Everyone of us know Income Tax is the tax levied by the government
on an individual’s income. It is often looked as a necessary evil and given our
country’s ever-changing tax laws, calculating tax considering exemptions, rebates,
deductions, etc. can be overwhelming to a beginner. Most of the time, we do not
even realize what portion of our income is being taxed, and how we can save
some money!
The term ‘individual’ in the context of income tax applies to a person, Hindu Undivided Family, company, co-operative societies and trusts. And, the tax slabs are decided based on one’s income and age. Taxable income is the income of an individual minus tax exemptions, deductions and rebate.
Step 1: Calculate Your Gross Income
If
you are a salaried individual, write down your annual gross salary. This will
include all the components of your salary including House Rent Allowance (HRA),
Leave Travel Allowance (LTA) and special allowances, like food coupons and
mobile reimbursements etc. Next, take out the exemptions provided on the salary
components. The major exemptions you get are HRA i.e. House Rent Allowance and
LTA i.e. Leave Travel Allowance.
For
HRA, remember you can claim HRA ONLY if you live in a rented house. If you have
your own accommodation or live with your parents, then HRA is fully taxable.
Also, your tax exemption under HRA is taken as the lowest of the following
amounts:
After
this, remove the standard deduction of Rs 50,000 (every salaried individual is
entitled to this deduction) to arrive at the net salary amount. Next, you need
to add income that you might have received from other sources. This could be
rental income, interest earned from deposits, capital gains you might have
received et
The amount you arrive at is your gross total income.
Step 2 – Arrive At Your Net Taxable Income
By Removing All Deductions
Tax
deductions allow you to reduce your taxable income further by investing, saving
or spending on certain items. First is the Standard Deduction of Rs 50,000,
which can be availed by all, without making investment or expenditure on any
defined products.
Under Section 80C, which is the biggest pool for deduction, you can
claim up to Rs 1.5 lakh deduction for various investment and expenditure.
Investments in PPF, ELSS Mutual Funds, EPF, Sukanya Smriddhi Yojana, premium
paid for term insurance are some of the most popular ways to claim this
deduction. If you have a home loan, the principal amount paid back in the year
can be claimed as deduction under this section. Further your EPF, which is a
part of your salary, falls in the category.
If
you are investing in NPS, you can claim another Rs 50,000 deduction under
Section 80CCD(1B), which is over and above the Rs 1.5 lakh limit under Section
80C. Apart from this, if you have paid premiums towards the health insurance
policy of your family and your parents, you can claim that amount as deduction
under Section 80D.
In
case of a home loan, the interest portion of the EMI paid for the financial
year can be claimed as a deduction, up to a maximum of Rs 2 lakh, under Section
24. Again, this is over and above the deduction on the principal amount under
Section 80C.
Step
3: Arriving At Your Net Taxable Income
By
subtracting all the eligible deductions from the gross taxable income, you will
arrive at your total income on which you need to pay tax basis your tax slab. We
will now get into the crucial step of calculating your tax.
STEP 4 – Calculate Your Taxes
Now,
one pays tax on his/her net taxable income. For the first Rs. 2.5 lakh of your
taxable income you pay zero tax. For the next Rs. 2.5 lakhs you pay 5% i.e. Rs
12,500. For the next 5 lakhs you pay 20% i.e. Rs 1,00,000 and for your taxable
income part which exceeds Rs. 10 lakhs you pay 30% on entire amount.
Step 5: Consolidate Your Net Tax
Rebate
under Sec 87A: Tax rebate is a form of tax incentive provided by the government
to individuals earning an income below a specified limit. In case your total
taxable income after deductions doesn’t exceed Rs 5 lakh, you can claim rebate
under Sec 87A of Rs 12,500.
Now if your taxable income is more than Rs 5 lakh, you can add the health and education cess of 4 percent to your tax amount to see the final amount you will pay. For people in the very high-income bracket, i.e. between Rs 50 lakh and Rs 1 crore, they need to pay a surcharge of 10 percent. And, for income between Rs 1 and Rs 2 crore, the surcharge is 20 percent.
You
have now arrived at your final income tax amount.
By : ETMONEY COO & Head of Marketing Mr Santosh Navlani
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