How to calculate Income Tax on Salary

When learning to calculate the tax on earnings, one should always start with the basics such as different tax-brackets, permitted relaxation, e filing process, getting refund, etc.

The investments you make actually make a significant difference when computing the final amount. So, one should also learn about the common types of deductions in taxation.

Do check our income tax calculator which will automatically compute the final figure after reducing the applicable deductions when you submit the necessary data in the form shown to you.

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It is a popular myth that different rates are applied directly to the total amount. This is not the case though.

For example, if you are less than 60 years old and earning Rs 14 lakh annually, then you won’t be charged 30%, i.e. Rs 420000, directly on your total salary.

However, this will be calculated as below:

First, if you are eligible for any deductions, your taxable earnings will be evaluated.

Let’s say, your taxable amount comes out to be Rs 13,00,000.

Now, total value will arrive in stages.

For the amount between Rs 250000 and Rs 500000, i.e. Rs 250000, you will be charged at 5%. This comes out to be Rs 12500.

For the amount between Rs 500000 and Rs 1000000, i.e. Rs 500000, you will be charged at 20%. This comes out to be Rs 100000.

For the amount between Rs 1000000 and Rs 1300000, i.e. Rs 300000, you will be charged at 30%. And, this comes out to be Rs 90000.

So, the total value charged     = Rs 12500 + 100000 + 90000

                                    = Rs 2,02,500

In the same way, you can work with the other slabs as well.

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Understanding Flat Tax

The way the people of a country are taxed by its government plays a significant role in the growth of the country’s economy. Throughout the world, employees, entrepreneurs, and corporations are taxed mainly in three ways, namely progressive taxes, regressive taxes, and flat taxes.

When people are levied progressively, the rich are charged more than the poor. The rates increase as income tax brackets rise, thus impacting the high-salary earners more than the low-salary earners.

On the contrary, regressive taxes affect taxpayers with lower salaries more than the ones with higher salaries. Here, the tax-burden is not imposed directly on a person’s ability to pay, but the government charges it as a percentage of the asset that the taxpayer buys. For instance, sales charge on purchasing an item is computed as a percentage of the item bought, which is the same for all.

You can find more information on topics like e filing, refund status, income tax calculator, income tax refund, etc. on our blog.

Flat Tax

In flat taxation, there exists a fixed marginal rate. A marginal tax rate is the rate one has to pay for one extra unit of salary.

This is also known as Proportional Tax. It’s a proportional system since it levies all taxpayers at the same rate, regardless of their salary-levels.

However, flat taxation can behave like progressive taxation (a marginally flat taxation) also whenever applicable deductions are included. This excludes certain types of incomes from being recognized as taxable salary.

This can also become a regressive taxation method when the earnings are taxed at a flat rate until a specified cap amount is reached.

Laffer Curve Theory

The Laffer Curve theory is based on the principle that marginal tax rates will impact the motivation as income rises. This means that higher marginal rates will leave people with less motivation to earn more.

That is why, on a larger scale, taxable income decreases as a function of the marginal rate, making the net government taxation revenues decrease after a particular point. 

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