To calculate the income tax for an assessee, they should first compute the taxable income and other information required. As the final step in the computation of income tax, tax payable can be derived after applying the applicable tax rates for the assessee. A deduction of tax deducted at source(TDS)/tax collected at source(TCS) or advance tax is deducted from the tax payable to arrive at the tax amount that is due.
With the advent of technology, income tax calculators are available online that help you to accurately know the exact tax liability.
If we look at the systematic approach that is followed to calculate income tax, the method is very straightforward. There are 5 income sources for any individual and any source of income can be categorised on the basis of these. Income tax calculators also require you to bifurcate and enter the sources of income. Calculating your tax liability is given by the formula.
Total gross income – deductions = taxable income
The five sources are namely salary, profits, and gains from business and profession, capital gains, and other sources. The income for an assessee has to be classified in either of the above.
- Income from salary
Salary slips and form 16 can be collected from your employer. Adding all the allowances will give you the gross total salary. Deduct the exemptions available. A standard deduction of up to Rs. 50,000 is allowed annually.
- Income from house property/House Rent Allowance
House rent allowance calculators are available online and can be referred by individuals getting a house rent allowance. The income from house property has to be calculated in the case of a rented house. Even for a self-occupied property, income has to be calculated and mostly the profit is nil or negative for a self-occupied property. A house rent allowance calculator lets you know how much salary is taxable and how much is exempt from tax.
- Income/Profits and gains from business and profession
The net profit earned in a financial year can be taken as a base for calculating the income earned from businesses or professions. Adding all the expenditures allowed by the Income Tax Act, of 1961, and subtracting the expenditures incurred gives the taxable income. Using the income tax calculator, entering values will easily give you the final taxable income.
- Income from capital gains
The sale of stocks, property, or bonds attracts capital gains in a financial year. Capital gains can be long-term or short-term. Calculating the short or long-term capital gains and deducting the exemption available under Section 54, gives the capital gains income for an assessee.
- Income from other sources
Income earned from any other source other than the above-mentioned sources is taxable under the head of other sources. Some examples are lottery earnings and dividends from mutual funds. Deductions subtracted after calculating the total income will provide net taxable income for this head.
- Clubbing of income
To avoid any kind of tax evasion by an assessee, there are provisions related to the clubbing of income of a spouse or minor child with an assessed income.
- Set-off/ Carry forward of losses
The provisions related to setting off and carrying forward aid in coping with any losses especially related to business and profession.
- Computation of total income and deductions from the gross total income
Using the income tax calculator, deductions from the gross total income are be applied to derive the total income that is liable to tax slabs for an assessee.
A surcharge is applicable if the income of an individual exceeds Rs. 50 lakhs. A rebate is available for income under Rs. 5 lakhs. The rebate amount is Rs. 12,500 or the tax amount whichever is less.
- Advance tax and tax payable
Advance tax to be paid in an assessment year is calculated after the tax payable for an assessee.
Knowing the exact and accurate amount of tax is essential to file a correct income tax return. Depending upon the tax liability, the tax slabs are applicable for an assessee. The liability can be calculated using an income tax calculator in a simplified manner. The tax slabs can be opted as per the new regime introduced by the government.