Calculating Your Income Tax in India for the FY 2020-21: A Comprehensive Guide

India's tax system is governed by the Income Tax Act, 1961. Every year, a finance bill is introduced and enacted as the Finance Act after approval by the President. This legislation sets the tax rates and deductions for the new financial year. To calculate your tax accurately, it's essential to understand the different heads of income and the various deductions available.

Introduction to Tax Calculation in India

Tax calculation in India follows specific rules based on the different heads of income and the applicable tax rates. There are five main heads of income to consider:

Each head has its own formula and deductions. This article will walk you through the process of calculating your income tax for the Financial Year (FY) 2020-21.

Example Calculations

Consider the following example:

Shagun receives a Basic Salary of Rs 80,000 per month, House Rent Allowance (HRA) of Rs 40,000 per month, Leave and Travel Allowance (LTA) of Rs 16,000 annually, and a Special Allowance of Rs 18,000 per month. Her income from other sources such as savings account interest, fixed deposit interest, and interest income from bonds totals to Rs. 15,000. Her income from freelancing or business is Rs. 40,000. She also pays Rs 9,600 in medical insurance and has other savings, including a Public Provident Fund (PPF) of Rs. 40,000, Life Insurance Company (LIC) premiums of Rs. 5,000, Employee Provident Fund (EPF) deducted by her employer of Rs. 1,15,200, and residential rent of Rs. 25,000 per month. Additionally, she donates Rs. 20,000 to the Prime Minister's Fund (PMF).

Calculations Under the Old Tax Regime

Step 1: Determine Total Income

Basic Salary: Rs 80,000 x 12 Rs 960,000

HRA: Rs 40,000 x 12 Rs 480,000

LTA: Rs 16,000

Special Allowance: Rs 18,000 x 12 Rs 216,000

Savings Account Interest: Rs 15,000

Freelancing Income: Rs 40,000

Total Income Rs 1,699,160

Step 2: Deduct Certain Payments

Medical Insurance: Rs 9,600

PPF: Rs 40,000

LIC Premium: Rs 5,000

EPF: Rs 1,15,200

Rent: Rs 25,000 x 12 Rs 300,000

Total Deductions: Rs 9,600 Rs 40,000 Rs 5,000 Rs 1,15,200 Rs 300,000 Rs 464,800

Total Income after Deductions: Rs 1,699,160 - Rs 464,800 Rs 1,234,360

Calculations Under the New Tax Regime

The new tax regime introduced in the Finance Act 2019 has simplified the tax calculation process. This regime introduces five tax slabs and a number of deductions and benefits under Sections 80C, 80D, 80CC, 80CE, 24, and 80G.

Up to Rs 2,50,000: Nil Tax

Rs 2,50,001 - 5,00,000: 5% Tax

Rs 5,00,001 - 10,00,000: 20% Tax

Rs 10,00,001 and above: 30% Tax

Step 3: Apply Deductions

Medical Insurance: Rs 9,600 (eligible for deduction under Section 80D)

PPF: Rs 40,000 (eligible for deduction under Section 80C)

LIC Premium: Rs 5,000 (eligible for deduction under Section 80C)

EPF: Rs 1,15,200 (already deducted from salary)

Rent: Rs 300,000 (eligible for deduction under Section 80GG if rent is more than 40% of the income)

Donation to PMF: Rs 20,000 (eligible for deduction under Section 80G)

Total Deductions: Rs 9,600 Rs 40,000 Rs 5,000 Rs 20,000 Rs 74,600

Total Taxable Income: Rs 1,234,360 - Rs 74,600 Rs 1,159,760

Final Tax Calculation

Given that the taxable income is Rs 1,159,760, it falls under the 20% tax slab as the income is between Rs 5,00,001 and 10,00,000. However, since the total income is less than Rs 5,00,001, the tax will be zero after applying all deductions.

Based on the given information, Shagun's tax liability under the new tax regime is Rs 0.

Conclusion

To accurately calculate your income tax in India, follow the specified steps and apply the relevant deductions. Familiarizing yourself with different tax regimes and the various deductions available can minimize your tax liability and ensure compliance with Indian tax laws.