Total Income and Tax Payable of Individual Assessee:
Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure for computation of total income of an individual for the purpose of levy of income-tax –
Step 1 – Determination of Residential Status of Person:
The residential status has to be determined as per the conditions specified in income tax Act.
The residential status is decide whether the amount is taxable or not in resident place Income-tax Act, 1961 can be classified as under –
In the case of an individual
- Resident and ordinarily resident,
- Resident but not ordinarily resident,
- Non-resident.
In Case Of Other than Individual
- Resident
- Non resident
Example: Santosh income earned and received at outside India. So, This income is not taxable in India because the income is not incurred in India. So the amount is not taxable.
Step 2 – Classification of Income Under Different Heads:
A person may earn income from different sources.
Example:
Santosh a salaried person earns income by way of salary. He also gets interest from bank savings account/fixed deposit. Apart from this, if he has invested in shares, he would be getting dividend and when he sells these shares, he may earn profit on such sale. If he owns a residential property which is gives for rent, it will add under the head income from house property.
For computation of total income, all income of a tax payer are classified into five different heads of income. These are shown below–
- Salary, pension earned is taxable under the head “Salaries”.
- Rental income is taxable under the head “Income from house property”.
- Income derived from carrying on any business or profession is taxable under the head “Profits and gains from business or profession”.
- Profit from sale of a capital asset is taxable under the head “Capital Gains”.
- The fifth head of income is the residuary head. Income which is chargeable to tax but not taxable under the first four heads will be taxed under the head “Income from other sources”.
Step 3– Computation of Income Under Each Head:
Income is to be computed in accordance with the provisions governing a particular head of income.
Exemptions
There are certain incomes which are wholly exempt from income-tax e.g. Share of profit from partnership firm to partner. These incomes have to be excluded and will not form part of Total Income.
Also, some incomes are partially exempt from income-tax e.g. House Rent Allowance, Leave Salary, Education Allowance. These incomes are excluded only to the extent of the limits specified in the Act. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income.
Deductions
There are deductions and allowances prescribed under each head of income. For example, while calculating income from house property, municipal taxes and interest on loan are allowed as deduction. Similarly, deductions and allowances are prescribed under other heads of income. These deductions etc. have to be considered before arriving at the net income chargeable under each head.
Step 4 – Clubbing of Income of Spouse, Minor child etc.
In case of individuals, income-tax is levied on a slab rates. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been
incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.
Step 5 – Set-off or carry forward and set-off of losses
An assessee may have different sources of income under the same head of income. He may have profit from one source and loss from the other. For instance, an assessee may have profit from his textile business and loss from his printing business. This loss can be set-off against the profits of textile business to arrive at the net income chargeable under the head “Profits and gains of business or profession”.
Similarly, an assessee can have loss under one head of income, say, Income from house property and profits under another heads of income, say, profits and gains of business or profession. There are provisions in the Income-tax Act, 1961 for allowing inter-head adjustment in certain cases.
However, there are also restrictions in certain cases, like business loss is not allowed to be set-off against salary income. Further, losses which cannot be setoff in the current year due to inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act.
Generally, brought forward losses under a particular head cannot be set-off against income under another head i.e., brought forward business loss cannot beset-off against income from house property of the current year.
Step 6 – Computation of Gross Total Income:
The final figures of income or loss under each head of income, after allowing the deductions allowances and other adjustments, are then aggregated, after giving effect to the provisions for clubbing of income and set-off and carry forward of losses, to arrive at the gross total income.
Step 7 – Deductions from Gross Total Income:
There are deductions prescribed from Gross Total Income. These deductions are of two types
Deduction in respect of certain payments
- Deduction for Payments Life Insurance Premium paid Under section 80C
- Contribution to Provident Fund/ Pension Fund Under section 80C
- Medical insurance premium paid Under section 80D
- Payment of interest on loan taken for higher education Under section 80E
- Payment of interest on loan taken for residential house Under section 80EEA
- Payment of interest on loan taken for purchase of electric vehicle Under section 80EEB
- Rent paid Under section 80GG
- Donation to certain funds, charitable institutions, etc. Under section 80G
- Contributions to political parties Under section 80GGA/ 80GGB
Deduction In respect Of Certain Incomes
- Employment of new employees
- Royalty income etc. of authors of certain books other than text books
- Royalty on patents
Step 8 – Total income:
The income arrived at, after claiming the above deductions from the Gross Total Income is known as the Total Income.
Step 9 – Application of the Rates of Tax on the Total Income:
The rates of tax for the different classes of assessees are prescribed by the Annual Finance Act. For individuals, HUF etc., there is a slab rate and basic exemption limit. At present, the basic exemption limit is 2,50,000 for individuals. This means that no tax is
| Amount | Rate |
| Up to 2,50,000 | Nil |
| > 2,50,000 to 5,00000 | 5% |
| > 5,00,000 to 10,00,000 | 20% |
| >30,00,000 | 30% |
But if income is up to Rs:5,00,000 then rebate is applicable under section 87A.
However, section 115BAC provides an option for concessional slab rates to individual and HUF subject to certain conditions to be applied on the total income to arrive at the income-tax liability.
For certain special Income (like Long Term Capital Gains, Lottery Income, Specified Short Term Capital Gains etc.), slab rates are not applicable.
Step 10 - Surcharge / Rebate under section 87A
Surcharge: Surcharge is an additional tax payable over and above the income tax. Surcharge is levied as a percentage of income-tax, where total income exceeds 50 lakhs. The rates of surcharge applicable for different slabs of total income.
| Limit | 50,00,000 to 1Cr | >1 Cr to 2 Cr | >2 Cr to 5 Cr | >5 Cr to 10 Cr | > 10 Cr |
| Rate Of Surcharge | 10% | 15% | 25% | 37% | 37% |
Rebate under section 87A:
In order to provide tax relief to the individual tax payers who are in the 5% tax slab, section 87A provides a rebate from the tax payable by an assessee, being an individual resident in India, whose total income does not exceed 5,00,000. The rebate shall be equal to the amount of income tax payable on the total income for any assessment year or an amount of 12,500, whichever is less.
Step 11 – Health and Education Cess on Income-Tax:
The income-tax, as increased by the surcharge or as reduced by the rebate under section 87A, if applicable, is to be further increased by an additional surcharge called health and education cess on income-tax @4% of income-tax plus surcharge, if applicable.
Step 12 – Advance Tax and Tax Deducted at source:
Although the tax liability of an assessee is determined only at the end of the year, tax is required to be paid in advance in four installments on the basis of estimated income i.e., on or before 15th June, 15th September, 15th December and 15th March.
However, residents opting for presumptive taxation scheme can pay advance tax in one instalment on or before 15th March instead of four instalment. In certain cases, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Income-tax Act, 1961 or the Annual Finance Act. Such deduction should be made either at the time of accrual or at the time of payment, as prescribed by the Act.
Step 13: Tax Payable/Tax Refundable:
After adjusting the advance tax and tax deducted at source, the assessee would arrive at the amount of net tax payable or refundable. Such amount should be rounded off to the nearest multiple of ` 10 as per section 288B.
The assessee has to pay the amount of tax payable (called self-assessment tax) onor before the due date of filing of the return. Similarly, if any refund is due, assessee will get the same after filing the return of income.
