This is one of the most frequently asked questions as one commences their career and is in anticipation to know their first take-home pay.
All of us remember our first appointment letter while reading through the terms and conditions; we flip through the pages to see our salary break up page. With the smile on our face, we quickly start going through the components, we start to estimate what will be the income tax calculation on our salary and what amount will we take home to spend in a month.
Obviously, we are all confused on what it is and cherish the moment of receiving your first hard earned income at the start of a successful career. Further, the thought of receiving a pay cheque at the end of the month to purchase your favourite dress or treat your parents for dinner at a good restaurant is just so satisfying that we ignore the fact of our limited knowledge on our taxable income. Eventually, as we grow in our career, we hire professionals or consult someone senior to understand the income tax calculation on our income from the confusing cost to company (CTC) break up shared with us.
This leaves us with the question …What is our taxable income?
It is the final amount received after taking into account the income tax calculation, applicable deductions, exemptions which are calculated as per applicable tax slab or rate of the individual. To calculate the tax slab applicable to you in India, the source of income is divided into 5 categories i.e. income from house property, salary, profession & business, income from capital gains and other sources. All these sources of income have certain exemptions and applicability of tax. To understand this further, let’s go through each source of income and calculate taxable income.
i) Income from House Property
Income from House Property arises when you have a property which is let out Property (on rent) i.e. you receive rental income from such property and the deemed income from a self-occupied property is part of this income.
To calculate income from house property, calculate the rent received and expected rent from the property.
You will also consider the higher of fair market value and municipal value.
The higher value between the actual rent received and expected rent, is considered as Gross Annual Value of your let out house property. Tax i.e. municipal tax is deducted from Gross Annual Value to arrive at Net Annual Value.
This deduction might be positive or negative income. Then, you deduct the interest paid on loan for such property from the income.
They allow 30 % of Net Annual Value as a deduction towards rent collection, repairs, etc. irrespective of the actual expenses incurred.
The deduction isn’t allowed if the gross annual value is nil.
ii) Income from Salary
Income from salary includes various components like basic salary, various allowances, bonuses, and commissions if any.
We need to add basic salary, allowances such as dearness allowance, HRA, travel allowance, commissions, bonuses if any to compute the gross salary which is mentioned in your salary slips and Form 16 issued by your employer.
Post the additions and arriving gross salary, deduct the HRA exemption as applicable, travel allowance exemption, any interest if applicable and reimbursements as per the actual bills plus the maximum ceiling.
The income tax calculation is basis the slab under which your taxable income falls under for the financial year of filing your income tax return.
iii) Income from Profession and Business
Income from Profession and Business means any income which is shown in the profit and loss account post deduction of all the expenditures. To do the income tax calculation on income arising out of gains from business or profession is a challenging task. There are several provisions under the Income Tax Act which deals with allowances of various expenditures and incomes. There are various concepts like AMT, Book Profits and Presumptive incomes which are also applicable while computation of gains from profession and business.
Business is defined as any commerce, trade or manufacturing of goods with a purpose to make a profit as per the defined laws of the country. A profession is any services provided by the professionally or technically qualified person basis the qualification degree.
Considering the nature of business and profession will vary, some of the general deductions under section 37/1 are mentioned below:
- Expenditure should be other than covered under Section 30 to 36
- Should not be in nature of Capital Expenditure
- Should not be in nature of Personal Expenditure of the assessee
- Should not have been incurred in the previous year
- Should not have been incurred for any purpose which is an offence or is prohibited by the law
- Should be in respect of business carried on by the assessee
- Should have been wholly and exclusively for the purpose of business
One should seek the assistance of a chartered accountant or tax calculator available online to help understand the process of calculating the income tax correctly considering the variation involved here. You do not need to pay any fee to use the online tax calculator.
iv) Capital Gain Income
Profit or Gain which is a result of the sale of a capital asset is termed as Capital Gains. It arises when you sell for an amount higher than the value of purchasing the asset. In case, the value of the asset decreases while selling in comparison to its purchase price, a capital loss is suffered.
Thus, capital asset means property of any kind held by the assessee. This shall include any real estate’s product like land, house or any investment products like jewellery, mutual funds, stocks, and others.
We have both long-term and short-term capital asset. The differentiation between them is
- Any capital asset (other than immovable property and certain listed securities) that is held
- Any capital asset (other than immovable property* and certain listed securities) that is held by an assessee for less than 36 months; in case of shares, debentures, and bonds, less than 12 month
v) Income from Other Source
Any monetary income that does not fall under the four heads above is taxed under the head “Income from other sources”. A few examples are income from Bank Deposits, income from bank interest, income from the dividend. This will also include winnings over INR 10,000 from lotteries, puzzles, race, games and all forms of gambling and betting such as card games, horse races, game shows, etc.
Income Tax Calculation on Gross Total Income
One needs to sum up all income from all the above 5 sources and deduct losses under the relevant heads of income.
Your gross income needs to be categorized in 2 parts i.e. one which is taxed at normal slab rates and other which is taxed at specific rates. For example, income tax calculation on securities with short team capital gain is taxed at 15 % and income from lottery, gambling will be taxed at 30%.
All deductions allowed under Section 80C which is up to 150000 to 80 U of the Income Tax Act from the gross total income. You should include all the deduction benefits allowed for investments such as Public Provident Fund (PPF), tax saving fixed deposit, health insurance premium.