Calculation of Tax Liabilty
( Easy way to calculate your Income Tax)

A.         CALCULATE TOTAL INCOME
Your total income is the sum of all money inflows in your name. The Tax rules classify individual income under Five Heads such as …

• Income form Salary

• Income from House Property

• Income from Business or Professions

• Income from Capital Gains

• Income from Others Sources

B.         DEDUCT EXEMPT INCOMES
There are some incomes that are exempt from Tax, like…

• Agricultural Income

• Capital Receipts ( lump sum payments like Life Insurance or Gratuity up to certain limit),

• Interest on EPF and PPF,

• Interest on Tax-Free Govt. of India Savings Bonds (now discontinued),

• Dividend on Equity Funds, and

• Commuted Pension

In addition, under each of the 5 above listed Income Heads, some Deductions and Exemption are allowed…

1. Salary Income :
House Rent Allowance : ( least of the following) Is deductible from your Total Income.:

• Actual Allowance

• 50% of Salary if house is in a Metro, otherwise 40% of salary or

• Excess of Rent paid over 10% of salary

2. House Property Income:

(a) Deduction :
30% of the net annual value of the house property ( annual rent minus municipal taxes paid in the previous year) is allowed as Deduction.

(b) Interest on Borrowed Capital :
For Self Occupied Property , Upto Rs. 1.5 lakh interest on money borrowed to buy a house is allowed as a Deduction if you live in that house. If you let it out, entire interest is allowed.

3. Income from Business:

• Business-related ( like Rent, Travel & Repairs ) are allowed as a Deduction.

• Depreciation.

4. Income from Capital Gains:

• Long-Term Capital Gains (LTCG) from House Property is Exempt from Capital Gain Tax if Investment is made by way of Purchase of another Residential Property within 2 years or by way of construction of Residential Property within 3 years or by Purchase of 54EC Bonds within 6 months.

• LTCG form Shares and Equity Mutual Funds held for minimum of 1 Year ( where Security Transaction Tax-STT has been paid ) are Tax Exempt.

5. Income from Other Sources :
Each head under this Income Source has its own exemptions. For example, dividend income is at present exempt in the hands of recipient.

After exemptions what is left is called Gross Income or your Assessable Income

C.         SUBSTRACT DEDUCTIONS

A deduction enables you to reduce your income on which tax will be levied. Before, computing your tax, you are allowed to reduce the amount of assessable income under certain conditions listed below :

• Medical Reimbursement upto Rs. 15,000 a year  can be claimed back from the employer and are not part of the taxable income.

• Conveyance Allowance of Rs. 800 per month if given by the employer can be deducted.

• U/s 80D, Premium paid on a Medical Insurance Policy, upto Rs. 15,000 ( Rs.20,000 if one of the beneficiary is Senior Citizen).

• A maximum of Rs. 1 lakh invested towards various savings schemes ( including pension plans) u/s 80C.

D.         CALCULATE TAX LIABILITY
The Income left after these Deductions is the Taxable Income, on which Tax will be levied...

• The First Rs. 1.6 Lakh is Exempt from tax.

• Income between Rs.1,60,001 and Rs.5,00,000 is taxed at 10%

• Income between Rs.5,00,001 and Rs.8,00,000 is taxed at 20%

• More than  Rs.8,00,000 is taxed at 30%

There is also a Education Cess  @ 3% on the liability at each slab.