The Computation of Total income and Tax Liability for individuals in India is governed by the Income Tax Act, 1961. The process involves several steps, from determining the gross total income across different heads of income, applying relevant deductions, to calculating the net tax payable after accounting for tax rebates and credits.
Step 1: Classify Income under the Correct Heads
An individual’s income is categorized under five different heads according to the Income Tax Act:
- Income from Salary:
Includes wages, pension, allowances, and other benefits received from employment.
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Income from House Property:
Rental income from a property or deemed rental in case the property is not let out.
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Profits and Gains of Business or Profession:
Income from business operations or from practicing a profession.
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Capital Gains:
Income from the sale of capital assets like shares, bonds, property, etc.
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Income from Other Sources
Includes interest on bank deposits, lottery winnings, gifts, etc.
Step 2: Compute Gross Total Income
Add the total income from all the above heads, considering the specific rules for deductions and exemptions applicable to each head. For example, standard deductions from salary, deductions from rental income under Section 24, and exemptions on capital gains under various sections.
Step 3: Apply Deductions to Arrive at Gross Total Income
Under Chapter VIA of the Income Tax Act, various deductions are available which can be claimed to reduce the gross total income. These include:
- Section 80C:
Investments in PPF, EPF, life insurance premiums, home loan principal repayment, etc., up to a limit of ₹1.5 lakh.
- Section 80D:
Premiums paid for medical insurance.
- Section 80E:
Interest paid on education loans.
- Section 80G:
Donations to charitable institutions.
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Additional deductions for contributions to NPS (National Pension System) under Section 80CCD.
Step 4: Compute Total Income
After deducting the allowable deductions from the gross total income, you get the total income on which tax will be computed.
Step 5: Calculate Tax Liability
Apply the relevant tax rates to the total income. India uses progressive tax rates for individuals which means higher income is taxed at higher rates. For the financial year 2021-2022, the individual tax rates (excluding cess and surcharge) are:
- Income up to ₹2,50,000: No tax
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
For senior citizens (aged 60 years and above but less than 80 years), the basic exemption limit is ₹3,00,000, and for super senior citizens (aged 80 years and above), it is ₹5,00,000.
Step 6: Add Cess and Surcharge
A health and education cess at 4% is added to the tax calculated. Additionally, surcharge is applicable for individuals with higher income:
- 10% of income tax for total income between ₹50 lakh and ₹1 crore.
- 15% of income tax for income above ₹1 crore.
Step 7: Calculate Tax Payable
Add the cess and any applicable surcharge to the income tax calculated to get the total tax liability.
Step 8: Subtract TDS and Advance Tax
Subtract any tax already deducted at source (TDS) and any advance tax paid during the year from the total tax liability to calculate the net tax payable or refund due.
Step 9: Include Interest under Sections 234A, 234B, 234C if applicable
If there are any delays or defaults in filing the tax return or paying the tax dues, interest under Sections 234A, 234B, and 234C may apply.