How is income tax calculated

Lots of people are amateurs in all of the gamut Calculation of the personal income tax, Paying taxes, filing tax returns, saving taxes, etc. There are several Online tools for calculating income tax to you. At IIFL, we firmly believe in financial independence and, consequently, in financial literacy. If you know your way around income tax, this time around, learn about income tax.

How is income tax calculated?

There is a lot to learn before you know it how income tax is calculated. Let’s dive into the (necessary) details of the process.

Who are taxpayers?

  • Individuals

  • Hindu undivided family (HUF)

  • Association of Persons (AOP)

  • Group of people (BOI)

  • Companies

  • Companies

People are further divided roughly into residents and non-residents.

  • Individuals resident in India are taxable on their global income.

  • Non-residents are only required to pay taxes on income earned or accrued in India.

Residence status is determined for each fiscal year based on the taxpayer’s time spent in India. Resident persons are further divided into:

  • People under 60 years of age

  • People over 60 but under 80 years of age

  • People over 80 years

Different sources of income:

Under the Income Tax Act 1961, a person can have five different sources of income. Any income a person earns can only be attributed to these five sources. They are:

➜ salary
➜ home ownership (rental income)
➜ business or profession
➜ Capital Gains – Long term and short term capital gains from the disposal of investments
➜ Other Sources – Any other residual income such as interest, dividends, taxable gifts, etc.

Calculating the gross total income and applying for deductions:

Your total gross income is calculated by subtracting all losses under each of the income heads and then adding the income from all five sources. Once you have the total gross income, the next step is to claim the appropriate income tax deductions. This is how we arrive at your taxable income.

Chapter VI-A of the Income Tax Act provides a wide range of tax deductions from Section 80C to Section 80U. You can claim deductions under the relevant sections. This will reduce your total gross income and consequently the calculated income tax.

Income from salary xxx
Add: Homeownership Income xxx
Add: business / professional income xxx
Add: Income from capital gains xxx
Add: Income from other sources xxx
Total gross income xxxx
Less: prints xxx
Taxable Income xxxx

Old & new tax system:

As you may know, the Union budget consists of a detailed breakdown of government finances, income and expenditure. In the 2020 budget, the government introduced a new tax regime to offer taxpayers significant relief and to tighten the income tax law. The new tax regulation reduces the taxpayers’ dependence on tax advisors and makes it easier for them to submit their own tax returns.

Both the old and the new tax systems remain relevant. You have a choice which scheme and how you want your income tax calculation be carried out. Individuals who have commercial or professional income cannot switch between the new and old tax systems every year.

If they choose the new tax system, these people only have one chance to return to the old system. If you return to the old tax system, you will not be able to opt for the new tax system unless the respective commercial or professional income is eliminated.

Understanding income tax tables:

Every taxpayer is taxed differently according to the Income Tax Act. Based on income, age, and tax boards and tax rates for a given fiscal year. Individuals’ incomes are grouped into blocks called tax brackets or tax blocks with different applicable tax rates. The rate increases in proportion to income.

Firms and Indian companies have a fixed tax rate that is calculated on their taxable profit. Individuals, HUF, AOP and BOI taxpayers are taxed based on the income bracket they fall under.

While the tax bills for resident natural persons over 60 years of age are different, in this article we deal with tax bills that apply to resident natural persons under 60 years of age. This is an educational exercise in Calculate your income tax online!

1. Old tax system

Natural persons have the option to continue with the old tax regime. You can claim deductions from allowances such as Leave Travel Concession (LTC), House Rent Allowance (HRA), and others. In addition, deductions for tax-saving investments according to § 80C (LIC, PPF, NPS etc.) up to 80U can be claimed. Standard deduction of Rs 50,000, the deduction for interest paid on a home loan.

The income tax plates under the old tax system are as follows:

Income range tax rate Tax payable
Up to Rs 2.50,000. 0 zero
Rs. 2.50,000 – Rs. 5.00,000 5% 5% of your taxable income
Rs. 5,00,000 – Rs. 10,000,000 20% Rs. 12,500 + 20% of income over Rs. 5,000,000
Over CHF 10.00,000 30%

For example:
Let’s say your income for the year is Rs. 12 Varnishes.
Option A: 30% tax on Rs. 12 lacs = Rs.3.60.000 X
Option B: Rs. 1.12.500 + (2 lacs x 30%) = Rs. 1.12.500 + Rs. 60,000 = Rs. 1.72.500. ✓

2. New tax system

From the 2020-21 fiscal year, a new tax system will be available for individuals and HUFs with lower tax rates but no tax deductions / exemptions. The new tax system is optional and the choice should be made at the time of submitting the ITR. If the old regulation is continued, all available tax deductions / exemptions will be available to the taxpayer.

The income tax blocks under the new tax regime are as follows:

Income range tax rate
Income from Rs 2.5 lacs to Rs 5 lacs 5%
Income from Rs 5 lacs to Rs 7.5 lacs 10%
Income from Rs 7.5 lacs to Rs 10 lacs fifteen%
Income from Rs 10 lacs to Rs 12.5 lacs 20%
Income from Rs 12.5 lacs to Rs 15 lacs 25%
Income over Rs 15 lacs 30%

Most tax deductions and exemptions are not allowed if you opt for the new tax system. However, tax exemptions and deductions available under the new regime are:

  • Transport allowance in the case of a particularly disabled person.

  • Transport allowance to cover the transport costs incurred in the course of your employment.

  • Any compensation to cover travel or transfer costs.

  • Daily allowance to cover the usual regular fees or expenses that you incur due to your absence from your usual place of work.

Points that apply to all individual taxpayers:

1.A discount of up to Rs 12,500 is available under Section 87A under both tax systems. Thus, in either regime, no income tax is payable on total taxable income up to Rs 5 lakh. [not applicable for NRIs and HUFs]

2.A tax rate of 4% is levied on the income tax amount.

3.A surcharge at varying rates on personal income tax is levied before the levy is levied if the total income in a fiscal year exceeds Rs 50 lakh.

What is input tax?

Input tax is the tax payable by natural persons who have other sources of income than their salary, as indicated above as the five sources of income. This applies to rent, capital gains from shares, time deposits, lottery winnings, etc.

As the name suggests, this means paying taxes up front rather than paying a lump sum at the end of the fiscal year. These taxes are also known as the “Pay as you Earning” system and should be paid in the same year in which the income is earned.

Under the Income Tax Act, a taxpayer must pay upfront tax if his tax liability is Rs. 10,000 or more in a fiscal year. This can be paid online or through certain banks.

Calculating your tax prepayments is easy. Follow the steps below:

1.Estimate how much income you earned in the fiscal year for which you are doing the tax projection. (except salary)

2.Add your salary to the above figure to determine gross taxable income (while there is no input tax on your salary, the grand total can change your tax plate, further changing tax liability)

3.Calculate the tax payable using the income tax tables that apply to you

4thAccording to the TDS plate, peel off the TDS that are likely to be peeled off or that have already been peeled off.

When your tax liability, after deducting TDS, exceeds Rs. 10,000, you are taxable.

Her Income tax calculation doesn’t have to be that daunting. With the right tools and knowledge of the tax system, you can calculate your income tax efficiently.