Income tax Calculation

Income Tax Calculation

To calculate the amount of tax the tax payer has to pay, he/she needs to understand the following things:

• Who is liable to pay tax in India?
• How to compute the Gross Taxable Income?
• What all incomes do not form part of the Gross Taxable Income?
• What are the permissible deductions from the Gross Taxable Income?
• What are the exempt limits and rates of taxes applicable on the net taxable Income?

Who is liable to pay tax in India?

All resident Indians, be it individuals or group of individuals or an artificial body, is liable to pay taxes in India. Thus, following categories are liable to pay tax

• Individuals
• Body of Individuals or Firms
• Hindu Undivided Family (HUF)
• Association of People
• Companies (irrespective of whether registered under the Companies Act)
  

  How to Compute the Gross Taxable Income?

  Any income received, accrued or deemed, to be received or accrued by a resident Indian, whether in India or abroad, during the previous year, is subject to tax in India. Also, non-residents who received, accrued or deemed, to be received or accrue income in India are subject to tax as per the Income Tax Act. The income earned is classified under the following heads as per the Income Tax Act:

  • Income from Salary: Income under the head Salary includes any amount of salary due to the employee, whether paid or not. Section 17 of the Income Tax Act defines salary as ‘any amount received as salary, perquisite and profits in lieu of salary.
  • Income from House Property: The annual value of property of which the assesse is owner is chargeable to tax under the head ‘House Property’. However, this does not include the self-occupied property. In case of other properties, the amount of actual rent received or might reasonably be expected to be received is charged to tax, subject to deductions under section 24. Section 24 allows the assesse to claim deductions to the extent of 30% of the annual value or rent received. Also, the amount of interest paid on the loan borrowed for the purchase of property is allowed as a deduction up to Rs. 2,00,000.
  • Income from Profits and Gains of Business or Profession: As the name suggests, ‘Profits and Gains’ of any business or profession carried out by the assesse during the previous year is charged to tax under this head.
  • Income on Capital Gains: Any profit derived from transfer or sale of any capital asset is chargeable to tax under the head ‘Income on Capital Gains’. Capital asset would include property, shares and securities, jewellery or any art of work. The income earned under this head is divided into Short Term Capital Gain and Long Term Capital Gain, based on the tenure for which the capital asset is held by the assesse.

  Short Term Capital Gain is profit earned on sale of short term capital asset, which is held for not more than 36 months by the assesse. Long Term Capital Gain is profit earned on sale of long term capital asset, which is held for more than 36 months by the assesse. However, in case of certain assets like shares, the holding period for long term capital asset is reduced to 12 months.

  • Income from other sources: Any income earned by the assesse and not chargeable to tax under any other head of income is charged to tax as ‘Income from Other Sources’. Thus, income from other sources would include but not limited to the following:
    • Interest on fixed deposits or securities
    • Dividend income
    • Family pension, subject to a deduction of one third or Rs. 15,000/- whichever is lower.

  
  The income earned is thus bifurcated amongst various heads of income. Gross total Income is arrived at by totaling the income earned under all the above heads of income.

  Gross Total Income = Income from salary + Income from house property + Income from business/profession + Income from Capital Gains + Income from other sources.