Many view income tax as a necessary evil. Taxes are difficult to comprehend due to the continuously changing tax laws and terms such as tax exemption, tax savings, tax deduction, tax rebate, etc. In most instances, we are unaware of how much we are taxed and how much we can save.
In this blog, we will demonstrate how to compute your income tax and introduce the best tax-saving strategies, so that the next time you will be able to do your own calculations and take as many tax-saving measures as possible.
Before moving forward, let’s define income tax and its components for calculating income tax.
What is Income Tax?
According to the Income Tax Act of 1961, a central income tax is a tax imposed on individuals or entities (taxpayers) based on their income or profits (commonly known as taxable income). Government of India collects income tax, which is unquestionably the most significant source of revenue for the Indian government. The government uses taxes to achieve its goals, which include meeting the country’s development and defence requirements, creating new employment opportunities, constructing infrastructure, etc.
In general, income tax is calculated by multiplying a tax rate by taxable income. Tax rates may vary depending on the nature or characteristics of the taxpayer and the nature of the income.
The 1961 Income Tax Act classifies assessee income into five categories:
- Income from Salary
- Income from House Property
- Income from Profits and Gains of Profession or Busines
- Income from Capital Gain
- Income from Other Sources
Key Components To Be Remembered When Calculating Income Taxes
When computing income taxes, keep in mind a few crucial factors. These essential elements are detailed below:
- Financial Year (FY) – The financial year is the year in which money is earned. It spans the months of April 1 this year through March 31 the following year. During this period, you must prepare all of your investment proofs and compile all of your paperwork.
- For instance, the fiscal year 2022–23 runs from April 1 until March 31, 2023.
- Assessment Year (AY) – An assessment year is the year in which your revenue from a specific financial year will be evaluated.
- For instance, the year that your income from April 1, 2022, to March 31, 2023, will be calculated is AY 2023–2024.
- Tax deductions – They enable you to lower your total taxable income in accordance with Section 80 of the Income Tax Act, Chapter VI-A.
- For instance, you can claim a tax deduction of up to 1,50,000 on premiums paid for life insurance plans and other investments listed in Chapter VI, in accordance with the tax regulations of Section 80C of Chapter VI-A. One of the most popular methods of tax savings is this.
- Tax Exemption – Exemption denotes exclusion, thus if certain income is not subject to tax, it will not be included in a person’s total income. The entire amount is an exemption for the taxpayer and is not counted as a portion of overall income. Here are a few of the exceptions:
- Salary Income Exemptions, Allowances and Deductions
- Leave travel concession as contained in clause (5) of section 10;
- House rent allowance as contained in clause (13A) of section 10;
- Some of the allowance as contained in clause (14) of section 10;
- Death-cum-retirement gratuity received by Government servants [Section 10(10)(i)]
- Standard deduction, the deduction for entertainment allowance and employment/ professional tax as contained in section 16;
- Rental Income from House Property Deductions
- Interest paid on home loan under section 24. Deduction against interest on home loan is applicable in respect of self-occupied or vacant property.
- In any assessment year, if there is a loss under the head “Income from house property”, such loss will first be set-off against income from any other head to the extent of ₹2,00,000 during the same year. The unabsorbed loss will be carriedforward to the following assessment year and this carry forward loss can not be set -off from any other head except income under the head “Income from house property”.Such loss shall be carry forwad for 8 years.
- Deduction From Business or Profession Income
- Expense incurred in relation to running such business or profession
- Depreciation on assets, and additional depreciation on such assets.
- Deduction for donation for or expenditure on scientific research
- Rent, Rates, Taxes, Repairs, and Insurance of building
- Any bonus or commission paid to the employees
- A contribution made to the employees recognized provident fund or approved superannuation fund or approved gratuity fund.
- TDS – Tax deducted at source is referred to as TDS. According to the Income Tax Act, a person (the deductor) who is compelled to make a payment of a particular kind to another person (the deductee) is required to withhold tax at source and submit it to the Central Government’s account. The payer must withhold tax at source at the rate provided in the Income Tax Act of 1961. TDS will be withheld at the earliest of the time of accrual or payment of such income to the payee. There is no requirement for TDS to be deducted at source if you are a “individual” or a “Hindu Undivided Family” (HUF), though, whose total revenue from the business or profession you are engaged in does not exceed one crore rupees in the case of a business or fifty lakh rupees in the case of a profession during the Financial Year immediately preceding the current financial year.
- Salary Breakup – Understanding your salary breakdown is the first step in figuring out how much income tax you owe on your wage. The pay stub or salary statement will contain the salary breakdown.
By carefully examining the slip or statement, you can comprehend the primary elements and fundamental structure of your pay.
Taxable Income = Total Income (Sum of All Your Earnings) – Eligible Deductions
Following receipt of your salary breakdown, you must ascertain your taxable income. Any income you get from sources other than your salary that is subject to taxation is referred to as “taxable income.”
| Income Source | Description |
|---|---|
| Income from Salary | An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary. “Salary” for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.). |
| Income from House Property | Any amount of money that is received by the landlord from tenant for using the property is called rental income. Here, property refers to any building including house, office building, warehouse etc. and any land attached to the building like compound, garage, car parking space etc. Different types of house property (like rental or self-occupied property) are taxed differently. |
| Income from Business/Profession | Any income shown in profit and loss account after taking into account all the allowed expenditures by an assessee. The income also includes both positive (profit) and negative incomes. Here is a list of the income chargeable under the head:Profits earned by the assessee during the assessment yearProfits on income by an organizationProfits on sale of a certain licenseCash received by an individual on export under a government schemeProfit, salary or bonus received as a result of a partnership in a firmBenefits received in a business |
| Income from Capital Gains | Any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place. |
| Income from other Sources | Any income that is not eligible for tax under any other head of income and cannot be excluded from the total income is taxed as residual income under the head “Income from Other Sources”. The following three conditions must be satisfied according to Section 56 of the Income Tax Act for an income to qualify as income from other sources.Income is generated.Any other provision of the Income Tax Act does not exempt such income.Income from such sources cannot be claimed as salary, house property income, profits and gains from business or profession, or capital gains. |
The most crucial and last stage is to determine the amount of tax that is owed. The assessee would determine the amount of net tax payable or refundable after adjusting the advance tax and tax deducted at source. According to section 288B, this value should be rounded to the nearest multiple of 10. The assessee is required to pay the tax liability (also known as self-assessment tax) on or before the deadline for filing the return. Similar to this, the assessee will receive any refunds after filing an income tax return.
The following are the applicable tax rates and tax slabs under the old and new tax regimes for an individual taxpayer who is under the age of 60. The taxpayer is free to select either of these two tax structures.
| Tax slab | Tax rate as per old regime |
|---|---|
| 0 – 2,50,000 | Nil |
| 2,50,000 – 5,00,000 | 5 % |
| 5,00,001 – 10,00,000 | 20 % |
| 10,00,001 & above | 30 % |
| Tax slab | Tax rate as per new regime |
|---|---|
| 0 – 3,00,000 | Nil |
| 3,00,001 – 6,00,000 | 5 % |
| 6,00,001 – 9,00,000 | 10 % |
| 9,00,001 – 12,00,000 | 15 % |
| 12,00,001 – 15,00,000 | 20 % |
| 15,00,001 & above | 30 % |
The financial year 2023–24, which corresponds to the assessment year (AY) 2024–25, will start with these rates in place. Surcharge and a 4% health and education cess are added to the total tax rate in addition to the total amount owed.
Additionally, numerous tax exemptions and deductions that were available under the previous tax system must be given up by taxpayers who chose concessional rates under the New Tax regime. Under the new tax law, a number of deductions and exemptions are no longer allowed. Reviewing the list in advance is recommended.
How to Calculate Income Tax on Salary with an Example
| Particulars | Amount |
|---|---|
| Basic Salary | xxx |
| Add: | |
| 1. Fees, Commission and Bonus | xxx |
| 2. Allowances | xxx |
| 3. Perquisites | xxx |
| 4. Retirement Benefits | xxx |
| 5. Fees, Commission and Bonus | xxx |
| Gross Salary | xxx |
| Less: Deductions from Salary | |
| 1. Entertainment Allowance u/s 16 | (xxx) |
| 2. Professional Tax u/s 16 | (xxx) |
| Net Salary | xxx |
A very easy formula to calculate the income tax is:
For Example:
Mr Shah has a basic salary of ₹ 1,00,000 per month
House Rent Allowance (HRA) of ₹ 45,000 per month
Special allowance of ₹ 20,000 per month
Leave Travel Allowance (LTA) of ₹ 20,000 per Annum
His taxable income would be calculated as follows:
| Components | Amount (₹) | |
|---|---|---|
| Basic Salary | 1,00,000 x 12 | = 12,00,000 |
| HRA (House Rent Allowance) | 45,000 x 12 | = 5,40,000 |
| Special Allowance | 20,000 x 12 | = 2,40,000 |
| Leave Travel Allowance (LTA) | 20,000 | = 20,000 |
| Total Annual Salary (Income) | 20,00,000 | |
As his taxable income is ₹ 20,00,000,he falls in the slab of above Rs 15 lakh of income tax.
Now let us calculate his Total Taxable Income under both Old Tax Regime and New Tax Regime
| Components | Old Tax Regime | New Tax Regime |
|---|---|---|
| Total Annual Salary | ₹ 20,00,000 | ₹ 20,00,000 |
| Gross Total Income | ₹ 20,00,000 | ₹ 20,00,000 |
| (now less all the applicable deduction, allowances, and exemptions) | ||
| Less: Standard Deduction | – ₹ 50,000 | – |
| Less: Deductions under Section 80C | – ₹ 1,50,000 | – |
| Less: Deductions under Section 80D | – ₹ 50,000 | – |
| Less: House Rent Allowance (Out of 5,40,000 deduction of) | – ₹ 3,00,000 | – |
| Less: Leave Travel Allowance (Out of 20,000 deduction of) | – ₹ 10,000(bills must be submitted) | – |
| Total Taxable Income | ₹ 14,40,000 | |
| Total Tax Liability (Payable) (tax liability + cess 4%) | = ₹ 2,54,280 | = ₹2,96,400 |
Under the old tax structure, one may save a lot of money by making different tax-saving investments and/or costs, as shown in the example above.
A resident taxpayer’s income tax due is reduced thanks to the rebate provided by Section (u/s) 87A. There is only one requirement to receive the benefit:
“The threshold limit shall not be exceeded by your total taxable income.” Meaning – Only taxpayers who fall below the set threshold limit are eligible to receive the Section 87A rebate.
The amount of the Section 87A rebate for the upcoming fiscal year (2023–24; AY 2024–25) has remained same. The lower of Rs 12,500 or the amount of tax due (whichever is less) would be given as a tax rebate to a resident taxpayer with taxable income up to Rs 5,00,000 per year.
The aforementioned restriction has been raised from 5,000 to 7,00,000 in the current system. A resident taxpayer with taxable income up to Rs 7,00,000 would receive a tax rebate of either Rs 25,000 or the amount of tax due, whichever is less.
Conclusion
To accurately determine the tax due, all investments must be disclosed at the beginning of the assessment year. To lay a strong financial foundation, it is imperative to have a working knowledge of taxes, deductions, and returns. Incorrect tax payments and information submissions may cause the income tax department to review your tax return.
- On purpose, avoiding filing the IT return
- Purposely letting the tax payments fail
- Intentionally not reporting total income
- Tax returns that have been faked
- False claims
Penalties for tax fraud include jail time and hefty fines. Everyone aspires to live a lavish life, but feels that it is difficult because taxes consume a sizable percentage of their income. Understanding how to do precise calculations and deductions helps with wise financial planning and tax reduction, enabling you to enjoy the luxurious life you’ve always desired. It also stops tax fraud from happening.
Frequently Asked Questions
What are the benefits of filing income tax online?
The following are some benefits of filing income tax forms online:
- Online filing is quick and straightforward.
- Enables the faster and more effective use of electronic tax refunds.
- Allows for immediate confirmation receipts and status updates in real time.
- It is private and safe.
- It is error-free and costs less to hire professionals
- Helps in the processing of insurance, loan, and VISA applications.
- Serves as evidence of a source of income and of an address.
- It makes it simple to avoid late fees.
- Allows you to carry forward losses.
Which income tax slab is better: Old Regime or new Regime?
You can choose which of the two income slabs is best for you by considering your yearly income and the perks you receive. It is best to conduct thorough research before selecting your own income tax bracket.
Is everyone required to file income tax?
If your gross total income for the financial years exceeds the basic exemption limit, you must file income tax returns. The basic exemption limit under the old regime is as follows:
For residents below age 60 – ₹ 2.5 lakh
For senior citizens (between 60 and 80 years) – ₹ 3 lakhs
For super-senior citizens (80 years and above) – ₹ 5 lakhs
The basic exemption under the new tax regime is 3 lakh (form F.Y. 2023-24) for all age groups. In addition, if you have the following you must file an ITR:
More than ₹ 1 crore was deposited in a current account(s)
More than ₹ 2 lakh was spent on international travel
Paid more than ₹ 1 lakh on electricity
An account in a foreign country that receives income/ has assets/ has signing authority
Before claiming relevant capital gains exemptions, you must have gross total income that is more than the exemption limit
According to the Union Budget 2021, senior citizens over 75 years of age are excluded from filing Income Tax Returns for the financial year 2021-22 if their only source of income is pension and interest income, both of which are deposited/ earned in the same bank.
If you had a loss during the financial year that you want to carry forward to the next year to offset positive income in the following year(s), you must file a claim of loss by filing your return before the due date.
What is the eligibility criteria to file Income Tax?
Any resident citizen whose total gross income exceeds the basic exemption limit is required to file income tax returns. You can, however, submit a NIL return if your total income is less than the taxable limit.
The following are some of the other entities that submit ITR in India:
- Hindu Undivided Family (HUF)
- Associations of Persons (AoPs)
- Local authorities
- Corporate firms
- Charitable and/or religious trust
- Companies
- Artificial juridical persons
- Body of Individuals (BOI)
The correct ITR form must be used depending on the taxpayer.
The following are the forms of return prescribed under the Income-tax Law:
Return Form
ITR-1 – Also known as SAHAJ is applicable to an individual having salary or pension income or income from one house property (not a case of brought forward loss) or income from other sources (not being lottery winnings and income from race horses, income taxable under section 115BBDA/ 115BBE and agricultural income up to Rs.5 thousand
ITR-2 -It is applicable to an individual or an Hindu Undivided Family not having income chargeable to income-tax under the head “Profits or gains of business or profession”
ITR-3 – It is applicable to an individual or a Hindu Undivided Family who has any income chargeable to tax under the head business or profession
ITR-4 – Also known as SUGAM is applicable to individuals or Hindu Undivided Family or partnership firm (other than LLP) who have opted for the presumptive taxation scheme of section 44AD/ 44ADA/44AE.
ITR-5, – This Form can be used by a person being a firm, LLP, AOP, BOI, cooperative society and local authority ( Not for trusts, political parties, institutions, colleges)
ITR-6 – It is applicable to a company, other than a company claiming exemption under section 11
ITR-7 – It is applicable to a persons including companies who are required to furnish return under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D) (i.e., trusts, political parties, institutions, colleges)
ITR-V -It is the acknowledgement of filing the return of income.
ITR-U – It is an ITR form for updating your income within 24 months of filing.
Reasons for updating your income:
- Return previously not filed
- Income not reported correctly
- Wrong heads of income chosen
- Reduction of carried forward loss
- Reduction of unabsorbed depreciation
- Reduction of tax credit u/s 115JB/115JC
- Wrong rate of tax
- Others
What are the details required for e-filing Income Tax Returns?
The following details and documents must be kept ready for e-filing of Income Tax Returns:
- PAN card
- Aadhaar card
- Permanent address proof
- Bank account details related to the financial year (indicate which account any income tax refund should go to)
- Form 16 and proofs of all the “other incomes” ( like commission, interest income, and/or dividend)
- Details of tax deduction(s), related to Section 80C, Section 80D, and many such deduction related to investments/expenses and other allowances – as mentioned under Chapter VIA.
- Proof of tax paid (TDS, advance tax, and so on.)
- Financial statements of the entity/ corporate
- Statement of equity trading/ future-options/ mutual funds (for all Demat accounts)
- Details of any capital assets sold/ purchased during the year
What deductions/exemptions are available for salaried individuals?
The following deductions/exemptions are available for salaried individuals:
- Standard deductions (Rs 50,000)
- Leave Travel Allowance (for domestic travel)
- HRA – House Rent Allowance (partial or total)
- Work-related expenses (telephone bills, meal coupons, etc.)
- Deduction under different Sections of Chapter VIA of Income Tax Act:
- 80C, 80CCC, 80CCD(1) – Life Insurance premiums, ULIPs, PPF, NPS, tuition fees, etc. ( ₹1,50,000 maximum)
- 80D – Premiums paid towards health insurance policy
- 80C, 24B, and 80EE/ 80EEA – Home loan repayment
- 80E – Education loan interest. (loan taken for higher education)
- 80G – Contributions to approved charitable organisations
- 80TTA – Savings account interest
Suggested Read: In-detail Guide on All Deductions/Exemptions Available under Chapter VIA
What is the limit of deductions under Section 80C?
Under Section 80C, taxpayers can claim deductions of up to 1,50,000 per financial year. However, there is an additional deduction of up to Rs 50,000 permitted for deposits made to an NPS account.
- The Section 80C deduction applies to investments like life insurance premiums EPF, PPF, ULIPs, home loan repayment, child’s tuition fees, and much more.
- The limit of Rs 1,50,000 is inclusive of subsections like 80CCC, 80CCD(1), and 80CCD(2).
Suggested Read: Most-Opted Tax-Saving Investments Under Section 80C
What is the amount of tax rebate available on a home loan?
Eligible taxpayers can claim the following tax rebate when repaying home loan:
- Under Section 80C for principal repayment and stamp duty – up to Rs 1,50,000 per year
- Under Section 24B for interest payment – up to Rs 2,00,000 per year
- As an additional interest deductions under Section 80EE – up to Rs 50,000 annually
- Under Section 80EEA – as an additional interest deduction on home loans taken for affordable housing – up to Rs 1,50,000 annually
Note:
- You can claim a maximum deduction of Rs 5 lakh per year (Rs 1,50,000 + Rs 2,00,000 + Rs 1,50,000) if you are eligible under Section 80EE or 80EEA.
- If co-owners take out a home loan, each of them can claim tax deductions based on their ownership stake.
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