Income tax guide for beginners

Do you know how to calculate your tax liability or does the tax calculation remain a black box? I find it quite surprising that a number of taxpayers even in the highest income tax bracket have little idea about how to arrive at income tax liability. If you don’t understand tax calculation, you won’t be able to plan your taxes well.

Well, it is never too late to find out. In this post, I will cover the basics of income tax calculation.

What is my total income?

Your total income is not just your salary. You might be earning income from multiple sources. Following are the five heads of income under the Income Tax Act.

• Income from Salary
• Income from House property (Renting out house)
• Capital gains (Sale of shares, mutual funds, gold, real estate etc)
• Income from Business/Profession
• Income from other sources (Includes interest from savings accounts, fixed deposit etc)

Note: Your total income is the sum of income under the aforementioned heads.

Do I get taxed on my total income?

Fortunately, no. A portion of your salary can be exempt from tax. A part of house rent allowance (component of salary) is exempt under Section 10(13A) if you are staying in a rented accommodation. There are other such exemptions for conveyance, medical allowance, leave travel allowance etc.

Additionally, there are deductions allowed under Section 80C to Section 80U from your total income. Commonly known deductions are:

1. Tax saving investments (PPF, EPF, ELSS, NSC, life insurance premium, home loan principal repayment etc) under Section 80C
2. Health Insurance Premium under Section 80D
3. Interest of education loans (Section 80E)
4. Interest payment of a housing loan (Section 24)
5. You taxable income reduces to the extent of these deductions availed.

Note: Total Income – Deductions = Taxable Income

I know my taxable income. How do I calculate my tax liability?

Once you have your taxable income, you can calculate your tax liability as per following table.

These tax slabs are for FY2015-2016 (for the financial year ending March 31, 2015).
Note: There are certain kinds of income that may be taxed at a different rate irrespective of you income tax slab. For instance, short-term capital gains on sale of equity mutual funds gets taxed at 15% while long-term capital gains on such sale are exempt. The only exception is when your taxable income does not exceed minimum tax exemption limit.

Illustration

Rajiv is 30 years old and has a total income of Rs 15 lakh. He is eligible for tax deductions worth Rs 3 lakh. We take a look at his tax liability. His taxable income is Rs 12 lakh (Rs 15 lakh minus Rs 3 lakh ).

So, the income tax liability is Rs 1.85 lakh.

Is there more to it?

If your taxable income exceeds Rs 1 crore, you will have to pay a surcharge of 12%, which shall be charged on the tax amount.Apart from this, education cess (including higher education cess) is levied at the rate of 3% on income tax and surcharge.In Ramesh’s case, there is no surcharge applicable since the total taxable income is less than Rs 1 crore. However, cess of Rs 5,550 (3% of Rs 1.85 lakh) will be levied. Hence, total liability increases to Rs 1,90,550.

How do I pay this income tax?

Typically, your employer will deduct TDS (tax deducted at source) from your salary before crediting to your bank account. The employer deposits this with the government. Hence, your employer estimates your tax liability (based on investment declarations made) and deducts TDS from your salary every month.

At the end of financial year, if the actual tax liability is greater than the TDS deducted, you must pay additional tax while filing income tax return. Alternatively, if excess TDS has been deduction, you can ask for refund while filing income tax return.

Hope the tax calculation is not a black box anymore.