Computation of Income Tax Liability under Different heads of Income- A Beginners Guide

Understanding Computation of Income Tax Liability

As per the Income Tax Act, Income is classified under five different heads. In every financial year, either the assessee himself or his appointed chartered accountant is likely to put all his incomes or earnings under the five heads of income for computation of income tax.

Here is a small primer for the computation of Income Tax under the 4 heads of income.

Computation of Income Tax Liability
Computation of Income Tax Liability

Income from salary

If there is an employer-employee relationship between the payer and payee then the income (Salary) of the payee shall be charged to tax under this head only.  Salary consists of basic salary, gratuity, any annuity or pension, arrears of salary, salary in advance, any commission, leave encashment, perquisites, and other retirement benefits.

The aggregate of the above-mentioned incomes (including perquisites and allowances) after availing available exemptions in the income tax act, is called Gross Salary and the same is charged under the head “Income from Salary”.

Income from house property

Any Income from commercial or residential house property that the assessee owns will be taxed under the head “House Property”. Under certain circumstances, i.e. beyond one house at wish of assessee that he can select for his occupation, even though the assessee hasn’t let out the property, still it will be liable to tax under the provisions of the income tax as the same will be considered as earning of rental income.

However, the income tax laws are a bit liberal on this head– as the assessee has to pay income tax, not on the actual rent received but on the capacity of the real estate to earn income. This capacity of real estate to earn income is known as the property’s Annual Value and is the higher of the rent received, municipal rent or fair rental value of the house property.

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A straight cut deduction of 30% is allowed on the annual value of the house property as standard deduction and the assessee can also claim a deduction for interest on borrowed capital for a home loan.

Profits and gains from Business or Profession

Any income earned by the assessee though his profession or business is chargeable to income-tax under the head “profits and gains of business or profession”. If there is any surplus after meeting expenses like Purchases/consumption, salaries  insurance and repairs; traveling; rent for premises; advertisements and the exemptions available in the income tax act will be liable to income tax

There are various deductions which are allowed under the income tax act, like depreciation of assets used for running the business; Sector specific deductions such as u/s 80I or anything that may be applicable.

Please note that certain businesses and professionals are allowed not to maintain books of accounts and instead pay tax on presumptive basis if their turnover is less than certain threshold provided they declare certain percentage of turnover as profits

Certain expenses unpaid, such as statutory liabilities due to be paid but not paid before due date of payment are added to income. You can read more about them here from link given

You can under provisions of such  presumptive tax scheme from here

Income from other sources

Any income which does not fall under the 4 heads of income (Salary, Profits Gains from Business Profession, Capital Gain and House Property) will be charged under the head “income from other sources”. Some examples of the income that fall under this head are Interest on securities, Interest other than interest on securities, income from lotteries etc

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Agricultural Income

Though Agricultural Income is exempt from Tax, the same needs to be added to the taxable Income first. Thereafter rebate is allowed on such agricultural income. As a result, though agriculture income is not taxed, it has the impact of raising the income tax slab of rest of the income thus increasing the tax liability

Read More about Taxability of Agricultural Income Here

Computation of Gross Total Income

Aggregate of all above incomes constitutes Gross Total Income

Deduction from Gross Total Income- Computation of Net Taxable Income

From Such Gross Total Income some deductions are allowed under provisions of Income Tax Act, commonly known as deductions under Chapter VI.

Depending on the status viz as Individual, HUF, Partner, Company etc, some of the these deductions under chapter VI may be available and some not. Please check the applicability of these deductions from link given

Income Tax Liability

Thereafter the Income Tax Liability can be calculated as per slab rates i.e.

Income between 1- Rs 2.50 lakhs Nil
Income Exceeding Rs 2.50 lakh and less than 500,001 @ 10% on such excess exceeding Rs 2.50 lakhs
Income Exceeding Rs 500,000 and less than Rs 10 lakhs @ 20% on such excess exceeding Rs 5 lakhs+ Rs 25000
Income Exceeding Rs 10,00,000 @ 30% on such excess exceeding Rs 10 lakhs+ Rs 125000

 

On above Tax Liability-

  1. Education Cess will be payable @ 3%
  2. Surcharge will be payable for Income Exceeding Rs 1 Crore
  3. Deduction u/s 87 will be applicable @ 5000 or tax liability whichever is less, with income less than Rs 500,000
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Above should be helpful for beginners / small businesses. Do Feel free to ask any query using Chat Button below