Budgeting is a critical step before embarking on any personal finance endeavour be it developing a savings plan or an investment plan. On a very fundamental level, every budgeting exercise requires a clear picture of cash inflows and cash outflows.
For salaried professionals, determining the cash flow can be tricky at times, primarily due to the tax outflow on the gross salary. Deducting the tax outflow on the gross salary is essentially what provides a clear picture on the actual cash inflow that is available to spend and invest. In my conversations with peers, it comes up a lot when the budget planning is actually done on the gross income but come tax season and the budgeting goes for a toss.
Therefore, it is critical to know what your tax outflow is to ensure your budget plan starts on a realistic note. A simple way to estimate the tax flow is to just deduct a certain percentage from your gross income and arrive at a net cash flow. This percentage differs by country and even state level but this information is easily available by searching online. For example, in India depending on the salary slab tax deduction can range from 10% to 30%.
However, in the age of technology and real-time data there is no reason to guesstimate. You can get clear picture of your tax outflows by using a simple to use income tax calculator. Using an income tax calculator helps you develop a very clear idea of what your tax outflow is going to be and subsequently helps you build a better budget plan.
You can just fill in the required information in a step by step fashion where in the information required tends to be in terms of total salary, house loan, income from other sources, investments etc.
The system then processes the information and provides a customized response in terms of the tax outflow further broken by specific components like the illustrative diagram shown below
Essentially, using an income tax calculator just takes the guess work out and provides you exact amount that you need to pay as tax. Subtract these from your gross income and you now know the kind of cash you are playing with.