Answer By law4u team
Income tax in India is calculated based on an individual's or a company's income during a given financial year. The tax calculation follows a series of steps that account for the person's income, exemptions, deductions, and applicable tax rates (slabs). The government updates the tax slabs periodically, and these directly affect how much tax an individual or entity will owe.
Steps to Calculate Income Tax in India:
Determine Gross Income:
The first step in calculating income tax is to determine the total income earned by an individual or entity in a financial year. Gross income includes all forms of income, such as:
- Salary (including bonuses, allowances, and perks)
- Income from Business or Profession
- Rental Income
- Capital Gains
- Interest and Dividends
Apply Exemptions:
Exemptions are allowed under various sections of the Income Tax Act. For example:
- House Rent Allowance (HRA) for salaried individuals living in rented accommodation.
- Agricultural Income is fully exempted from tax in India.
- Leave Travel Allowance (LTA) for travel expenses. These exemptions reduce the gross income.
Deduct Allowable Deductions:
After applying exemptions, the next step is to claim deductions available under the Income Tax Act. Common deductions include:
- Section 80C: Investments in instruments such as Public Provident Fund (PPF), Life Insurance Premium (LIC), National Savings Certificate (NSC), and more, up to ₹1.5 lakh.
- Section 80D: Deductions for health insurance premiums paid for self, family, or parents.
- Section 24(b): Deduction on home loan interest (up to ₹2 lakh per year for self-occupied properties).
- Section 80E: Deduction on interest paid for education loans.
- Section 10(13A): Exemption for HRA, subject to specific conditions.
Calculate Taxable Income:
After applying exemptions and deductions, the remaining income is termed as taxable income. This is the income on which tax will be levied.
Apply Tax Slabs:
The government sets tax slabs for different income groups. For individuals below 60 years, the following are the tax slabs for the financial year (subject to changes based on the annual budget):
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹5 lakh: 5% of taxable income
- ₹5 lakh to ₹10 lakh: 20% of taxable income
- Above ₹10 lakh: 30% of taxable income
In addition, a rebate of ₹12,500 under Section 87A is available to individuals with taxable income up to ₹5 lakh.
Add Cess and Surcharge:
After applying the tax slab, a Health and Education Cess of 4% is added to the calculated tax. If the taxable income exceeds ₹50 lakh, a surcharge is also applied:
- Income between ₹50 lakh and ₹1 crore: 10% surcharge on tax.
- Income above ₹1 crore: 15% surcharge on tax.
Consider TDS (Tax Deducted at Source):
If you are employed or have a regular source of income, tax may already be deducted from your salary (TDS). The amount of TDS is subtracted from your final tax liability. If TDS exceeds the tax payable, you may receive a refund.
Final Tax Payable:
The final amount payable is the total tax calculated after considering all the components, including exemptions, deductions, tax slabs, and any TDS already paid.
Example:
Let’s calculate the income tax for an individual named Amit, whose details are as follows:
- Gross Salary: ₹9,00,000
- HRA Exemption: ₹1,00,000 (based on the rented accommodation he lives in)
- Section 80C Deductions: ₹1,50,000 (PPF, LIC, etc.)
- Section 80D Deductions: ₹25,000 (health insurance premium)
Step 1:
Amit's total income: ₹9,00,000
Step 2:
Apply exemptions:
- HRA Exemption: ₹1,00,000
- Amit's income after exemption = ₹9,00,000 - ₹1,00,000 = ₹8,00,000
Step 3:
Apply deductions:
- Section 80C: ₹1,50,000
- Section 80D: ₹25,000
- Total deductions = ₹1,50,000 + ₹25,000 = ₹1,75,000
- Amit's taxable income = ₹8,00,000 - ₹1,75,000 = ₹6,25,000
Step 4:
Apply tax slabs:
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2,50,000 = ₹12,500
- ₹5 lakh to ₹6.25 lakh: 20% of ₹1,25,000 = ₹25,000
- Total tax = ₹12,500 + ₹25,000 = ₹37,500
Step 5:
Add cess:
- 4% Health and Education Cess: 4% of ₹37,500 = ₹1,500
- Total tax after cess = ₹37,500 + ₹1,500 = ₹39,000
If TDS of ₹20,000 has already been deducted from Amit's salary, his final payable tax is:
- ₹39,000 - ₹20,000 = ₹19,000
Amit will need to pay ₹19,000 to the government.
