An Income tax in India is a mandatory financial charge or some other type of levy imposed on individuals or entities termed as taxpayers in respect of the income, money received in exchange for providing service or goods or profits, by investing capital earned by the taxpayers which are generally termed as taxable income.
Who collects Income Tax in India?
The Central Board of Direct Taxes (CBDT) governs the income tax department, part of the department of revenue of the Ministry of Finance which is the largest revenue generator of the Central Government of India.
Six things to know before Calculating Income tax:
Gross salary or income is an annual salary amount earned by an employee from all sources without any tax deductions.
Under Sec 16(ia), Rs 50,000 flat amount is deducted from the gross salary considering it as transport allowance and medical reimbursement. The taxpayer doesn’t need to provide any proof or bill for this deduction.
Under sec 80c, up to 1,50,000 can be deducted from gross income based on as follows.
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Sukanya Samriddhi Yojana
- National Pension Scheme (NPS)
- Equity Linked Savings Scheme (ELSS)
- Infrastructure bonds
- Term Insurance
- Endowment Plans with Life Insurance
- Unit Linked Insurance Plans (ULIP)
- Housing loan principal repayment
- Children’s tuition fee
Under sec 80d, up to 25,000 can be deducted from gross income for medical insurance paid for parents and for senior citizen parents up to 50,000 can be deducted.
House Rent Allowance (HRA)exemption for Salaried Individual is based on Section 10-13A and whichever is least among the following list of 3.
- Actual house rent allowance paid by the employer.
- 40% (50% in metro cities) of the employee’s salary.
- Actual house rent paid minus 10% of salary.
House Rent Allowance (HRA) exemption for self-employed Individuals is based on Section 80GG.
A portion of the gross salary of an individual’s income after all tax deductions is used to calculate the tax amount the individual owes the government in a particular financial year.
CESS is an additional tax levied by the government for specific purposes such as health and education promotion.
Tax slabs are different tax rates for different ranges of net taxable income levied by the government.
Calculating Income Tax:
For understanding tax calculation, we take the example of Mr X who works in company X.
STEP-1: Gross Income Calculation
1. Identify Income from all sources
Various sources of income for Mr X are listed as follows:
|Basic Salary||₹ 7,50,000 annually|
|Property rent||₹ 50,000|
|Interest from bank deposits||₹ 30,000|
|Income from business||₹ 30,000|
|Capital gains||₹ 30,000|
2. Calculate Total Income
Total income is calculated by adding all the above sources including other minor sources of income.
|Total Gross Income||₹ 8,90,000|
STEP-2: Calculate Net Taxable Income (after deductions)
1. HRA Tax Exemption
- Mr X pays annual house rent for ₹ 1,25,000.
10% of his salary = ₹ 75,000
- HRA exemption = house rent – 10% salary = ₹ 50,000
2. Sec 80c deductions
- Mr X invest Rs 35,000 in Public Provident Fund.
3. Sec 80d deductions
Mr.X Pays medical insurance for himself – 25,000
Mr.X pays medical insurance for his senior citizen parents – 65,000
Total deduction in sec 80d = 25,000 + 50,000 (out of 65,000) = 75,000
4. Calculating total Deductions
|HRA Exemption||₹ 50,000|
|Standard Deduction (16 ia)||₹ 50,000|
|PPF Savings (Sec 80C)||₹ 35,000|
|Medical Insurance (Sec 80D)||₹ 75,000|
|Total Deductions||₹ 2,10,000|
5. Calculating Net taxable income
Net Taxable Income = Total income – Total Deductions
|Net Taxable Income||₹ 6,80,000|
STEP-3: Compute income tax based on the tax slab
1. Find Income Tax Slab Rates
Individual taxpayers will need to pay the income tax based on the slab system they fall under. Depending on the income of the individual, he/she may fall under a different tax slab. There are two tax regimes. One is the old tax regime and another is the new tax regime available from Financial Year (FY) 2020 -21. Individuals are given the option to choose a new tax regime or the old tax regime while filing ITR (Income Tax Returns).
New tax regime slab rates are not differentiated based on age group. However, under the old tax regime, the basic income threshold exempt from tax for senior citizens (aged 60 to 80 years) and super senior citizens (aged above 80 years) is ₹ 3 lakh and ₹ 5 lakh respectively.
The following tax slab system is based on the old regime.
|Income Tax Slabs||Tax Rate||Tax Amount|
|Up to 2.5 lakhs||0%||–|
|2.5 – 5 lakhs||5%||₹ 12,500|
|5 – 10 lakhs||20%||₹ 1,00,000|
|> 10 lakhs||30%||₹ 1,50,000|
2. Divide your Net Taxable Income Based on Tax Slabs
STEP-4: Finalize income tax (adding CESS, reducing rebate)
1. Sec 87A Rebate
If net taxable income is less than Rs 5,00,000, income tax will be refunded. Hence, no income tax for taxpayers but need to file income tax returns.
2. Calculating Surcharge on Income Tax
Only for the net taxable income more than 50 lakhs
|Net Taxable Income||Tax Rate|
|50 lakhs – 1 crore||10%|
|1 crore – 2 crore||15%|
3. Calculating CESS
- CESS – 4% from Income Tax
CESS for Mr.X = 1,940 (4% of 48,500)
4. Calculating Total Income Tax
Total Income Tax = Net Income Tax + CESS + Surcharge
Total Income Tax for Mr.X – 48,500 + 1,940 = 50,440
Income tax is paid by an individual end of each financial year in India. Income tax returns filed in the income tax department failing are punishable by law.
Click here to know what are the taxes imposed on citizens.