Computation of total income and tax liability for individuals and Hindu Undivided Families (HUFs) in India involves several steps. Here’s a general overview of the process:
Determine Residential Status: The first step is to determine the residential status of the individual or HUF for the relevant financial year. The residential status can be categorized as resident, non-resident, or resident but not ordinary resident, based on the duration of stay in India.
Categorize Income: Classify the income earned into different heads of income, such as:
- Income from Salary: Include income from employment, allowances, perquisites, etc.
- Income from House Property: Include rental income from owned properties.
- Income from Business or Profession: Include income from business activities or professional services.
- Capital Gains: Include gains from the sale of capital assets such as property, stocks, or mutual funds.
- Income from Other Sources: Include income from sources not covered under other heads, such as interest, dividends, winnings from lotteries, etc.
Calculate Gross Total Income: Add up the income from all heads to arrive at the gross total income.
Deductions: Deduct permissible deductions under various sections of the Income Tax Act to arrive at the total income. Common deductions include:
- Deductions under Section 80C: Deductible investments such as life insurance premiums, provident fund contributions, National Savings Certificates (NSC), etc.
- Deductions under Section 80D: Deductions for health insurance premiums.
- Deductions under Section 80G: Deductions for donations to charitable organizations.
- Deductions under Section 80E: Deductions for interest on education loans.
- Deductions under Section 24: Deductions for home loan interest payments for self-occupied or let-out properties.
- Other applicable deductions: Deductions for specific investments, expenses, or allowances as per the provisions of the Act.
Compute Total Taxable Income: Subtract the total deductions from the gross total income to arrive at the total taxable income.
Apply Applicable Tax Slabs and Rates: Determine the income tax slab rates applicable to the individual or HUF based on their total taxable income.
Calculate Tax Liability: Apply the applicable tax rates to the total taxable income to determine the tax liability.
Include Applicable Cess: Add the applicable health and education cess to the calculated tax liability.
Claim Rebates and Credits: Consider any applicable tax rebates or credits, such as relief under Section 87A for individuals with lower income, to reduce the final tax liability.
Pay Tax or Seek Refunds: Pay the tax liability through advance tax, self-assessment tax, or tax deducted at source (TDS). If the total tax paid exceeds the tax liability, a refund can be claimed.
Income of Other persons included in assessee’s total income
The income of other persons can be included in an assessee’s total income under certain circumstances. The provisions relating to the inclusion of income from other persons are covered under the Income Tax Act, 1961. Here’s an explanation of how the income of other persons can be included in an assessee’s total income:
Clubbing of Income: The concept of clubbing of income is applicable when an individual transfers or assigns their income to another person, typically a spouse, minor child, or any other person, with the intention to reduce their tax liability. In such cases, the income is “clubbed” or added to the income of the transferor/assignor, and it becomes taxable in their hands.
- Spouse’s Income: Under the provisions of Section 64 of the Income Tax Act, if an individual transfers their income, directly or indirectly, to their spouse (except in cases where the transfer is due to an agreement to live apart), the income is included in the individual’s total income. This is applicable even if the spouse has no income or has income below the taxable limit.
- Minor Child’s Income: According to the provisions of Section 64(1A) of the Income Tax Act, any income earned by a minor child (below 18 years of age) is included in the income of the parent whose total income is higher. This rule applies if the minor child’s income arises from any of the following sources:
- Income from manual work or any activity involving the application of skill, knowledge, or experience.
- Income from assets transferred directly or indirectly by the parent.
- Income from any investment made by the parent in the name of the minor child.
- Transfer of Assets: If an individual transfers assets to any other person, directly or indirectly, without adequate consideration, the income derived from such assets is treated as the income of the transferor. This provision is applicable if the main purpose of the transfer is to avoid tax liability.
Aggregation of Income and Set-off and carry forward of losses
Aggregation of income refers to the process of combining and calculating the total income from various sources for an assessee. Set-off and carry forward of losses, on the other hand, pertain to the utilization of losses incurred in one income head to offset taxable income in another income head. Here’s an explanation of these concepts:
Aggregation of Income: Under the Income Tax Act, an individual or Hindu Undivided Family (HUF) is required to calculate their total income by aggregating income from different sources. The different heads of income include:
- Income from Salary: Income earned from employment or services rendered.
- Income from House Property: Income from rental property or deemed rental income.
- Profit and Gains from Business or Profession: Income earned from business or professional activities.
- Capital Gains: Income derived from the sale of capital assets like property, stocks, or mutual funds.
- Income from Other Sources: Income from sources not covered under the above heads, such as interest, dividends, etc.
The total income is computed by adding up the income from each head after applying the relevant deductions and exemptions.
Set-off of Losses: If an assessee incurs a loss in any of the above heads of income, the Income Tax Act allows for the set-off of such losses against income from other heads. The following rules apply for set-off:
- Inter-head Set-off: Losses incurred in one head of income can be set off against income from any other head in the same assessment year. For example, a loss from house property can be set off against income from salary or business.
- Intra-head Set-off: Losses can be set off against income from the same head in the same assessment year. For example, a business loss can be set off against business income.
Carry Forward of Losses: If the entire loss cannot be set off in the same assessment year, the unabsorbed loss can be carried forward to future years for set-off against income in those years. The following rules apply for carry forward:
- Losses from house property and capital gains can be carried forward for up to 8 assessment years.
- Business loss (except speculation business loss) can be carried forward for up to 8 assessment years.
- Speculation business loss can be carried forward for up to 4 assessment years.
- Losses from the activity of owning and maintaining racehorses can be carried forward for up to 4 assessment years.
Deductions from Gross Total Income
Deductions from gross total income refer to specific expenses, investments, or contributions that are allowed to be subtracted from the gross total income to arrive at the taxable income. These deductions help in reducing the overall tax liability. In India, the Income Tax Act provides several sections under which deductions can be claimed. Here are some commonly used deductions from gross total income:
Section 80C: This is one of the most popular sections for claiming deductions. It allows deductions for various investments and expenses, up to a maximum limit of ₹1.5 lakh per financial year. Some eligible investments include:
- Life Insurance Premiums
- Employee Provident Fund (EPF) Contributions
- Public Provident Fund (PPF)
- National Savings Certificates (NSC)
- Tax-saving Fixed Deposits
- Tuition Fees for Children’s Education
- Repayment of Home Loan Principal
- Equity-linked Saving Schemes (ELSS)
- Sukanya Samriddhi Yojana (SSY)
Section 80D: This section allows deductions for medical insurance premiums paid for self, spouse, children, and parents. The maximum deduction limit varies based on the age of the insured and the type of policy.
Section 80G: Donations made to specified charitable organizations are eligible for deductions under this section. The deduction can be claimed up to a specified percentage of the donated amount, subject to certain limits.
Section 80E: Deduction can be claimed on the interest paid on loans taken for higher education. This deduction is available for a maximum of 8 years from the start of loan repayment.
Section 80TTA: This section allows a deduction of up to ₹10,000 on interest earned from savings bank accounts.
Section 80GGA: Deductions are allowed for donations made to scientific research or rural development institutions.
Section 80U: Individuals with disabilities can claim deductions under this section, subject to specified conditions and limits.
Section 24: This section allows deductions on interest paid on home loans. For self-occupied properties, the maximum deduction is ₹2 lakh per year.
These are just a few examples of deductions available under the Income Tax Act. It’s important to note that each section has specific conditions, limits, and requirements that must be met to claim the deduction. It is advisable to consult with tax professionals or refer to the provisions of the Income Tax Act for accurate and up-to-date information regarding deductions from gross total income.
Rebates and Reliefs
Rebates and reliefs are provisions that provide certain benefits and reductions in tax liability to taxpayers. They are aimed at providing relief to specific categories of taxpayers or encouraging certain activities. Here are some common rebates and reliefs available under the Income Tax Act:
- Rebate under Section 87A: This rebate is available to individual taxpayers whose total income is below a specified threshold. As per the latest provisions, taxpayers can avail a rebate of up to ₹12,500 if their total income does not exceed ₹5 lakh.
- Relief for Senior Citizens: Senior citizens (aged 60 years or above) are eligible for certain additional tax benefits, including a higher threshold for income tax exemption and lower tax rates in some cases.
- Relief for Very Senior Citizens: Very senior citizens (aged 80 years or above) are provided with further tax relief, including higher thresholds for income tax exemption and reduced tax rates.
- Relief for Medical Treatment of Specified Diseases: Under Section 80DDB, taxpayers can claim deductions for expenses incurred on the treatment of specified diseases for themselves, their dependents, or any member of a Hindu Undivided Family (HUF).
- Relief for Rent Paid: Individuals who do not receive House Rent Allowance (HRA) but pay rent for their accommodation can claim deductions under Section 80GG, subject to certain conditions and limits.
- Relief for Donations to Political Parties: Taxpayers can avail deductions under Section 80GGC for donations made to registered political parties, subject to specified conditions and limits.
- Relief for Start-ups: Start-ups meeting certain criteria may be eligible for tax relief for a specified period under the provisions of the Income Tax Act. This relief aims to promote entrepreneurship and innovation.
- Relief for Export-oriented Units (EOUs) and Special Economic Zones (SEZs): EOUs and units operating in SEZs can avail various tax benefits and incentives under the Income Tax Act to encourage export-oriented activities.