How to Calculate Your Income Tax

Taxes are an integral part of every economy. They enable the government to fund important nation-building initiatives and strengthen services in different sectors such as infrastructure, defence, healthcare etc. There are two kind of taxes in our country – Direct and Indirect. Although in both the cases, the ultimate cost of the tax is borne by the individual, but the collection mechanism is different.

In direct taxes, the tax is directly paid by an individual to the government. For instance, income tax and corporate tax.

Whereas indirect taxes are collected by the service or goods seller and passed on to the government. For example, Goods and Service Tax, which is now a single indirect tax that business or service providers need to account for. It was launched last year and has now replaced all other indirect taxes.

Income Tax in India

Income tax features as one of the most commonly known and talked about direct taxes of our country. The Income Tax department under the Department of Revenue (Ministry of Finance) manages the whole process of income tax calculation and collection.

Who all need to pay income tax?

Any person who earns an income is liable to pay income tax in India. The government announces a specific income level every year during the Budget. Anyone whose earnings are higher than that need to pay income tax. This means individuals falling in the tax bracket as well as the Hindu Undivided Families need to pay the income tax.

Some common income tax features

The Income Tax Act prescribes the guidelines regarding the eligibility and income tax calculation. It however does not describe the tax rates.

Residential status does not impact the liability to pay income tax. Both Residents and Non-residents need to work on their income tax calculation

Minors who are earning are also covered in the ambit of income tax calculation The income of such minors is added to either of the parents (the one with the higher earnings) and is taxed like their own income.

There are certain incomes which are exempt from income tax calculation Such as agricultural income and gratuity up to a certain limit are exempt from tax.

The Income tax calculations depend on a host of factors. For instance, there are separate tax slabs on the basis of age of the taxpayer.

There are numerous deductions that are allowed by the IT Department in the income tax calculation

Steps for income tax calculations

If one is familiar with the income tax features and guidelines, calculating the tax amount is not a very difficult task. In order to arrive at the income tax payable, one needs to follow some simple steps.

Step 1: Gross Income Calculation

The Income Tax Department has classified the source of income into five categories. These are:

Income from salary (paid by an employer to employee)

Income from business and profession (self-employed, professionals and freelancers)

Income from housing property (rent, etc.)

Income from capital gains (Income from transfer or sale of capital assets)

Income from other sources (interest on investments, royalty, lottery winnings, etc.)

It is important to note that each income source has some exemptions and deductions that are allowed for income tax calculation purposes. For instance,

Salaried individuals can claim exemption on account of House Rent Allowance. Earlier, medical allowance and conveyance allowance were also included in the scope of exemptions. However, with the recent changes in the Finance Bill, these have been removed and replaced with "Standard Deduction" that can be claimed by all individual taxpayers.

Short term losses can be set off against short-term and long- term capital gains.

The sum total of the income (or loses) from these five heads of income is the Gross Income of a taxpayer.

Step 2: Taxable Income Calculation

One of the most important aspect in income tax calculation is determining the taxable income. Taxable income is the amount on which the tax slabs are applied. It is derived by subtracting the eligible deductions (Section 80 C to Section 80U) from the gross income of an individual.

These deductions not only help bring down the tax liability of an individual but also promote the habit of savings and investment in important aspects such as healthcare, etc.

For instance, Section 80C allows taxpayers to claim a deduction (up to Rs 1.5 Lakhs in a year) through investments in instruments such as life insurance, provident fund, saving certificates. Premium paid towards medical health insurance (up to Rs 25,000 for non-senior citizens) is claimable as deduction under Section 80D.

Step 3: Income Tax Calculation

Once the amount of taxable income is ready, the next step for income tax calculation is knowing the tax slabs. The government annually announces the income tax slabs during the Union Budget that are applicable for a particular financial year. For the current financial year 2018-19 (Assessment Year 2019-20), the tax slabs are as follows:

Individuals below the age of 60 years

Slab 1: Income is below Rs 2.5 Lakhs: No tax applicable

Slab 2: Income is between Rs. 2.5 to 5 Lakhs: 5% tax

Slab 3: Income is between Rs. 5 to 10 Lakhs: 20% tax

Slab 4: Income is above 10 Lakhs: 30% tax

Senior Citizens (Individuals above 60 years but less than 80 years)

Slab 1: Income is below Rs 3 Lakhs: No tax applicable

Slab 2: Income is between Rs. 3 to 5 Lakhs: 5% tax

Slab 3: Income is between Rs. 5 to 10 Lakhs: 20% tax

Slab 4: Income is above 10 Lakhs: 30% tax

Super Senior Citizens (Individuals above 80 years)

Slab 1: Income is below Rs 5 Lakhs: No tax applicable

Slab 2: Income is between Rs. 5 to 10 Lakhs: 20% tax

Slab 4: Income is above 10 Lakhs: 30% tax

So, if the taxable income (after taking into account all the deductions) of an individual (age less than 60 years) is Rs. 7.2 Lakhs then the income tax calculation will be as follows:

Till Rs 2.5 Lakhs: No Tax

From 2.5 Lakhs to 5 Lakhs: Rs 12,500 (i.e. 5% of 2.5 Lakhs)

From 5 Lakhs to 7.2 Lakhs: Rs 44,000 (i.e. 20% of 2.2. Lakhs)

Total tax amount (before cess): Rs. 56,500

Step 4: Additional charges applicable

In addition to the income tax calculated as per the applicable tax slabs, there are certain other charges which are also payable. These are Surcharge, Health and Education Cess.

Surcharge to the tune of 10% is applicable wherein the total income of the taxpayer is more than Rs. 50 Lakhs but less than Rs. 1 Crore. If the total income is above Rs. 1 Crore, then the surcharge is applied at 15%.

Health and Education Cess is calculated as 4% of the total income tax (including surcharge).

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