In India, estimation of the income tax is an important element of financial planning. It can appear like a complex process to calculate, but with an acquaintance with the basic structure of the Income Tax Act, you will have an easy time calculating it. Being certain how your income is taxed makes you dodge mistakes, spend less due to fiscal deductions, and be in accordance with the law in a timely fashion.
Income tax collected by the Indian government is based on the provisions of the Income Tax Act, 1961, and its rates, rules, and procedures may vary each time with the Union Budget. To simplify the process, we need to remember to take it one step at a time, starting with how you are going to be classified as far as income is concerned, to what tax regime to follow and lastly how you will be liable.
Steps to Calculate Your Income Tax
Step 1 – Learn the Classification of Income
Calculation of your income tax starts by determining the kind of income that you have. As per Income Tax Act, the income you earn shall be classified into five heads:
- Salary income: This comprises your base salary, allowances, bonus and other incomes that are employment-related.
- House Property Income: Money received on letting property or even notional income on ownership of two or more self-occupied houses.
- Business/Profession Profits and Gains: Business Income generated through business operations or professional services.
- Capital Gains: Earnings on the sale of a capital asset (shares, bonds, real estate, and so on).
- Other Sources of Income: Interest on deposits, dividends, winnings of the lottery or other miscellaneous income.
To begin computing your taxes, you add together all sources of taxation.
Step 2 – Select the Suitable Tax Regime
India has been providing two tax regimes since the year 2020, the Old Regime and the New Regime.
Old Regime Income earned by the taxpayers is subject to several exemptions and deductions, such as HRA, LTA, Section 80C investments, interests on home loans, etc.
The New Regime uses lower rates on the slabs, although most of the exemptions and deductions are eliminated.
To give an example, a salaried individual with considerable deductions would find the Old Regime favourable and the individual with minimum deductions would find it more economical to use the New Regime. The regime type is important since it reduces the slab rates as well as the benefits that you would be entitled to.
Step 3 -Compute Your Gross Total Income
When you decide on the regime, compute your income under all the heads that you can earn. This figure is called Gross Total Income (GTI).
During calculation, include:
- Salary including allowances and perquisites
- Income in the form of property rent or deemed property rental income
- Profits in business or profession
- Short-term and long-term capital gains
- Miscellaneous income, like bank interest
Step 4- Exemptions and Deductions
When you have chosen the Old Regime, you now have less GTI to pay in taxes by taking allowed exemptions and deductions.
Common Exemptions include:
- House Rent Allowance (HRA) if you live in rented accommodation
- Leave Travel Allowance (LTA) for eligible travel expenses
- Standard deduction on a salary earner of 50000 rupees
Common deductions include:
- Section 80C: Up to 1.5 lakhs investments in ELSS, PPF, EPF, etc.
- Section 80D: Premiums of the health insurance
- Section 24(b): Interest on home loan repayment
These exemptions and deductions are deducted in computing your Net Taxable Income by reducing your GTI.
Step 5- Apply the Relevant Tax Slab Rates
Then the Net Taxable Income is multiplied by the tax slab rates applicable to the regime you have chosen.
As an illustration, under the Old Regime FY 2024-25:
- Up to 2.5 lakhs-No Tax
- 2.5 Lakh to Rs 5 Lakh- 5 percent
- 5 lakh to 10 lakh- 20 per cent
- More than 10 lakh: 30 per cent
There are additional slabs that will be provided under the New Regime, where the rates have been reduced by 5% on up to 6 lac and 10% on up to 9 lac. Using these rates will yield your basic tax liability.
Step 6- Include Cess and Surcharge
Once you have determined your basic tax:
- Add Health and Education Cess 4 percent of your tax amount.
- Levy Surcharge on your income which is above some limit, beginning at 50 lakhs.
This is the Total Tax Payable prior to making monetary allowances on the money paid.
Step 7- TDS and Advance Tax Adjustment
The last stage involves the differences you need to make in light of the tax you have already paid. This includes:
- TDS (Tax Deducted at Source) by your employer, bank, or clients
- Advance Tax paid in the course of the financial year
In case the sum of taxes you pay is higher than the amount of taxes that you owe, you have the right to assert a refund. In case it is not sufficient, payments of the balance should be made prior to submitting your tax return by means of Self-Assessment Tax.
Example of Income Tax Calculation
So, in the Old Regime, suppose your salary is 12 lakhs and you witnessed a deduction of 1.5 lakhs under Section 80C:
- Gross Total Income = Rs 12, 00,000
- Deductions – Rs 1, 50,000
- Taxable Income (Net) = Rs 10, 50,000
Tax calculation:
- Rs 12,500= Rs 2.5 5 lakh
- Rs 5- 10 lakh = Rs 1,00,000
- Above 10 lakh = 15 000
Total = 1, 27,500 + 4 % cess = 1, 32,600 payable
How Expert Guidance Can Benefit You?
You can do your tax calculations on your own, but when you do so, chances are high that you might end up making some costly mistakes. Expert help by organisations such as Kanakkupillai can guarantee proper calculation of taxes, intelligent strategy and prompt submission, saving you time, money and worry.
Conclusion
Calculation of income tax in India involves familiarity with your sources of income, selection of the appropriate regime, making deductions in the right way and calculating slab-wise tax. By getting the mechanics clear, you can then make tax planning a part of your arsenal to ensure that your tax liability remains at the legal limit. Not staying compliant not only incurs penalties but also the overall stress of not knowing you are active.
Related Service
Income Tax Return Filing Online
Frequently Asked Questions
1. Can I change my tax regime each year?
Yes, the salaried taxpayers have the option to do it annually and the business owners are not so free in this.
2. What is the basic exemption?
These levels were 2.5 lakh for those under 60 under the Old Regime, and a bit more conservative limits on seniors.
3. Is tax applicable to agricultural income?
It is exempt, although it counts toward the rate, should you have other income.
4. How shall I make a choice between the Old and New Regimes?
Make a comparison with the help of the income tax calculator prior to filing, of both.
5. Do I need to pay tax if I earn below the exemption limit?
No, you do not have to pay, but in many cases, filing can still be a good idea.
