- The process of calculating the tax liability begins with the computation of your Gross Total Income (GTI).
- Once you have calculated your GTI, you must also calculate the deductions available out of your total income which can allow you to reduce your tax.
- Income Tax is required to be calculated on the total income, net of the deductions available
“There is nothing certain in this world, except death and taxes.“ – Benjamin Franklin
This quote holds so true in the current era. The personal tax section in the Budget speech is always the most awaited one since it affects pockets of each one of us. The tax rates for the upcoming financial year are announced by the Hon’ble Finance Minister in that section. Union Budget 2018 had been presented on 1st February 2018 and contrary to the expectations, no change in tax rates or income tax slabs was made. This article attempts to simplify the computation of income tax for a common man.
Steps to Calculate your Income Tax
- Compute the Gross Total Income - The process of calculating the tax liability begins with the computation of your Gross Total Income (GTI). It requires you to calculate the total income earned/ expected to be earned during a financial year from various sources. Under the tax laws, the income is classified under five categories under Income Tax namely :
- income from salaries when you are employed under someone else
- income from house property, when you rent out your house/ shop
- profits and gains from business and profession, when you undertake some business activity,
- capital gains, when you sell some asset including shares, mutual funds, house etc.
- income from other sources, covering miscellaneous incomes including interest from FDs, RDs, savings account, gifts etc.
- Calculate the Deductions Available – Once you have calculated your GTI, you must also calculate the deductions available out of your total income which can allow you to reduce your tax. The deductions cover investments in tax saving instruments like 5-year tax savings fixed deposits, equity-oriented mutual funds with 3-year lock-in, National Saving Certificates, Public Provident Fund etc.), life insurance premium payment, medical premium payment, interest paid on education loan, donations etc.
- Calculate the Net Tax Payable - Income Tax is required to be calculated on the total income, net of the deductions available. For the income earned during the financial year 2017-18, the rates for all the assessees below the age of 60 are as below:
|
Net Taxable Income
|
Income Range
|
Rate
|
|
Upto Rs. 2,50,000
|
0 - 2,50,000
|
Nil
|
|
Next Rs. 2,50,000
|
2,50,001 – 5,00,000
|
5%
|
|
Next Rs. 5,00,000
|
5,00,001 – 10,00,000
|
20%
|
|
The Balance Taxable Income
|
10,00,001 and above
|
30%
|
For the taxpayer with income below Rs. 3,50,000, a tax rebate u/s 87A is also allowed for the tax amount payable up to a maximum of Rs. 2,500. So, effectively, another Rs. 50,000 is allowed as exempt for people up to income of Rs. 3.50 lakhs.
The tax so calculated has to be increased by 3% towards Education Cess. The rate of cess has been proposed to be increased from 3% to 4% in the Union Budget 2018. The resultant figure is the total income tax payable on the income earned for the year.
Let’s calculate the tax payable for a person with annual income of Rs. 6 lakh:
|
Particulars
|
For the year 2017-18
|
For the year 2018-19 (as per rates proposed in Budget)
|
|
0 - 2,50,000
|
Nil
|
Nil
|
|
2,50,001 – 5,00,000
|
10% of Rs. 2,50,000 = Rs. 25,000
|
10% of Rs. 2,50,000 = Rs. 25,000
|
|
5,00,001 – 6,00,000
|
20% of Rs. 1,00,000 = Rs. 20,000
|
20% of Rs. 1,00,000 = Rs. 20,000
|
|
Total Income Tax
|
Rs. 45,000
|
Rs. 45,000
|
|
Cess
|
3% of Rs. 45,000 = Rs. 1,350
|
4% of Rs. 45,000 = Rs. 1,800
|
|
Total Tax Payable
|
Rs. 46,350
|
Rs. 46,800
|
