After collecting all the related documents and information related to income tax return (ITR) filing, the next step is to ascertain one’s gross total income before claiming tax-saving deductions, and thereby the tax liability.
As per income tax laws, gross total income is divided into five parts: income from salary, income from house property, income from capital gains, income from business and profession, and income from other sources.
Depending on your sources of income, you will have to select the appropriate ITR form to file your tax return for FY 2019-20.
Here is a look at how you can compute your total taxable income for FY 2019-20.
- Income under the head ‘Salary’
The first head under the taxable income is income from salary. Total income which is taxable under the head income from salary can be easily computed via your Form 16. Form 16 is a TDS certificate issued by your employer if the tax is deducted from your salary income during a financial year (FY).
Abhishek Soni, CEO & founder, Tax2win.in says, “Form 16 issued to you by your employer informs two things to an employee – first being total tax deducted from salary income during FY 2019-20 and second being total salary income that is chargeable to tax. The salary income chargeable to tax is less of tax-exemptions provided documentary proof for the same has been submitted to the employer. There are certain tax-exemptions on allowances that can be claimed via salary income only such as house rent allowance (HRA), standard deduction, leave travel allowance (LTA) etc.”
For instance, the tax exemption on HRA can be claimed by submitting rent receipts or rent agreement to your employer. Further, if the annual rent paid to your landlord (which can be your parents as well) exceeds Rs 1 lakh, then it is mandatory to submit PAN of your landlord/parents to your employer for claiming the exemption. However, to claim the standard deduction of Rs 50,000 in FY 2019-20, you do not have to provide documentary proof.
If you have not received Form 16 from your employer, then your salary slips will help you to compute the income taxable under the head salary. Your salary slips contain the break-up of the total salary paid to you monthly. Manual calculations will have to be done to claim certain tax exemptions such as HRA etc. However, other components in the salary slip such as basic, dearness allowance, special allowance etc. are fully taxable in the hands of an employee.
Pension received by an individual (not the family pension generally received by spouse of government employee) is also taxable under the head Salary.
- Income from house property
The second head is ‘Income from house property’. If you have given your house on rent, then rental income from such house must be reported under this head. The income from house property depends on the number of houses an individual has.
If an individual has one house which is occupied by him/her, then income in such a case will be nil or negative. If there is an on-going home loan on such property, then deduction up to Rs 2 lakh available on interest paid on home loan can be claimed under this head.
“Remember from FY 2019-20, if an individual has two or more self occupied houses then any of the two houses can be treated as self-occupied property and no tax will have to be paid. Till FY 2018-19, if an individual had sec ..
second self-occupied house, then in such a case tax would have been paid on deemed rent basis such second house”, adds Soni.
Income from house property can be computed as follows:
Step 1: Compute the Expected Rent (i.e., expected rent from the 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.
Step 2: Compare the actual rent receivable for the year with the expected rent and the higher value will be the Gross Annual Value (GAV) of the house. Remember, if a property is covered under the Rent Control Act, then expected rent cannot exceed the standard rent.
Step 3: Calculate the Net Annual Value (NAV) by deducting municipal taxes paid during the year from GAV.
Step 4: Deduct 30 per cent from NAV. This 30 per cent deduction is offered to cover the expenses made for the maintenance of the house. It is a straight deduction which does not require any documentary proof.
Step 5: Deduct the total amount of interest paid on the home loan taken, if any, to purchase the said house. The final figure arrived at will give you an income from house property. This may be a positive or negative value.
Soni says, “In the case of self-occupied property, the GAV would be taken as nil and maximum deduction of interest paid would be limited to Rs 2 lakh. In the case of rental property, there is no limit on maximum deduction on the amount of interest paid. However, the setoff of losses of the head of house property from the other heads of income will be restricted to Rs 2 lakh only.”
- Income from capital gains
Capital gains arise from the sale of assets such as house, mutual fund units, equity shares etc. The type of capital gains depends on how long an individual has held the asset, where the holding period varies for every asset class. There are two types of capital gains: short-term capital gains (STCG) and long-term capital gains (LTCG).
The rate at which capital gains will be taxed depends on the asset class.
- Equity-oriented mutual fund units and equity shares: If equity-oriented mutual fund units and equity shares are sold after holding it for more than one year, then capital gains arising from such transactions will be classified as LTCG and taxed as 10 per cent without any indexation. However, LTCG up to Rs 1 lakh in a financial year is exempted from tax. On the other hand, if equity-oriented
mutual fund units and equity shares are sold before the completion of one year, then STCG will be levied at the rate of 15%. Remember, the taxation of debt mutual fund unit is different than the equity mutual fund.
- Property: If a house is sold after two years from the date of purchase, the gains arising will be termed as LTCG. The capital gains will be taxed at 20.8 per cent (inclusive of cess) after considering the benefit of indexation. If the house is sold before the completion of two years, then gains will be classified as STCG and taxed at income tax slab rates applicable to your total income.
Soni says, “Under this head, you are required to report all the types of capital gains that have occurred during the FY 2019-20. If there are deductions that should be claimed from the capital gains income such as Section 54, 54 EC etc., then such deductions can be claimed under this head of income.”
- Income from business and profession
An individual with income from his/her business and professionals such as lawyer, CAs etc. are required to report income under this head. Soni says, “An individual is required to report profit and gains made from his/her business and profession. Apart from profit and gains, normally individual undertaking transactions in stock market derivatives (i.e., options and futures) are also reported under this head.”
Salary income is taxed on an accrual basis, however, in the case of income from business/profession, an individual can choose his/her choice of method of accounting. There are two types of method of accounting – Cash system and Accrual system of accounting.
Under the cash system, all expenses and income are accounted as and when they are paid/received. In the accrual system, the income and expenses are accounted as and when they become due irrespective it is paid/received or not.
Soni adds, “Certain deductions and expenses are allowed from the gross income earned from business and profession. These expenses and deductions, if eligible, can be claimed to arrive at the net income taxable under this head. Some of the examples of these deductions are rent paid, business related expenses etc.”
He adds, “The taxpayer may also opt for presumptive taxation as per Section 44AD or 44ADA. Under Section 44AD, 8 per cent profit of Total Turnover [ 6% in case of Digital transactions] needs to be reported in the ITR. Specified professionals can opt for section 44ADA where 50% of the Gross Receipts needs to be shown as profit and no needs to require the maintain the Books of Accounts.”
- Income from other sources
The last head for computing gross total income is income from other sources. Under this head, you are required to report income from sources which are not reported in either of the four heads mentioned above. Examples of income reported under this head include dividend income, interest income from a savings bank account, fixed deposits, recurring deposits, commission income, taxable gifts etc.
Once you have computed the income from each head, you will add them all together to arrive at the gross taxable income. After arriving at the gross taxable income, you can claim deductions from sections 80C to 80U which you are eligible for in FY 2019-20.
After claiming deductions, you will arrive at net taxable income on which you are required to calculate the tax liability and pay taxes, if any, before starting the process of filing ITR.
Source : Times of india