In order to file your income tax return (ITR), you first need to collect all the information required to file it. The next important step is to compute your total taxable income. After this, final tax payable or refundable is calculated by applying the applicable tax rates in force and then deducting taxes already paid by way of TDS/TCS or Advance tax from the tax due amount arrived at.
Here’s a step by step guide on how to calculate one’s total taxable income:
As per the income tax laws, a person can have a total of 5 sources of income which are: Income from salary, Income from House Property, Income from Business or Profession, Income from Capital Gains, Income from Other sources. All income of a tax-assessee has to be categorized as one of the above.
Income from Salary
You can compute income from your salary using the TDS certificate in Form 16 issued by your employer. This is to be done as follows:
* Collect your salary slips and Form 16 for the financial year. – Now add all your emoluments like (Basic salary, DA, TA, DA on TA, HRA, all other allowances, and reimbursements) which will be mentioned in your salary slips and Form 16 (Part B).
Add the Bonus (TVP- Ex gratia) received in the FY for which income is being computed.
* The total will be termed as your gross salary.
* Deduct the following from your gross salary :
Exempted portion of HRA, – Transport Allowance (maximum exemption can be upto Rs19200 per annum) – All reimbursements subject to the furnishing of actual bills i.r.o expenditure incurred (Medical reimbursement can be maximum upto Rs 15000)
* The result will be your net income from salary.
Note: From FY 18-19, deduction in respect of transport allowance of Rs19,200 per annum and medical reimbursement of Rs 15,000 per year have been withdrawn. Further, a standard deduction of Rs 40,000 a year will be allowed from your gross salary.
Income from House Property (HP)
Income from house property mainly consists of rental income received by the assessee from the house that he has let out. In case, assessee has only one house and that too is self occupied by him, then also he will be required to compute his income from house property.( which will be nil or a negative value in most cases)
The assessee must consider following points while computing his income from House Property. – Compute the Gross Annual Value (GAV) of your let out HP as follows:
* Compute the Fair Market Value (expected rent from similar property) and Municipal Valuation (valuation as per municipal authorities). Take the higher value of the two. This higher value is termed as Expected rent.
* Compare the Actual rent received/Receivable for the year with the expected rent and the higher value will be the GAV of the House.
Note: If property is covered under Rent Control Act, then Expected rent cannot exceed the Standard rent.
* Calculate the Net Annual Value (NAV) by deducting municipal taxes actually paid during the year from GAV. Deduct the following from the NAV to compute the income/loss from House Property
* 30% of NAV – Annual interest cost paid on the amount of loan taken, if any, to purchase the said House.
Note: In case of self occupied property, the GAV would be taken as nil and maximum deduction of interest paid would be limited to Rs 200000.
Income from Capital Gains
Computing income from capital gains involves some effort depending on the number and complexity of transactions. You might need an expert to calculate the same depending upon the nature and number of transactions. Broadly, income from capital gains is computed as follows:
* Compute your Long term capital gains (LTCG) from sale of all capital assets. – Compute your Short term capital gains (STCG) from sale of all capital Assets. – Claim the deductions u/s 54, 54G, 54EC etc. if any.
Income from Business/Profession
Calculating the taxable income arising from gains from Business/ Profession might be a challenging task. In case, the business or professional set up is not on a big scale and does not involve complex transactions, then income from Business/Profession can be computed by the assessee himself/herself but in most cases, it is beneficial to take the advice of an expert( like a chartered accountant) to do this. . There several provisions under the Income Tax Act which deal with the allowance/disallow of various expenditures and incomes. Other concepts like AMT, Book Profits, and Presumptive incomes are also applicable while computing gains from a Business/Profession.
For a simple business, the assessee can compute his taxable business income in the following manner:
*Take the Net Profit mentioned in the Books of Accounts as the base value.
* Add back all the deductions that are disallowed under the income tax act (Refer Section 37, 14) which you have already availed in the P&L account maintained as a part of books of accounts.
* Subtract the expenditures that are allowed as per the provisions of income tax laws (Refer sec 32, 35, 36).
It is always better to take the help of a chartered accountant, as the calculations tend to change with each case. Income from Other Sources
* All the incomes that cannot be classified in the heads of income mentioned above will be considered as income from other sources. It generally consists of Interest Income, Dividend income, Gifts (where taxable) etc. These figures are to be collected by categorizing all the credit entries in your savings account passbook/statements. In case of accrued income such as interest earned on cumulative fixed deposits which will not reflect in your savings account as credit entries, you can obtain interest certificates from the institution where you have placed the FD. You will need interest certificates only in case tax has not been deducted at source from the accrued income because in case of TDS a TDS certificate will be issued to you.
* Saving account credit entries (except inter-account transfers) are to be categorized under the above mentioned five heads of income. In this manner, compute your annual income from other sources like Interest income, Dividend income , family pension, Lottery income, income from race horses etc.
Interest income typically includes interest from fixed deposits, recurring deposits, savings accounts, bonds, debentures etc. Dividend income typically comes from mutual fund schemes where you have opted for the dividend option and equity shares. Most people would have only these two kinds of income from other sources.
* Subtract the deductions available under Income Tax act for which you are eligible.
Set Off of Current year losses and set off of brought forward losses. After computing income under each head of income, you might see losses reflecting under some heads of income. The income tax laws allow the assessee to set off the losses under one head of income from income under the same head or other heads of income too.
However, there are certain restrictions on set off of losses such as:
* The loss from business can’t be set off from income from salary.
* Long term capital losses can’t be set off against any other head of income.
(However, LTCL for FY 18-19 and onwards can be set off against LTCG)
* Short term capital losses can be set off against any other short term capital gains as well as long term capital gains, but not against any other head of income
* Losses from owning an maintaining race horses can’t be set off against any other head of income
Even if there are no losses under any head in the current year, then also any losses which could not be set off in earlier years and have been brought forward by the assessee can be set off from the current year income of the same head in which the loss was incurred. Any unsettled loss can be carried forward to the next year. There are multiple conditions attached to carry forward and set off of losses so it is advisable to consult an expert in this matter.
Gross Total Income
It is the sum of income from all 5 heads after setting off the losses under the relevant heads of income. It is worth noting that Gross total income is to be categorized in 2 parts i.e. one which is to be taxed at normal slab rates (NORMAL INCOME) and other which is subject to tax at specific rates.
For this purpose, following are not considered as normal income:
* Short Term capital Gains on which Securities Transaction Tax has been paid (taxed at 15 percent)
* Long term capital gains except for those exempted under section 10(38) (Taxed at 20 percent)
(From FY 18-19, no capital gains are exempt under section 10(38) and will be taxed at 10 percent.)
* Casual income like lottery income, income from horse racing (taxed at 30 percent)
Deductions under chapter VI-A
We all are aware of the popular deductions like deductions under 80C (upto Rs 150000), but there are many more deductions that can be claimed by the assessee. Make sure you claim all the relevant deductions from your Gross total income which are given under sections 80C to 80U
In case the amount of deductions exceeds the Gross total income (GTI), then the amount of deduction shall be restricted to the amount of GTI.
Further, deduction under chapter VI-A can only be claimed from NORMAL INCOME computed above
Some of the investments/expenditures which can be claimed as deductions include: Investment in NSC, PPF, ULIPs, ELSS, NPS, VPF, Tution fee, Mediclaim policy, Life insurance policy, donations given to certain approved institutions, royalty income received by the author of books, rent paid (subject to conditions).
Source : PTI