Earning More Than Rs. 12 Lakh in a Year? Here’s How Much Tax You Need to Pay
Breakdown of a 12 LPA Salary
Before diving into tax calculations, it’s essential to understand how a 12 LPA salary is typically structured. Salaries in India usually consist of several components, including:
- Basic Salary: The core part of the salary, usually forming 40-50% of the total salary.
- House Rent Allowance (HRA): Provided to cover rental expenses.
- Special Allowances: Various allowances that can be part of the salary package.
- Provident Fund (PF): Contributions made by both employer and employee.
- Bonuses and Incentives: Additional earnings based on performance.
For this example, let's assume the following structure for a 12 LPA salary:
- Basic Salary: ₹5,00,000
- HRA: ₹3,00,000
- Special Allowances: ₹2,50,000
- PF Contribution: ₹1,00,000
- Other Allowances: ₹50,000
Income Tax Slabs for FY 2023-24
The income tax calculation depends on the applicable tax slabs. For the Financial Year (FY) 2023-24, the tax slabs for individual taxpayers below 60 years are as follows under the old and new tax regimes:
Old Tax Regime:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5%
- ₹5 lakh to ₹10 lakh: 20%
- Above ₹10 lakh: 30%
New Tax Regime:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5%
- ₹5 lakh to ₹7.5 lakh: 10%
- ₹7.5 lakh to ₹10 lakh: 15%
- ₹10 lakh to ₹12.5 lakh: 20%
- ₹12.5 lakh to ₹15 lakh: 25%
- Above ₹15 lakh: 30%
Calculation of Taxable Income
To calculate the taxable income, various exemptions and deductions under the Income Tax Act can be applied. Here’s a step-by-step breakdown:
1. Deductions under Section 80C
Section 80C allows a maximum deduction of ₹1.5 lakh for investments in specified instruments such as PF, PPF, NSC, ELSS, and life insurance premiums. In this example, the employee’s PF contribution is ₹1,00,000.
2. House Rent Allowance (HRA)
HRA exemption is calculated as the minimum of the following:
- Actual HRA received: ₹3,00,000
- 50% of basic salary (for metro cities): ₹2,50,000
- Actual rent paid minus 10% of basic salary: (Assume rent paid is ₹2,40,000 per year)
Calculating HRA exemption:
- Actual HRA received: ₹3,00,000
- 50% of basic salary: ₹2,50,000
- Rent paid minus 10% of basic: ₹2,40,000 - ₹50,000 = ₹1,90,000
The minimum value is ₹1,90,000, so the HRA exemption is ₹1,90,000.
3. Standard Deduction
A standard deduction of ₹50,000 is available to all salaried employees.
Calculation of Taxable Income
Based on the above deductions, the taxable income is calculated as follows:
- Gross Salary: ₹12,00,000
- Less: HRA Exemption: ₹1,90,000
- Less: PF Contribution under 80C: ₹1,00,000
- Less: Standard Deduction: ₹50,000
Taxable Income: ₹12,00,000−₹1,90,000−₹1,00,000−₹50,000=₹8,60,000\text{₹12,00,000} - \text{₹1,90,000} - \text{₹1,00,000} - \text{₹50,000} = \text{₹8,60,000}₹12,00,000−₹1,90,000−₹1,00,000−₹50,000=₹8,60,000
Income Tax Calculation
Under the Old Tax Regime
Taxable income is ₹8,60,000. The tax calculation would be:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500
- ₹5 lakh to ₹10 lakh: 20% of ₹3.6 lakh = ₹72,000
Total tax: ₹12,500 + ₹72,000 = ₹84,500
Under the New Tax Regime
Taxable income is ₹8,60,000. The tax calculation would be:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2.5 lakh = ₹12,500
- ₹5 lakh to ₹7.5 lakh: 10% of ₹2.5 lakh = ₹25,000
- ₹7.5 lakh to ₹10 lakh: 15% of ₹1.1 lakh = ₹16,500
Total tax: ₹12,500 + ₹25,000 + ₹16,500 = ₹54,000
Education Cess: 4% of the tax payable is added as education cess.
- Under Old Regime: ₹84,500 + 4% of ₹84,500 = ₹87,880
- Under New Regime: ₹54,000 + 4% of ₹54,000 = ₹56,160
Comparison of Tax Under Old and New Regimes
- Old Tax Regime: ₹87,880
- New Tax Regime: ₹56,160
Conclusion
For a 12 LPA salary, the new tax regime offers a lower tax liability compared to the old regime. However, individual circumstances and available deductions must be considered when choosing the most beneficial regime. Proper tax planning, including investments and understanding applicable exemptions, can significantly reduce tax liabilities and maximize savings. It is advisable to consult a tax professional for personalized advice and to ensure compliance with the latest tax laws.