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Calculation of Income-tax in India

Income Tax is calculated on the income earned by a person. The Income Tax Act 1961, has classified earnings into various sources. Incomes through all these channels have to be considered while calculating your tax liability. At first, your Gross Income is ascertained by considering income from salaries, house property, profits or gains from business/ profession, capital gains and income from other sources. You can avail various deductions and exemptions against these incomes to know the Total Income. Tax is then applied on the Total Income as per applicable rates.

Sources of Income

Income from Salary:

Monthly remuneration earned through employment. All form of wages (daily, weekly, bi-weekly) is also considered under this head of income.

Income from House property:

Any rental income that an individual earns as rent from a residential or commercial property.

Profits or gains from business/profession:

The income that one earns through transactions of a business or setting up a profession.

Income from capital gains:

Any profit/gain/loss that arises from sale or transfer of capital assets (shares, securities, real estate, mutual funds, etc.) is taxable under the head capital gains.

Income from other sources- Any income that can't be classified specifically under the above four heads of income will be considered under this head (bank interest, dividends, etc.).

Deductions from Income

Amongst the wide range of deductions available across the Income Tax Act, the below are a few available to the salaried class of individuals

Standard deduction:

A deduction of the lower among the salary received, or Rs.50,000 is available. Pre-budget 2019-20, the limit of standard exemption was Rs.40,000.

Professional tax-deduction is allowed against professional tax borne and paid by the employee.

Chapter VI, Deductions:

80C: Investment in instruments of LIC, EPF, PPF, NSC, ELSS up to a limit of Rs.1,50,000 annually.

80C: Investment in any annuity plan of a life insurance company up to a limit of Rs. 1,50,000 annually.

80CCD (1): Contribution to National Pension Scheme (NPS) up to a limit of Rs.1,50,000 annually.

80CCD (1B): Additional contribution to National Pension Scheme (NPS) up to Rs.50,000 annually, thereby effectively increasing the total deduction under section 80CCD to Rs.2,00,000.

80CCD (2): Contribution made by the employer towards the National Pension Scheme (NPS) of the employee. This deduction is available over and above 80CCD (1).

80D: Medical Insurance premium paid for self, spouse, parents, dependent children are allowed up to Rs.25,000. Premium paid for parents (above 60 years) is allowed up to Rs.50,000.

80DD: Expenditure on medical treatment of a disabled dependent relative. Where disability is 40% to 80%, the deduction allowed is Rs.75,000. For disabilities above 80%, the deduction allowed is Rs.1,25,000.

80E: Interest paid on education loan is allowed as a deduction up to 8 years, beginning from the year in which the individual starts repaying interest.

80U: Deduction for a Resident Individual being a person with a disability. The deduction is Rs. 75,000. Where the disability is severe, deduction is Rs.1,25,000.

Income tax slabs

Individuals have been categorized into three age groups:

  1. Super senior citizens (aged above 80 years)
  2. Senior citizens (aged between 60 and 80 years)
  3. Others (Individuals below the age of 60 years)
  • The following are the tax slabs under existing taxation scheme. (pre-Budget, 2020).

Assessee Type

Total Income (TI)

Rate of Tax

Explanation

Super Senior Citizen

Up to 5,00,000

Nil

5,00,001 to 10,00,000

20%

20% of the amount exceeding 5,00,000
i.e., 20% of (TI - 5,00,000)

10,00,001 and above

30%

1,00,000(above) + 30% of the amount exceeding 10,00,000
i.e., 1,00,000 + [ 30% of (TI - 10,00,000)]



Assessee Type

Total Income (TI)

Rate of Tax

Explanation

Senior Citizen

Up to 3,00,000

Nil

3,00,001 to 5,00,000

5%

5% of the amount exceeding 3,00,000
i.e., 5% of (TI - 3,00,000)

5,00,001 to 10,00,000

20%

10,000(above) + 20% of the amount exceeding 5,00,000
i.e., 10,000 + [ 20% of (TI - 5,00,000)]

10,00,001 and above

30%

1,10,000(above) + 30% of the amount exceeding 10,00,000
i.e., 1,10,000 + [ 30% of (TI - 10,00,000)]



Assessee Type

Total Income (TI)

Rate of Tax

Explanation

Others
(represents Individuals)

Up to 2,50,000

Nil

2,50,001 to 5,00,000

5%

5% of the amount exceeding 2,50,000
i.e., 5% of (TI - 2,50,000)

5,00,001 to 10,00,000

20%

12,500(above) + 20% of the amount exceeding 5,00,000
i.e., 12,500 + [ 20% of (TI - 5,00,000)]

10,00,001 and above

30%

1,12,500(above) + 30% of the amount exceeding 10,00,000
i.e., 1,12,500 + [ 30% of (TI - 10,00,000)]


To know the slab rates under the New taxation scheme, calculation of taxes, and a comparison of the two tax regimes, refer to calculator ‘ Income Tax Comparision Tool

Is filing of Income Tax Return mandatory?

It is necessary for all persons whose income exceeds the Basic Exemption Limit to file their income tax return. However, the government may relax the limits (for filing requirements only) as deemed necessary.

Even though tax filing isn’t mandatory for all, you must file your returns to:

  • Claim Tax refunds: TDS that has already been deducted can be claimed back only by filing your return.
  • Applying for a loan: Your tax return filed for the earlier periods act as proof of your source of income. While applying for a loan, the eligibility and the loan amount sanctioned depends on the assesses income.
  • Carry forward of Losses: Losses from various income sources can be carried forward and set off against certain incomes only if you have filed your returns promptly. This process will reduce your future tax liability.

Details required when e-filing income tax returns.

  • Basic information (PAN, Aadhar card, address details, etc.)
  • Details of all the bank accounts held in the financial year. You also get to select which among these do you want your tax refund ‘Credited to’.
  • Proof of Income earned (Form-16, interest earned on the savings account, fixed deposits and other investments)
  • Proofs for all deductions claimed under Chapter VI-A (LIC receipts, investment papers, health insurance policies, etc.)
  • Details of tax payment in the nature of advance tax paid challan, TDS forms.

TDS calculation on salary

TDS or Tax Deducted at Source is the amount deducted from an individual’s income by the employer on behalf of the employee and deposited to the Income Tax department.

Steps to calculate TDS on salary:

  • Calculate the monthly gross income. This income includes basic pay, allowances, and perquisites received in a month.
  • Then calculate tax exemptions under Section 10 of The Income Tax Act.
  • Deduct the tax exemptions from gross income.
  • Now multiply the above monthly income by 12 to calculate the yearly taxable income.
  • Then add incomes from other sources and deduct losses.
  • Calculate investments that fall under Chapter VI-A of The Income Tax Act. An example of investments eligible for deductions under 80C is Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS Mutual Fund), Fixed Deposits (FDs), ULIPs SSY, Senior Citizen Savings Scheme, car loan (four-wheeler loan) taken for business purpose etc. This amount has to be deducted from gross income.
  • Now the resulting figure is the total taxable income. According to age and income, the tax slabs have to be applied to calculate taxes or TDS on the income.
  • TDS is usually calculated on basic salary plus allowances. After deducting all the allowances and deductions, TDS is calculated by the employer on the gross salary. They do not generally consider any other income or losses. The tax liability is distributed throughout 12 months. The individual will receive a salary post TDS.

You may refer our tool Salary Structure Optimizer to get a clear picture of Gross Total Income , Total Income, Tax Liability, and the applicable TDS.