Income Tax Calculation for Beginners

You are excited to get first salary credit to your account. Along with salary comes the salary slip. You try to make some sense out of it but can’t.  Somehow, the numbers don’t add up for you.

Well, to be comfortable, you need to understand how to calculate your tax liability. This will also help you in planning your taxes better. Finally, you need to take it to a conclusion by filing income tax returns.

Let’s first start with calculating your income tax liability.

What is my Income?

As per Section 14 of the Income Tax Act, your total income comprises following five heads.

  1. Income from Salary
  2. Income from House property (Renting out house)
  3. Profit or gain from Business or Profession (if any)
  4. Capital gains (Sale of equity shares, mutual funds, bonds, gold, real estate etc)
  5. Income from other sources (Includes interest from savings accounts, FD, gifts, dividends etc)

Yes, when it comes to income tax, you may have more than your salary to worry about.

You are not taxed on your total income

There are a few portions of your income that are wholly or partially exempt e.g. HRA, LTA, Conveyance Allowance etc.

In addition, there are a few investments/expenses that are allowed as deductions.

Your Taxable Income = Gross Income – Exempt Income – Deductions

What are the Common deductions available?

Common deductions include:

  1. Up to Rs 1.5 lacs under Section 80C (life insurance premium, ELSS, PPF, EPF, home loan principal repayment etc)
  2. Section 80D (health insurance premium and health check up)
  3. Section 24 (Interest payment on a home loan)
  4. Section 80CCC (Contribution to pension plans)
  5. Section 80E (Education loan)
  6. Section 80CCD for contribution to Notified Pension Schemes including NPS

Do note this is not an exhaustive list of deductions. There are many more.

What about Tax Slabs?

Your taxable income is not taxed at a flat rate. There is a slab architecture where the rate of taxation increases as your taxable income grows.

How to calculate income tax Income Tax Slabs

Your tax liability does not end here. You need to pay cess and surcharge, if applicable, too.

By the way, capital gains may not always be taxed at your marginal tax rate (slab rate). For instance, short term capital gains on sale of equity/equity mutual funds are taxed at 15% while long term capital gains on sale of equity/equity funds are exempt from tax, irrespective of the amount of capital gains.

Do I need to file income tax return?

There are certain cases where you might be exempted from filing income tax returns. For instance, if you gross total income is less than Rs 2.5 lacs (subject to a few other conditions), there is no need to file IT return.

However, in my opinion, it is always better to file an income tax return. You need to file if you want to claim a tax refund or you have capital losses to carry forward.

Even otherwise, your income return may be required for various non-tax related matters such as applying for a loan or visa. I had to submit my previous year returns to apply for SEBI RIA license. You never know when you might need it. Hence, it is better to be prepared and file income tax returns.

There are many income tax returns. You need to choose the right form for you. Many online portals will help you figure out the right return form for you.

How do I file Income Tax Returns?

For filing returns, you can seek assistance of a local tax consultant.

Alternatively, you can give it a try yourself. You can e-file your returns on income tax website or through other income tax e-filing portals. Many such portals also provide professional assistance in filing returns.

Disclosure: I am not an income tax expert. You are advised to seek services of a professional while filing your income tax returns.

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

2 Responses to Income Tax Calculation for Beginners

  1. Vikram Kapoor says:

    This query is regarding the Exemption that is available for LTA. I am a salaried professional. I had not declared the LTA exemption when my finance department asked me for the income tax projected investments for the financial year 2016-17.
    In January 2017 I have to submit the proofs for the investments made in the financial year 2016-17.
    During this time I have made a trip within India with my family and I would like to claim this as LTA. However, my finance dept is saying that I cannot claim this LTA exemption at this point since I did not declare it in advance as part of the projected investments and exemptions.
    1.Is this correct?
    2.Also, if I cannot do this through the finance department, is it possible to claim this as part of Income Tax returns filing for the financial year 2016-17?

    • Deepesh Raghaw says:

      Dear Vikram,
      As I understand, LTA benefit is only available through your employer and thus has to be part of your salary structure. You can not claim it while filing income tax return. Suggest you verify this with a Chartered Accountant.

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