exceeds Rs. 1,000,000.

Note: -

• Education cess is applicable @ 3 per cent on income tax, inclusive of surcharge if there is any.
• A marginal relief may be provided to ensure that the additional IT payable, including surcharge, on excess of income over Rs 1,000,000 is limited to an amount by which the income is more than this mentioned amount.
• Agricultural income is exempt from income-tax.

Now, let me explain the method of calculating income tax in detail with few examples:

Example 1: Mr. Ganesh Prasad is 67 year old and earning 8 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 225000	Nil	Nil
Tax on Income between 225000-300000	10%	7500
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 800000	30%	90000
Total		137500
Educational Cess	3% of the total tax	4125
Net Tax Payable		141625

Example 2: Ms. Lakshmi 66 year old and earning 12 lac annually.

Calculation:

Heads	% of Income Tax	Income Tax
Tax on Income up to 225000	Nil	Nil
Tax on Income between 225000-300000	10%	7500
Tax on Income between 300000-500000	20%	40000
Tax on Income between 500000- 1200000	30%	210000
Total		257500
Surcharge	10% of the Income Tax	25750
Total		283250
Educational Cess	3% on the total tax including surcharge	8497
Net Tax Payable		291747

I hope this will help you to understand income tax calculation better. Please click on the below link to access Income Tax Calculator.