How to Calculate Your Income Tax
Posted: Nov 15, 2018
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.
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
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:
It is important to note that each income source has some exemptions and deductions that are allowed for income tax calculation purposes. For instance,
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
Senior Citizens (Individuals above 60 years but less than 80 years)
Super Senior Citizens (Individuals above 80 years)
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:
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).