How Taxable Income Is Derived In Income tax

All incomes according to IT act have been divided into 5 major heads to get it taxed in India. If it is falling under any one of these 5 heads then that will be taxable under that head and can not be taxed under any other head.

Tax is charged on the total income that is generated during the financial year (previous year) starting from 1st of April to 31st March. Income generated in a financial year is taxed in the assessment year i.e. the next year following the financial year in which it has been generated. For example: if you have generated it during the financial year starting from 1st of April 2012 to 31st march 2013 then that is taxable in the assessment year 2013-2014 and you need to file your IT return before the due date of 31st July 2013.  Income tax

Incomes from various sources are classified according to section 14 of IT Act as follows;

  • Salaries
  • House property
  • Profits and Gains of business or profession
  • Capital Gain
  • Other Sources

Income falling under one head will be taxable under that head and all provisions related to that head will be applicable. Aggregate amount under all these heads will be termed as gross total income and deduction for your investment can be claimed from this to arrive at your total or taxable amount.

Any amount due to or received by an employee including arrears of salary from his employer will be taxable under the head SALARY. Accordingly your tax liability will be calculated based on the provisions that are applicable to salary.

If you have a house on rent and the rent is more than the basic exemption limit (assuming that you do not have any other income) then it will be taxable under the head House property.

If you have your own business or you are a owner of a company or a doctor or  generating income from some other profession then such amount will be taxable under the head “profits and gains of business or profession”. For this you need to prepared your profit and loss account and balance sheet and accordingly based on the tax provision you calculate your tax liability.

During the financial year if you have incurred a capital gain by selling some immovable property and that receipt is one of the receipt mentioned as taxable capital gain under IT act then your capital gain will be taxable under the head “Capital Gain”.

Any amount which is not taxable under any other head (i.e. the four heads mentioned above) will be finally taxable under the head “Other sources”. There is some specified income mentioned under the IT act which is taxable under the head “other sources” like “interest from your saving bank account”.

Chargeability of a particular item under one or the other head depends on the nature and character of such income and in certain cases it also depends on the specific provisions of law.

After getting the taxable income one need to charge the tax rate that is applicable to him along with the surcharge if any and cess to arrive at the tax liability.

For a salaried employee if your tax liability arrived above matches with the tax amount deducted by the employer then you need not pay any tax. If your employer has deducted higher tax compare to the tax amount that you arrived at then you need to claim refund from IT department for the excess amount deducted other wise you need to pay tax along with interest if any before filling your ITR. From assessment year 2013-2014 onwards (i.e. if you have generated your income during the financial year ending march 31st 2013) if your taxable income is more than Rs. 5, 00, 000 then you need to compulsorily file your ITR online.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.