How To Calculate Income Tax

Income Tax

July to September is a busy period for all Tax Consultants and Chartered Accountants in India. Due dates for businesses requiring audit of financials is 30th Sept (i.e. those Assesses whose Sales turnover exceeds 1 crore or professional receipts exceed 25 lakhs for the FY ended 31st March) and for Non Audit Assesses is 31stAug.

At this time of the year, Calculating Income tax is a socially discussed issue all over the country. May it be Companies, Individuals or other entities, all rush to their Consultants for Tax calculations and return filings assistance.Income from salary is the sum of Basic salary + HRA + Special Allowance + Transport Allowance + any other allowance. Some components of your salary are exempt from tax, such as medical reimbursements, telephone bills reimbursement. If you receive HRA and live on rent, you can claim exemption on HRA.

Though, it appears technical to calculate your Income tax right? But for all those busy bugs around, its not that time consuming and complex process. A simple read over can help you for sure.

Going through few quick and easy steps can get you off your worries :

Basics of Income Tax :

  1. All Assesses (Individual, Partnership, Companies, HUF etc) having a valid PAN are required to file their Income tax returns. However for individuals and HUF having income below the basic exemption limit(e. for very Senior Citizens  5 lakhs, for Senior Citizens 3 Lakhs and others 2.5 Lakhs), filing ITR (Income Tax Return)is not mandatory.
  2. There are only five heads of Income i.e. Income from Salary, House Property, Business & Profession, Capital Gains and other Sources.
  3. Certain incomes are tax free by nature eg. Agricultural Income tax u/s. 10, certains deductions are allowable to Assesses under chapter VI A eg. Insurance premium U/S. 80 C up to Rs. 150000/- and certain deductions are allowable on reinvestment of Capital Gains eg. Transfer of House Property and reinvestment of the LTCG (Long term Capital Gains) in another House Property for availing exemption u/s. 54.
  4. Slab Rates (applicableonly for) Individuals & HUF are as follows (from AY 2015-2016):

INDIVIDUAL (AGE BELOW 60 YRS) / HUF

Income Tax Rate

Upto 2,50,000,  NIL

2,50,001 to 5,00,000,  10{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

5,00,001 to 10,00,000,  20{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

Above 10,00,000,  30{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

SENIOR CITIZENS (AGE 60 YRS AND ABOVE BUT BELOW 80 YRS)

Income Tax Rate

Upto3,00,000, NIL

3,00,001 to 5,00, 10{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

5,00,001 to 10,00,000,  20{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

Above 10,00,000,  30{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

VERY SENIOR CITIZENS (AGE 80 YRS AND ABOVE)

Income Tax Rate

Upto5,00,000, NIL

5,00,001 to 10,00,000,  20{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

Above 10,00,000,  30{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9}

  1. For other entities vis.-a-vis DomesticCompanies / Partnership Firms / etc. flat tax rate of 30 {06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} on the profits / gains derived from Business / profession.
  2. Also Education Cess & Secondary & Higher Eductaion Cess @ 3{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} of Tax liability is payable by all Assessees.

Steps to Calculate Income Tax :

  1. Find out all your incomes from your Bank Statement / Form 16 for Salaried Employees / Form 16A for Other Incomes on which TDS is deducted / Accounting records if maintained.
  2. Arrange these Incomes according to the 5 heads of Income.
  3. For Income under the head Business and profession certain expenditures incurred are allowed . as deduction from the turnover for arriving at taxable profits / gains.

Eligible Expenditures : Rents, Rates, taxes, Insurance of Business premises u/s. 30, Repairs & Insurance of Machinery, Plant & Furniture u/s. 31, Depreciation u/s. 32, Incentive for acquisition of new Plant & Machinery u/s. 32AC, Expenditure on Scientific Research u/s. 35, Expenditure of Capital Nature on specified business u/s. 35AD, Amortization of preliminary expense u/s. 35D, Bonus / Commission to employees Sec 36, etc. and general deductions u/s. 37.

  1. Plan your taxes by investing into various tax saving schemes of Government in the same financial year itself and obtain exemptions under various sections.
  2. General Exemptions :
  3. Investment in Life Insurance / National Saving Scheme (NSS) / National Saving Certificates (NSC) / or payment of Tuition fees / Principal amount of your Housing Loan etc exempt u/s. 80 C upto 150000.
  4. Investment in Medical Insurance u/s. 80 D upto 15000 for individuals and upto 20000 for senior citizens.
  5. Interest on Loan taken for Higher Education is fully exempt u/s. 80 E.
  6. Donations to charitable organisation exempt upto 50 {06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} u/s. 80 G.
  7. Savings Bank Interest exempt upto 10000 u/s. 80 TTA
  8. Rebate u/s. 87 A upto 2000 is allowed for Individuals whose total income does not exceed 500000.
  9. Arrive at taxable income tax by claiming all eligible deductions and exemptions as per applicable tax laws like deductions u/c. VI A.
  10. Compute your tax liability according to the applicable slab rates for Individuals / HUF or applicable tax rates to other entities.
  11. Avail credit of taxes paid like Advance Tax, Tax Deducted at Source (TDS) , Tax Credit at Source (TCS) etc and arrive at final tax payable along with interest if any.
  12. Applicability of Simple Interest :
  13. U/s. 234A : Late filing of returns : 1{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} per month or part thereof.
  14. U/s. 234B : Late Payment of Income tax : 1{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} per month or part thereof.
  15. U/s. 234C : Late Payment of Advance Tax instalment : 1{06122e3a69f2011a565f88e0aeb17786618f68e9df77764f2353ddee6b5145e9} per month or part thereof.
  16. Pay your Self Assessment Tax according to your Computation of Tax Liability.

The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of India to levy income tax on all income other than agricultural income (subject to Section 10(1)). The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts.

The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from 1,392.26 billion (US$21 billion) in 1997-98 to 5,889.09 billion (US$88 billion) in 2007-08 Income tax is payable when your income exceeds Rs 2.5lakhs. Income tax is aggregated from all sources. And deductions under section 80 of the income tax act are allowed from such aggregate income. Your income tax return cannot be successfully submitted unless tax has been duly paid.

Upon completing the above procedure, you can go for your return filing.

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