Taxable total income for the purpose of tax calculation is to be computed as follows, in the following order;
In the first step you need to classify all items of income under the following heads-
(B) House property
(C) Profit and gains from business or profession (by way of salary, interest, commission, etc., from the firm in which the assessee is partner)
(D) Capital gains
(E) and other sources
There may be no income under one or more of the heads at (A), (B), (D) and (E).
(ii) Compute taxable income of the current year (i.e., the previous year) under each head separately. Statutory provisions decide what is to be included and not to be included, what you can claim as an expenditure or allowance and how much, and also what you cannot claim as an expenditure/allowance.
(iii) Set off current year’s head wise loss (es) against current year’s head wise income(s) as per procedures prescribed by the law.
(iv) Set off, as per procedures prescribed by the law, loss (es) and/or allowance(s) of earlier assessment year(s) brought forward. Also, compute loss (es) and/or allowance(s) that could be set off in future and is (are) to be carried forward as per procedures prescribed by the law. The losses, if any shall not be allowed to be carried forward unless the return has been filed on or before the due date.
(v) Aggregate the head wise end-results as available after (iv) above; this will give you “gross total income”.
(vi) From step V, subtract, as per procedures prescribed by the law, “deductions” mentioned in Chapter VIA of the IT Act. The result will be the total income. Besides, calculate agricultural income for rate purposes.
Note: “Previous year” is the financial year (1st April to the following 31st March) during which the income in question has been earned.” Assessment Year” is the financial year immediately following the previous year.
Computation of tax, education cess including secondary and higher education cess and interest
(a) Compute tax payable on the total income. Special rates of tax are applicable to some specified items. Include agricultural income, as prescribed, for rate purposes, in the tax computation procedure.
(b) Add Education cess including secondary and higher education cess as prescribed on the tax payable.
(c) Claim relief(s) as prescribed by the law, on account of arrears or advances of salary received during the year or of double taxation and calculates balance tax payable.
(d) Add interest payable as prescribed by the law to reach total tax, and interest payable.
(e) Deduct the amount of prepaid taxes, if any, like “tax deducted at source”, “advance-tax” and “self-assessment-tax”. The result will be the tax payable (or refundable).