How to calculate your taxable income
Your taxable income is the final amount on which you pay tax after adjusting for all the tax breaks and benefits that you are eligible for. Here’s how to calculate it
Most people tend to confuse their total income with their taxable income. As most of the salaried individuals know only their take home pay and leave the tax calculation to their employers, they are not aware of their taxable income.
So, what is taxable income? It is the final amount you get after deducting all those tax benefits and exemptions applicable. Once you get the taxable income, you pay tax as per the respective tax rate that applies to you. However, calculating our taxable income isn’t that easy.
To calculate your taxable income, the Income Tax department has divided income sources into five categories. These are income from salary, income from house property, income from business and profession, capital gains and income from other sources. While most of these categories have some tax exemptions that you can avail, the others don’t have any exemptions. You will need to calculate your income under each source when you file your Income Tax Return (ITR). Here’s a look at each of these income sources.
Income from salary
Salary income will not only include your basic salary, it will include all your allowances and perquisites. To calculate your income from salary, you need to take your basic salary, allowances such as House Rent Allowance (HRA), dearness allowance, travel allowance, commissions and other allowances. You need to also include any bonuses to get your gross salary.
Note that allowances are taxed either fully, partially or are exempt. Allowances that are fully taxable include dearness allowance, city compensatory allowance paid to those who live in metros such as Mumbai, Delhi, Bengaluru, Chennai, overtime allowance and deputation allowance/servant allowance. Partially taxable allowances areHRA, entertainment allowance (except those paid to Central and State Government employees, special allowances for uniform, travel, research, personal expenses such as children’s education.
Fully exempt allowances are foreign allowance given to employees working abroad, allowances of judges working in the High Court and Supreme Court, allowances received by the employees of the United Nations Organization.
Perquisites are taxable for all employees. Perks include rent free accommodation, concession in accommodation rent, interest free loans, movable assets, educational expenses and insurance premium paid on behalf of employees.
You will need to deduct the tax exempted income such as HRA and travel allowance from your gross salary to arrive at the income from salary.
Income from house property
Any rental income that you might earn from letting out your property is a part of income from house property. Even if you have a vacant self-occupied house, you will need to take into account the deemed income from the self-occupied property.
To calculate your income from house property, you will need to calculate Gross Annual Value (GAV) of your let-out house property. For this, you will need to know the rent received by you, the municipal value, and the fair rent from the property. Then, you will take the higher of the three as the GAV of your property.
Once you have the GAV, the municipal tax will have to be subtracted from the GAV to arrive at the Net Annual Value (NAV) for our house property. The NAV may be a positive or negative figure. From the NAV, you will need to deduct any interest that you pay on the home loan for the property that you let out. Note that 30% of the NAV is allowed as a deduction towards repairs, maintenance, etc. irrespective of whether you spent the amount or not. However, this deduction is not allowed if the GAV is nil.
| Particulars | Amount (Rs.) |
| GAV | 14,000 |
| Less Municipal taxes | 2,000 |
| NAV | 12,000 |
| Less Standard deduction (30%) | 3,600 |
| Less Interest on loan | 3,500 |
| Income from house property | 4,900 |
If you find the manual calculations to be tough, you can use the calculator on the Income Tax website – https://www.incometaxindia.gov.in/Pages/tools/income-from-house-property.aspx.
Income from business and profession
A business is any economic activity carried on for earning profits. Business profit need to be calculated using the profit & loss account (P&L) of the business. In P&L account, the expenses are divided into partly allowed and disallowed under the Income Tax Act. On the credit side of the P&L account, you can find income that is tax free/not taxable under the category business or profession.
You could use the presumptive tax method if your business is eligible for it. Presumptive taxation for businesses is covered under section 44AD of the Income Tax Act. Any business having a turnover of less than Rs. 2 crores can opt to be taxed presumptively. Get the help of a chartered accountant if you don’t understand the income calculations.
Income from capital gains
If you own investments such as property, stocks and mutual funds and sell them for a profit, you need to pay capital gains tax. You will need to differentiate between long-term capital gains and short-term capital gains for various assets. There are no exemptions for short-term capital gains. For long term capital gains, you can claim the applicable deductions under various sections such as Sec 54, 54EC etc. Deduct the exemptions from your capital gains to calculate your net capital gains.
Income from other sources
Any income that does not fall under any of the above categories will come under income from other sources. Income from other sources includes interest from our savings account, dividends from investments, income from deposits etc. Income from other sources will also include any winnings worth over Rs. 10,000 from lotteries, games, races, gambling and betting such as card games, horse races, etc.
Calculate your taxable income
Add all the income from the five categories to arrive at your total income. Note that some of our income shouldn’t be included as they are taxed at rates that are different from the income tax slab. For instance, short-term capital gains are taxed at 15% and income from winnings is taxed at 30%.
To calculate your taxable income, subtract the tax deductions allowed under Section 80C to 80U of the Income Tax Act from your total income. It will include investments such as Public Provident Fund (PPF), ELSS mutual funds, tax saving fixed deposit, Health insurance premium, etc. You can apply the tax rate as per your respective slab to your taxable income get the final tax you need to pay.
Below is how taxable income is calculated.
| Taxable income calculation (For a salaried individual) | ||
| Particulars | (Amt in Rs) | |
| Salary Income | 900000 | |
| Income from other sources | 40000 | |
| A | Total Income | 940000 |
| Deductions | ||
| Sec 80 (C) | 150000 | |
| Sec 80 (D) | 25000 | |
| Sec 80 (CCD) | 10000 | |
| Sec 80 (TTA) | 5000 | |
| B | Total | 190000 |
| (A-B) | Taxable Income | 750000 |
| Tax Calculation | ||
| Up to Rs 2.5 Lac | NIL | |
| Rs 2.5 Lac to Rs 5 Lac (5% of the amount) | 12500 | |
| Rs 5 Lac to Rs 10 Lac (10% of the amount) i.e. 10% of (Rs 750000-Rs 5 Lakh) | 25000 | |
| CESS at 3% (3% of 12500+25000) | 787 | |
| Total tax amount (Rs) | 38287 | |
| *All figures are for illustration |
Make sure that you are declaring all your income and are using all the right deductions and tax benefits while filing your ITR
