Income tax is something that you shouldn’t worry about only at the end of the financial year. Rather, it’s something you must plan for, right at the start of a financial year, allowing you to save as much as you can. Understanding income tax calculations can also help you review your returns and cross check whether you qualify for a refund or not.
You’re expected to pay income tax and file tax returns if your total taxable income exceeds Rs, 2.5 lakhs in a financial year. When we say taxable income we mean the income arrived at after taking all types of incomes into account and making all possible deductions (as per various sub-sections under section 80 of Income Tax Act, 1961). Following are the income tax slabs applicable for the F.Y. 2016-17 (A.Y 2017-18) for individuals below the age of 60 years:
Total taxable income (in Rs.) Income tax rate
0 to 2,50,000 NIL
2,50,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
10,00,001 and above 30%
In the case of salaried people, a majority of their income tax payment is taken care of via the tax deducted at source (TDS) by their employers. However, it’s always better to do a final assessment yourself and file your tax returns accordingly. This is all the more important if you receive income from other sources such as interest from investments, freelance income, capital gains etc.
Let’s now look at income tax calculation in detail.
You can categorise income earned by you under five different heads:
- Income earned from salary
- Income earned from capital gains
- Income earned as rent from house property
- Income earned from profession and/or business
- Income earned from other sources
The final aggregate taxable income is calculated after taking all such incomes into account, and after making allowed tax deductions under each income head. For instance, you’re allowed to deduct LTA (Leave Travel Allowance) and HRA (House Rent Allowance) first from your salary before including it in the calculation of total taxable income. In the same way, when it comes to annual rental income from house property, you can deduct 30% from it as a standard deduction (after subtracting municipal taxes), before including it in total income. You’re also free to deduct any freelancing expenses (internet bill, phone bill etc.) from your freelance income before including it for tax calculation purposes.
After you’ve totalled your income from all these heads, you can make allowed deductions under section 80 of the Income Tax Act, 1961. For instance, deductions on account of LIC (Life Insurance Corporation) premiums, Public Provident Fund and Employee Provident Fund investments can be made u/s 80C. Deductions on account of health insurance premium can be deducted as per section 80D.
You’ll arrive at your total taxable income after making all these deductions. It is this income that you’ll use for your final income tax calculation. Let’s move on to the actual calculation now.
As per the income tax slabs provided above, there’s no tax charged on Rs. 2.5 lakhs of this taxable income. So you don’t need to pay any income tax if your total taxable income is Rs. 2.5 lakhs or less.
There’s a 10% tax applicable to the portion falling between Rs. 2.5 lakhs and Rs. 5 lakhs (in your total taxable income). Furthermore, you can claim an additional rebate of Rs. 2,000 (u/s 87A of Income Tax Act, 1961) from the computed income tax (after allowing all other deductions).
Any taxable income between Rs. 5 lakhs and Rs. 10 lakhs is subjected to a flat 20% income tax. And anything over Rs. 10 lakhs is charged a flat tax rate of 30%.
Once you’ve calculated the total tax, you’ll need to add an extra 3% as cess to it and make the final tax payment accordingly. A surcharge of 15% would be levied (on income tax) if your taxable income exceeds Rs. 1 crore in the concerned financial year.
Please note, you’ll also need to make appropriate adjustments with regard to the tax deducted at source. The TDS already paid by you may be less than, equal to or more than the total tax calculated by you. Hence you may have to either pay the difference, pay nothing or claim a tax refund.
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