Taxable income is the final amount arrived at after adjusting for all tax sops and benefits on your total income. Here’s all you need to know about it.
While calculating income tax, we are often confused about what our taxable income is. Since most of us know our salaries only in the cost-to-company (CTC) format, we leave the tax calculation to our chartered accountants, without being aware of our taxable income.
So, what is taxable income? It is the final amount arrived at after taking into account all the tax deductions and exemptions applicable and calculated as per the respective tax rate of the individual. In order to calculate income tax in India, income sources are segregated into 5 types i.e. income from salary, house property, business and profession, capital gains and other sources. While some of these categories have certain levels of exemptions, the others may not. So let us see how incomes are categorised into different sources, which is further tabulated to calculate the actual taxable income. The income tax return (ITR) will be filed based on this income.
Let’s look at each of these income sources in detail.
Income From Salary
This component includes basic salary, bonuses, commissions and allowances. To calculate the income from salary, you need to add basic salary, allowances such as dearness allowance, travel allowance, House Rent Allowance (HRA), commissions and other allowances.
Also, include any bonuses to arrive at the gross salary. From the gross salary, you need to deduct the HRA exemption amount, travel allowance exemption and reimbursements as per actual bills subject to a maximum ceiling.
Additional Reading: Important Tax Questions To Ask If You Are Self-employed
Income from House Property
The rental income that you might earn when you let out your property and deemed income from a self-occupied property are part of this income.
To calculate income from property, assess the rent received and expected rent from the property. For this, you need to consider the higher of fair market value and municipal value. Now, between the actual rent received and the expected rent, whichever is higher will be considered as the Gross Annual Value (GAV) of your let-out housing property. The municipal tax will then be subtracted from the GAV to arrive at the Net Annual Value (NAV).
There may be positive or negative income from the let-out property. You need to deduct the interest paid on loan for such property from the income. 30% of the NAV is allowed as a deduction towards repairs, rent collection, etc. irrespective of the actual expenditure incurred. This deduction is not allowed if the GAV is nil.
Income From Business and Profession
You can calculate income from business and profession as per stipulated rules under the Income Tax Act. You can also use the presumptive tax system, provided your business is eligible for it. Get the help from your chartered accountant to calculate the business and income tax payable correctly.
Capital Gain Income
Differentiate between long-term capital gain and short-term capital gain for various assets. This is usually applicable to capital assets such as property and shares. Then make the adjustment for the applicable deductions under various sections such as Sec 54, 54EC etc to calculate your total capital gains. Read this post for more information – How To Save Tax On Long-Term Capital Gains.
Additional Reading: How To Calculate Your Income Tax
Income From Other Sources
Any monetary income that does not come under any of the above heads is included in income from other sources. This normally includes income, such as interest from Savings Account, dividend, income from FD and other interest income. This includes winnings over Rs.10,000 from lotteries, puzzles, races, games and all forms of gambling and betting such as card games, horse races, game shows etc.
Calculate Gross Income
Add all the income from the five sources to arrive at gross income. You will need to separately calculate and add the income from securities with short-term capital gains, which is taxed at 15% and income from lottery, gambling etc which is taxed at 30 %.
Calculate Taxable Income
To calculate taxable income, subtract the deductions allowed under Section 80C to 80U of the Income Tax Act from the gross total income. It should include deduction benefits allowed for investments such as Public Provident Fund (PPF) ELSS, tax saving Fixed Deposit, Health Insurance premium, and all eligible donations. Once you are ready with the taxable income, then you can apply the tax rate as per your respective slab to get the final tax liability.
|Income tax calculation(For salaried individual)|
|Detail||(Amt in Rs)|
|Income from other sources||30000|
|Sec 80 (C)||150000|
|Sec 80 (D)||20000|
|Sec 80 (CCD)||10000|
|Sec 80 (TTA)||5000|
|Up to Rs 2.5 Lac||NIL|
|Rs 2.5 Lac to Rs 5 Lac (5% of the amount)||12500|
|Rs 5 Lac to Rs 10 Lac (20% of the amount) i.e. |
20% of (Rs 745000-Rs 5 Lakh)
|Above Rs 10 Lakh (30% of the amount)||NIL|
|CESS at 3% (3% of 12500+49000)||1845|
|Total tax amount (Rs)||63345|
|*All figures are for illustration|
Additional Reading: Why The LTCG Tax Is No Big Deal
Make sure you declare all the income. If you don’t, the Income Tax department can send you a notice asking you to pay taxes for it. If you are not sure about the taxes, you should consult your tax advisor for help.