How to calculate taxable income in India?

Soon, it will be the time of the year where we attempt to save as much of our income as we legally could from the gallows of tax cuts. Let’s take a look at what constitutes a person’s taxable income and how to calculate taxable income in India?

Every new year brings with it a lot of new beginnings, settlements, and guarantees. What it also brings in is the need to put our financial statement in order. Soon, it is going to be the time of the year where we try to conserve as much of our income as we legally could from the gallows of tax cuts. It is crucial to review our financial statements in order to make sure only the required tax is being deducted from our annual income. Because of this, we must understand that there is a difference between gross annual earnings and taxable income. Now that we have an agenda in place, let’s take a look at what constitutes a person’s taxable income.

How to calculate taxable income in India?

Calculation of taxable income is not that tricky as we think. Let us understand this in 4 simple steps.

Step 1- Consider your different income resources

In accordance with the income tax legislation, a person may have a total of 5 sources of earnings i.e.: Income from Salary, Income from House Property, Income from Business or Profession, Income from Capital Gains, Income from Different Sources. All earnings of a tax-assessee have to be categorized among the above mentioned.
This can be exemplified in another manner-

Souce Of Income
  • Income from Salary: This includes salary paid to an employee in money as well as the taxable perquisites made available to the worker
  • Income from House Property: Income from house property mainly consists of rental income received by the assessee from the home that he has rented out.
  • Income from Capital Gain: Income from profit or loss if you sell a capital asset
  • Income from Business or Profession: Income/loss that appears as a result of carrying on a business or profession.
  • Income from additional Sources: Any income not classified under any other head of income such as salary, house property, business/ livelihood, and capital gain fall under the class of income from other sources. Such earnings mainly include interest income earned from a savings bank account, deposits, lottery income, dividend income, etc..

Step 2- Calculate your gross income

While calculating income under each head of income, a taxpayer is permitted certain exemptions and/or deductions, subject to the satisfaction of conditions. After calculating earnings under each head, the aggregate of all of the above heads of income results in Gross Total Income (GTI).

Gross income is the beginning point where the Income-tax division (IT division ) computes a person’s tax due. Gross income includes any income not specifically designated by the IT department as tax-exempt. Gross income essentially comprises any source of income that a person might have viz. Wages, commissions, bonuses, capital gains or dividend income from investments, or income from property rentals. Some withdrawals from retirement accounts, Social Security benefits or disability income may also qualify to be included in the calculation of gross income.

To get a self-employed individual or a business owner, gross profit is your total revenue obtained from the company, minus the allowable business expenses. Gross earnings for business owners is referred to as net business income.

Let’s illustrate this with an example:

Sumit has a basic salary of Rs800,000/ annum, HRA of Rs300,000, a special allowance of Rs60,000 and LTA of Rs20,000. Sumit pays a lease of Rs 21,000.

First, let’s know how his earnings from salary is calculated. These elements are included in your wages:

  • Bonuses and commissions
  • Allowances (these could be taxed fully, partially or completely exempt from taxation )
  • Fully-taxable allowances include Dearness Allowance (DA), Overtime Allowance (OA) and city compensatory allowance (for those who move to metros like Mumbai, Delhi, Kolkata, and Chennai)
  • Partly taxable allowances include House Rent Allowance (HRA), entertainment allowance, and other special adjustments
  • Entirely exempt allowances incorporate foreign allowance (for employees that are posted in different nations ), allowance of the high court and supreme court judges, etc..

Currently, apart from this salary income, Sumit also comes with income from interest income from his fixed deposit that comes to Rs10,000 and attention out of his savings deposit at Rs7,500. So, his gross income could be calculated as follows:

Gross Income Calculation

Step 3- Understand deductions

The Income Tax Act allows a taxpayer to claim deductions from his income. Furthermore, certain types of income are exempt from tax and are consequently not considered while calculating income tax. The Act provides that when a taxpayer incurs certainly given expenditure or makes investments in some specific instruments, the total amount of expenditure/investment may be permitted as a deduction from GTI to arrive in overall income. This provides a chance for citizens to plan taxes.

Some of the common deductions available to taxpayers are within Section 80C, Section 80D, Section 80CCC, Section 80CCD, Section 80CCE, Section 80E, Section 80G of the Act among other people. We all are aware of the popular deductions like deductions under 80C (around Rs 150,000), but there are many more deductions that may be claimed by the assessee. Ensure you claim all of the relevant deductions from your GTI which are given under sections 80C to 80U.

A number of the investments/expenditures which can be claimed as deductions comprise compensation in NSC, PPF, ULIPs, ELSS, NPS, VPF, Tuition commission, Mediclaim policy, Life insurance plan, donations given to certain authorized institutions, royalty income received by the author of books, etc..

Step 4-Computing Taxable revenue

Once you subtract the deductions and exemptions from the gross income, you’ll arrive at the taxable income. We can illustrate this is actually the following manner- Sumit has invested Rs50,000 in Public Provident Fund (PPF) and Rs20,000 in tax saving mutual funds. Furthermore, within the previous year, he paid a premium of Rs80,000 to get life insurance coverage and paid Rs10,000 for medical insurance coverage.

Deductions Amount80C 1,50,000 (PPF+ELSS funds+ LIC policy)80D 10,000 (medical insurance)Total160,000

Hence, Sumit’s taxable income = Gross total income – total deduction s= Rs1,013,500 -160,000 = Rs 853,500. So Rs 853,500 is his net taxable income on which he has to pay his taxes.

I hope this article helps how to calculate taxable income. If you have any query just type in the comment box.

Thanks for reading. Happy Investing!

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