Computation of Total Income and Tax liability

Computation of Total income and tax liability is a critical aspect of tax planning for individuals and businesses under the Indian Income Tax Act. Understanding the process of arriving at total income and determining the applicable tax liability is essential for taxpayers to ensure compliance and optimize their tax position.

• Understanding Total Income:

Total income refers to the aggregate income earned by a taxpayer during a financial year from all sources, including salary, house property, business or profession, capital gains, and other income such as interest, dividends, etc. It serves as the basis for calculating the tax liability.

Components of Total Income:

• Income from Salary:

This includes salary, wages, bonuses, commissions, perquisites, allowances, etc., received by an individual from an employer. Certain deductions such as standard deduction and exemptions like HRA (House Rent Allowance) are allowed from salary income.

• Income from House Property:

Income from house property is computed after deducting municipal taxes paid and a standard deduction of 30% of the annual value. Deductions on interest paid on home loans are also available.

• Income from Business or Profession:

For individuals engaged in business or profession, total income is computed by deducting allowable expenses incurred for earning business income from the gross receipts.

• Capital Gains:

Capital gains arise when there is a transfer of capital assets such as stocks, real estate, etc. Total income includes both short-term and long-term capital gains, which are computed after adjusting for cost inflation index and deductions available under various sections of the Income Tax Act.

• Income from Other Sources:

Income from other sources includes interest income, dividend income, rental income from machinery, winnings from lottery or game shows, etc. Deductions and exemptions may be available for certain types of income.

Computation of Taxable Income:

After determining the income under each head, adjustments are made for deductions and exemptions available under various sections of the Income Tax Act to arrive at the taxable income. Some common deductions:

• Deductions under Section 80C for investments in specified instruments.
• Deductions under Section 80D for health insurance premiums.
• Deductions under Section 80G for donations to specified charitable institutions.
• Deductions for interest on home loans under Section 24.
• Deductions for education loans, contributions to NPS (National Pension System), etc.

Calculation of Tax Liability:

Once the taxable income is determined, tax liability is computed based on the applicable income tax slab rates for the respective financial year. The income tax slabs and rates may vary depending on the type of taxpayer (individual, HUF, senior citizen, etc.) and the total income earned during the financial year.

Applicable Old or New Income Tax Slabs and Rates (For Individuals for FY 2023-24):

For Individuals below 60 years:

• Income up to Rs. 2.5 lakh: Nil
• Income from Rs. 2.5 lakh to Rs. 5 lakh: 5%
• Income from Rs. 5 lakh to Rs. 10 lakh: 20%
• Income above Rs. 10 lakh: 30%

For Senior Citizens (60 years and above but below 80 years):

• Income up to Rs. 3 lakh: Nil
• Income from Rs. 3 lakh to Rs. 5 lakh: 5%
• Income from Rs. 5 lakh to Rs. 10 lakh: 20%
• Income above Rs. 10 lakh: 30%

For Very Senior Citizens (80 years and above):

• Income up to Rs. 5 lakh: Nil
• Income from Rs. 5 lakh to Rs. 10 lakh: 20%
• Income above Rs. 10 lakh: 30%

Rebates and Surcharge:

After computing the tax liability as per the applicable slab rates, rebates under Section 87A (for individuals with total income up to Rs. 5 lakh) and surcharge (applicable on higher income levels) are factored in to arrive at the final tax payable.

Education Cess and Health and Education Cess:

Education cess and health and education cess are levied on the tax payable amount to fund education and healthcare initiatives. These cesses are calculated as a percentage of the tax payable amount.

Final Tax Liability:

The final tax liability is the sum of the tax payable amount, education cess, and health and education cess, after considering any tax deducted at source (TDS) and advance tax paid during the financial year.

Filing of Income Tax Return:

Taxpayers are required to file their income tax returns (ITR) disclosing their total income, deductions, exemptions, and tax liability within the due dates specified by the Income Tax Department. Failure to file returns or pay taxes on time may attract penalties and interest.