Income tax is a fundamental aspect of financial planning, affecting individuals and businesses alike. Understanding how income tax is calculated, including deductions and liabilities, can help taxpayers manage their finances effectively. This article explains the components of income tax, how taxable income is determined, and the role of deductions in reducing tax liability.
How Income Tax is Calculated?
The calculation of income tax depends on several factors, including income sources, applicable tax slabs, and eligible deductions. Here’s a step-by-step breakdown:
1. Determine Total Income:
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Income from Salary
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Income from Business or Profession
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Income from House Property
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Income from Capital Gains
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Income from Other Sources (e.g., interest, dividends)
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2. Apply Deductions and Exemptions:
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Standard Deduction (For salaried individuals)
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Section 80C Deductions (Investments like PPF, EPF, LIC, etc.)
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Section 80D (Health insurance premiums)
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House Rent Allowance (HRA) Exemption
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Interest on Home Loan (Section 24b)
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3. Calculate Taxable Income:
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Taxable Income = Total Income – Deductions
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The taxable income is then assessed according to the applicable tax slabs.
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Understanding Tax Slabs and Rates
The income tax rates are determined based on whether a taxpayer follows the new tax regime (which offers lower tax rates but no deductions) or the old tax regime (which allows deductions but has higher tax rates).
Example Tax Slabs for Individuals (Old Regime):
|
Income Slab (₹) |
Tax Rate (%) |
|
Up to ₹2,50,000 |
Nil |
|
₹2,50,001 – ₹5,00,000 |
5% |
|
₹5,00,001 – ₹10,00,000 |
20% |
|
Above ₹10,00,000 |
30% |
New Tax Regime (Without Deductions):
|
Income Slab (₹) |
Tax Rate (%) |
|
Up to ₹2,50,000 |
Nil |
|
₹2,50,001 – ₹5,00,000 |
5% |
|
₹5,00,001 – ₹7,50,000 |
10% |
|
₹7,50,001 – ₹10,00,000 |
15% |
|
₹10,00,001 – ₹12,50,000 |
20% |
|
₹12,50,001 – ₹15,00,000 |
25% |
|
Above ₹15,00,000 |
30% |
Additional Liabilities: Surcharge and Cess
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Surcharge applies to individuals with high incomes (above ₹50 lakh).
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Health and Education Cess (4% of total tax) applies to all taxpayers.
Conclusion
Understanding income tax calculations helps individuals optimise tax-saving strategies while ensuring compliance. To simplify the process, taxpayers can use an Income Tax Calculator to estimate their tax liability based on income and deductions.
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