Financial planning is a crucial aspect of managing your money effectively. A key part of this process is understanding how to calculate your income, including different income sources and applicable taxes. This knowledge helps you make informed decisions regarding savings, investments, and tax planning while aligning with your financial goals.

In this article, we will guide you through the process of calculating your income, provide insights into various income types, explain the basics of taxation, break down the tax slabs in India, and provide a step-by-step calculation of income tax.

Overview of Different Types of Income

Broadly, income can be classified into five categories:

• Income from Salary: This is the most common type of income for salaried individuals. It includes wages, bonuses, commissions, and other benefits received from an employer. Income from salary is taxed after considering deductions, exemptions, and allowances such as HRA (House Rent Allowance), standard deductions, and others as applicable under Indian tax laws.
• Income from Business or Profession: If you are self-employed or running a business, the income generated from the business is considered here. This includes earnings from freelancing, consulting or running a company. You are taxed on your net profit after deducting allowable business expenses.

• Income from Capital Gains: When you sell an asset such as property, stocks, or bonds, the profit earned is termed as capital gains. The tax on capital gains depends on the holding period and the nature of the asset sold (long-term or short-term).
• Income from House Property: If you own a property and rent it out, the rental income is considered under this head. If the property is self-occupied, you can claim a deduction for the interest paid on home loan repayments under Section 24(b).

 

• Income from Other Sources: This includes any income not falling under the above categories, such as interest from savings accounts, dividends from investments, lottery winnings, etc. The tax on such income varies depending on its nature and applicable exemptions.

Introduction to Taxation and Tax Slabs in India

Taxation in India is governed by the Income Tax Act of 1961, which outlines how individuals, businesses, and other entities must calculate their taxable income and pay taxes accordingly. The government of India levies taxes on the income earned by individuals and entities, with the tax rate depending on the amount and nature of the income, as well as the taxpayer's category.
The income tax rates in India are progressive, which means that as your income increases, the rate of tax applicable to your income also increases. The tax slabs under the New Tax Regime for individuals below 60 years of age are: 

• Income up to INR 3,00,000: No tax
• Income between INR 3,00,001 and INR 7,00,000: 5%
• Income between INR 7,00,001 and INR 10,00,000: 10%
• Income between INR 10,00,001 and INR 12,00,000: 15%
• Income between INR 12,00,001 and INR 15,00,000: 20%
• Income above INR 15,00,000: 30%

Additionally, there are rebates and deductions available under various sections of the Income Tax Act, which can help reduce taxable income. For instance, under Section 80C, investments in instruments such as Provident Fund (PF), National Savings Certificate (NSC), and Public Provident Fund (PPF) are eligible for deductions.

Steps to Calculate Income Tax

Now that you understand the different sources of income and the applicable tax slabs, let’s move on to step-by-step income tax calculation.

Step 1: Calculate Gross Income

Begin by calculating your total income. This includes all your earnings from various sources:

• Salary/Wages
• Business Income
• Rental Income from property
• Interest income
• Dividends, etc.

Add up all the income sources to get your gross income for the financial year.

Step 2: Apply Eligible Deductions

Once your gross income is calculated, the next step is to subtract eligible deductions. These are allowed under various sections of the Income Tax Act and will help reduce your taxable income. Some common deductions include:

• Section 80C: Deductions for investments in life insurance premiums, PPF, NSC, tax-saving fixed deposits, etc. (up to INR 1.5 lakh).
• Section 80D: Deductions for premiums paid on health insurance policies for self and family.
• Section 24(b): Deductions on home loan interest (up to INR 2 lakh for self-occupied properties).
• Section 10(14): House Rent Allowance (HRA) deductions, if applicable.

These deductions help reduce your taxable income, which in turn reduces the overall tax liability.

Step 3: Calculate Taxable Income

After applying all eligible deductions, subtract the total deduction amount from the gross income to get the net taxable income.

Step 4: Apply Tax Slabs

Once you have your taxable income, refer to the tax slabs and calculate the tax accordingly based on the applicable slab.

Step 5: Apply Tax Rebate (if any)

If you qualify for tax rebates, like the Section 87A rebate for individuals with taxable income up to INR 7 lakh, deduct it from the total tax payable. This step will reduce your tax liability further.

Step 6: Add Cess and Surcharge

In India, a Health and Education Cess of 4% is added to the total tax payable. There may also be a surcharge if the taxable income exceeds certain thresholds.

Step 7: Payment of Tax

Finally, you need to pay the tax to the government by the due date, which is typically by July 31st of the assessment year (for individuals who do not have business income). You can pay the tax online through the Income Tax Department’s website or by submitting a challan at authorised banks.

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Conclusion

Calculating your income for tax purposes is an essential part of financial planning. Understanding the different types of income, the applicable tax slabs, and the various deductions available can significantly reduce your tax liability and help you save more. By following the steps outlined in this article, you can calculate your taxable income and ensure you comply with the tax regulations while optimising your savings.

Moreover, staying tax-compliant is crucial when applying for loan products, such as home loans. Lenders typically assess your income tax returns (ITRs) as proof of your financial reliability and repayment capacity. A well-documented tax history can enhance your creditworthiness and improve your chances of loan approval.

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