TDS module Documentation
Calculating income tax on salary involves several steps. Simplified overview of
the process of computation of taxable income is as follows:
Determine Gross Salary: Start by calculating gross salary. This includes
basic salary, allowances, LTA, and any other taxable components. Other
than reimbursement, rest all pay components are taxable. Please note
that while computing TDS for the particular month, we will be considering
actual gross salary or taxable salary for the months, which are already
passed and standard rate gross salary for the rest of the future months to
arrive at the yearly taxable Income to compute income tax.
Determine perquisite: Perquisites in salary are the privileges you earn
from your company besides the monthly salary. As per Section 17(2) of the
Income Tax Act, perquisite in salary includes the following for AHGRS
Rent-free Accommodation provided by the employer along with electricity
and furniture usage charge. Provision should be made under TDS module
to enter these values.
Rent free accommodation: Monthly 5% of the taxable gross
Furniture: Rs 125/month
Electricity: Rs.600/750/1200 fixed based on designation.
Please note, the above-mentioned amounts under perquisite will only be
considered for TDS computation. These amounts will not reflect in the
monthly Pay Register.
In our present system, we manually calculate and bulk import these
amounts in specific pay head, which are mapped to TDS module for TDS
computation purpose only on monthly basis. These amounts are not
visible in Pay Register as it is not a monetary benefit.
Identify Exemptions: Certain components of salary may be exempt from
income tax. Common exemptions include House Rent Allowance (HRA)-
Only applicable in Old Regime , Leave Travel Allowance (LTA)-Only
applicable in Old Regime, and Standard Deduction. Subtract these
exemptions from your gross salary to arrive at taxable salary.
For HRA exemption, please refer to Tax Calculator FY 2025-26 with
Summary (HRA Calculator sheet).
Calculate Deductions: Deductions can be claimed under various
sections of the Income Tax Act, such as Section 80C (for investments like
Provident Fund, PPF, or life insurance), Section 80D (for health insurance
premiums), and Section 24b (for home loan interest). Subtract these
deductions from taxable salary to arrive at net taxable income. These
deductions are available only under the old tax regime.
Please refer to the Excel Sheet for all available deductions in old tax
Regime.
Determine Taxable Income: After considering exemptions and
deductions, we will get taxable income.
Apply Income Slabs and Tax Rates: Calculate the tax applicable to
each slab based on taxable income under New Regime or Old Regime as
chosen by the employee.
Calculate Tax Liability: Calculate the tax liability for each slab and add
them up to determine total income tax liability.
Consider Rebates and Surcharge: Consider any applicable rebates or
surcharges based on specific circumstances. For instance, there may be
a rebate under Section 87A for individuals with a taxable income up to Rs.
12 lakh.
Surcharge on Income Tax
Income tax surcharge is an additional charge payable on income tax. It is
an added tax on the taxpayers having a higher income inflow during a
particular financial year
Surcharge
Surcharge Rate on the
Rate on the amount
Net Taxable amount of
Income limit income tax Of income
under old tax tax
regime under new
tax regime
Less than Rs 50
Nil Nil
lakhs
More than Rs 50
lakhs ≤ Rs 1 10% 10%
Crore
More than Rs 1 15% 15%
Crore ≤ Rs 2
Crore
More than Rs 2
Crore ≤ Rs 5 25% 25%
Crore
More than Rs 5
37% 25%
Crore
Surcharge Rates for Individuals Under the Old Regime and New
Regime
Marginal Relief for Individuals
Marginal relief is provided to prevent the instances of tax liability
increasing disproportionately to income, due to surcharge becoming
applicable on crossing of threshold limit.
If your income goes slightly above the surcharge threshold, and the extra
tax is more than the extra income earned, marginal relief helps you pay
only the difference, not more than what you gained.
For further details, do refer to the [Link]
surcharge
Calculate Health and Education Cess: Add the Health and Education
Cess (currently 4%) to your total tax liability.
Final Tax Liability: After considering all factors, arrive at final income tax
liability for the financial year.
TDS and Advance Tax: For salaried individual, employer deducts Tax
Deducted at Source (TDS) from salary every month. This TDS is adjusted
against final tax liability (yearly tax liability)
The formula for calculating income tax on salary is as follows -
Taxable Income = Gross salary - Deductions
Income Tax = (Taxable income x Applicable tax rate) - Tax rebate
Income tax on salary per month can be calculated by dividing the total tax
by 12.
New Tax Regime Slabs for FY 2025-26 (AY 2026-27)
The income tax slab rates under the new tax regime for FY 2025-26 (AY 2026-27)
are as follows:
New Income Tax Rates
New Income Tax Slabs for FY
for FY 2025-26 (AY
2025-26 (AY 2026-27)
2026-27)
Up to Rs. 4,00,000 Nil
Rs. 4,00,001 to Rs. 8,00,000 5%
Rs. 8,00,001 to Rs. 12,00,000 10%
Rs. 12,00,001 to Rs. 16,00,000 15%
Rs. 16,00,001 to Rs. 20,00,000 20%
Rs. 20,00,001 to Rs. 24,00,000 25%
Above Rs. 24,00,000 30%
Rebate under Section 87A is available for income up to Rs. 12 lakh, meaning
taxpayers with total income not exceeding Rs. 12 lakh have zero tax liability.
Example - FY 2025-26 (AY 2026-27)
Let's say Mr. A had an income of Rs. 10 lakh for FY 2025-26 (AY 2026-27). His
tax liability will be computed as follows:
New Income Tax Slabs New Income Tax
for FY 2025-26 (AY 2026- Rates for FY 2025-26 Tax Liability
27) (AY 2026-27)
Up to Rs. 4,00,000 Nil 0
Rs. 4,00,001 to Rs.
Rs. 4,00,000 at 5% 20,000
8,00,000
Rs. 8,00,001 to Rs.
Rs. 1,25,000 at 10% 12,500
9,25,000
32,500
Add: Cess at 4% 1,300
Total Tax Liability 33,800
Rebate u/s 87A (33,800)
Final Tax Liability 0
A standard deduction of Rs. 75,000 is available to Mr. A, thus making his taxable
income Rs. 9,25,000. As the rebate u/s 87A is available for income less than Rs.
12 lakh, Mr. A can enjoy this benefit and pay Zero tax.
Let's say Mr. A's income for FY 2025-26 (AY 2026-25) remained at Rs. 9 lakh. He
would still pay Zero Tax as his income is eligible for rebate.
Old Tax Regime Slabs for FY 2025-26 (AY 2026-27)
The income tax slab under the old tax regime has not changed. Though the new
tax regime slab may look liberal, the old tax regime might still end up beneficial
for a few taxpayers. The income tax slabs under the old tax regime for FY 2025-
26 (AY 2026-27) are as follows:
New Income Tax
New Income Tax Slabs
Rates
Up to Rs. 2,50,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Popular Deductions Allowed under Old Tax Regime
80C, 80D, 80G, 80TTA
HRA, LTA, home loan interest (Section 24)
Education loan interest (Section 80E), etc.