Five-Step Guide to Income Tax Basics
Tax filing season is here and it’s time to acquaint ourselves with the tools and terms to calculate our taxes.
Step 1: Understanding our sources of income
The first step is to identify one’s sources of income. As per the Income Tax Act, income is classified into five “Heads of Income”.
Salary - remuneration paid by an employer to an employee for services rendered over a period of time.
House Property – income from building or land appurtenant thereto
Profits and Gains of Profession or Business – income earned from a business or exercise of any profession
Capital Gains– income arising from the sale of a capital asset such as land, building, securities etc.
Income from Other Sources – income which is not chargeable to tax under the first four heads such as dividends, winnings from lotteries, gambling etc.
Step 2: Computing Gross Total Income (GTI)
Gross total income (GTI) is the sum of incomes computed under the five heads of income i.e. salary, house property, business or profession, capital gain and other sources after applying clubbing provisions and making adjustments of set off and carry forward of losses.
GTI = Salary Income + House Property Income + Business or Profession Income + Capital Gains + Other Sources Income + Clubbing of Income - Set-off of Losses
Step 3: Claiming deductions
To arrive at the Total Income, we are allowed to claim certain deductions which are permissible under sections 80A to 80U from the Gross Total Income calculated in Step 4. We should carefully analyze all deductions applicable to us. A simple way to remember is to categorize these as follows:
Investments / payments such as Life Insurance Premium, pension funds, public provident fund etc. (Section 80C, 80CCC, 80CCD)
Medical insurance premium and medical treatment (Section 80D, 80DD,80DDB,80U)
Interest on loan taken for higher education or for residential house property (Section 80E, 80EE)
Donations to certain funds, charitable institutions etc. (Section 80G,80GGA/B/C,)
Rent paid (Section 80G)
Interest on deposits in savings account
In respect of certain incomes (Section 80IA-80RRB)
Step 4: Calculating Total Income
The income arrived at after claiming all allowable deductions from Gross Total Income is known as Total Income.
Gross Total Income is the sum of all of the income a person receives during a year, whereas Total income is the amount of income that is subject to taxation, after all allowable deductions or exemptions have been subtracted from the Gross Total Income.
Total income = Gross Total Income – Allowable Deductions
Step 5: Determining the tax payable
Finally, we calculate the Tax Payable on the Total income (calculated in Step 4 above) at the prescribed rates i.e. at special rates and normal slab rates including surcharge and cess. TDS, advance tax paid and double taxation relief is deducted from such Tax Payable to calculate Net Tax Payable.
By Priyanka Khanna 6/19/2018 7:10:01 AM
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