In our earlier article we have discussed about Gross Total Income or GTI. In this article we will show you how to calculate total taxable income and tax liability on it.
After collecting all required information to file your ITR, you are required to calculate your total taxable income. Based on the applicable slab and tax rates, tax liability is calculated on it. After arriving at total tax liability, you need to deduct advance tax, TDS/TCS and taxes already paid to arrive at the final net tax liability or refund.
To understand total taxable income you need to read section 2(45), 5 and 14 of the IT Act, 1961. As per the definition of section 2(45), total taxable income means the total amount of income referred to section 5, computed in the manner laid down in the IT Act,1961. As per section 14 of the IT act 1961, the assessee is required to distribute his/her income under the following five heads based on the sources from which it’s derived:
- House property
- Profits and gains of business or profession
- Capital gain
- Other sources
As per section 5, a resident has to pay tax on his foreign income, where as a non-resident is not required to pay tax on it.
As a salaried person, you can compute your income under the head salaries from your form 16, salary slips and offer letter issued by employer.
You need to calculate different components of your salary for the previous year as specified in the monthly salary slips and take all eligible exemptions such as house rent allowance exemption from it to calculate gross salary. From gross salary, you can take deductions under section 16 to arrive at income under the head salaries.
Please note, from assessment year 2019-20 (FY 2018-19), exemption in respect of transport allowance and medical reimbursement has been withdrawn. Instead, the government has introduced fixed standard deduction of Rs 40,000 for all employees and pension holders per year to claim from gross salary. For financial year 2019-20 (AY 2020-21), standard deduction has been increased to Rs 50,000.
If you are not employed or in case of a person other than an individual, you are required to calculate GTI by considering under four different heads except under the head salary.
You are required to calculate your income under the head house property only when you have house rent for the year. This means you have a house property and you receive rent out of it. In case you have one house and its self occupied, then also you will be required to calculate income under the head house property.
Before arriving at income under the head house property, you can claim the standard deduction under section 24, interest for taking home loan and other eligible benefits.
Business or profession
If you have a business or profession, then profit/loss out of it will be considered under the head of income from business or profession. In such case the calculation will be complex as you are required to claim your expenses based on different provisions of tax laws. You may also be required to undergo tax audit under section 44AB and maintain books of accounts under section 44AA.
This is the residual head. All other income that can not be classified under above four heads will be considered under the head other sources. For instance interest on bank deposits or from savings account, dividend, winning from lotteries and crossword puzzles.
While computing income under above heads, you are required to apply provisions of clubbing and set-off and carry forward of losses to calculate GTI. However there are certain exceptions to set off and carry forward of losses:
- Business loss can not be set off from salary
- Long term capital losses can not be set off against any other head. It can only be set off against long term capital gain.
- Losses from winning and maintaining races horse can not be set off against any other head.
- Short term capital loss can not be set off against any other heads except other short term capital gains and long term capital gains.
Deduction under chapter VI-A to get total taxable income
To calculate total taxable income, you need to deduct tax deductions as applicable under chapter VI-A from the total of all the above five heads, which is known as gross total income (GTI).
Here is the list of few allowed tax deductions for an individual under chapter VI-A of the IT act,1961;
- Contribution to life insurance policy
- Tuition fees paid
- Contributions to public provident fund or PPF
- Contribution to employee provident fund or EPF
- Contributions to national pension scheme or NPS
- Medical insurance premiums paid
- Medical expenditure for self, spouse and children
- Medical expenses for parents
- Deduction for donations given to certain approved institutions – eligible under section 80G
- Tax deduction on education loan
- Royalty received by the author of books
- House Rent – Section 80GG
- Interest on deposits with bank or financial institutions
Resulting figure after taking out all eligible deductions under chapter VI-A from GTI is referred as total taxable income. In case the amount of deduction under chapter VI-A exceeds the GTI, then the amount of deduction will be restricted up to the GTI. This means deduction under chapter VI-A or GTI, whichever is lower will be allowed as a deduction.
If your total taxable income does not exceed the basic exemption limit, then you need not pay any taxes. For the financial year 2018-19 and 2019-20, basic exemption limit is Rs 2,50,000.
As per recent amendments made in the interim budget 2019 to section 87A, an individual is not required to pay any taxes if total taxable income for the financial year 2019-20 does not exceed Rs 5,00,000.
Rounding off of total taxable income
As per section 288A, the amount of total taxable income shall be rounded off to the nearest multiple of ten rupees. While rounding off, paisa shall be ignored.
This means if your total taxable income is Rs 5,80,205, then it will be rounded off to Rs 5,80,210. Instead of Rs 580,205, if its Rs 5,80,203 then nearest multiple of 10 should be Rs 5,80,200.