How to calculate taxable income
Definition of Taxable income
Taxable income: Income which is calculated after deducting all the deductions from your income from various sources. The income so calculated is subject to pay income tax. In other words, you can say that it is the total assessable income less all deductions allowed or tax free allowances.
Calculation of taxable income
Incomes included calculating taxable income
To calculate taxable income, following items will be taken while calculating total income:
• Salary from 1 April, 20115 to 31 March, 2016: The salaried gets a certificate (Form 16) from his employer in the month of May- June. This certificate has the description of salary, allowances and Tax Deducted at Source (TDS). Gross salary includes all the allowances (like house rent allowance, leave allowance, travel allowance, etc.) provided by employer. Tax is levied on all these allowances but you can get exemption or deduction on these allowances if you fulfill some conditions. The main parts of salary are basic salary, Dearness Allowance (DA), House Rent Allowance (HRA), Transportation allowance, medical reimbursement, Leave Travel Allowance (LTA), Bonus/ variable pay.
• Business or Profession: Any income from business or profession will be included in taxable income.
• Income from real estate: All income from real estate is included in taxable income.
• Capital gains: Capital gain is the gain from selling any property or shares. It could be either long term capital gain or short term capital gain. Tax is not levied on long term capital gain so it is not added while making calculations but short term capital gain is added as tax is levied upon it. Please note that if the property is sold within 3 years of its purchase (1 year in case of shares) then it is a short term capital gain but if the property is sold after 3 years of its purchase (1year in case of shares) then it is a long term capital gain.
• Income from other sources:Any other incomes than above is included in this category, like: - Interest received from saving bank account- Interest received from post office savings like NSC, KVP, IVP, MIS etc.- Interest received from loan granted- Interest received from company deposits- Interest received from debentures/ bonds- Income from winning a lottery - Interest received from government securities
• Income excluded while calculating taxable income
• Following incomes are not included in taxable income and also don't have any upper limit:
• Interest received on PPF/ GPF/ EPF.
• Interest received on GOI tax free bonds
• Dividend received on shares and mutual funds
• Interest received on savings account of post office
• Long term capital gain on shares and equity mutual funds (if security transaction tax is paid on transaction)
• Gifts received from close relatives (if received from far away relatives, then tax will be levied on whole amount if the gift value of more than Rs. 50,000).
• Agricultural income
• Property received in heritage shall be tax free but tax will be levied on any rent received on it.
• If you submit the receipt of rent paid to your employer then HRA is assumed to be an expense and thus it shall not be included in taxable income.
• If you receive House Rent Allowance (HRA) from your employer and your house is on the name of your parents or your spouse then you can avail tax exemption by paying them annual rent through a cheque (subject to some conditions).
• Transportation allowance less than Rs. 800 is tax free
• Medical reimbursement allowance less than Rs. 15,000 is not included in calculating tax
• LTA is tax free twice in 4 years (1 block).
• Thus you can now easily calculate and pay your income tax. You can also pay income tax online. Use the appropriate form for this purpose.