“Today it takes more brains and effort to make out the income tax form than it does to make the income”

-Alfred E. Neuman

 

Let us see if we can simplify this seemingly complicated monster. Before we get to the calculation part we need to understand a few terms that are used here.

Financial Year (FY) – This refers to the period between 1 April – 31 March of the following year and all the financial reporting made during the same.

Assessment Year (AY) – This refers to the period between 1 April -31 March of the year following the Financial Year and is the period in which the income is assessed. For E.g. For the current financial year FY2015-16 the Assessment Year is AY2016-17.

Previous Year (PY) – This is the year preceding the Assessment Year. For e.g. In the Assessment year 2015-16, the income is assessed for the year 2014-15.

Taxable Income – For Residents all incomes earned in India as well as global are taxable. However for NRIs only incomes earned in India are Taxable.

Receipts – Receipts are categorized as Revenue Receipts and Capital Receipts. Revenue receipts refer to incomes like salaries, rents, interest on investments etc. and are taxable unless there is a specified exemption. Capital receipts refer to incomes due to sale of property, loans, gifts etc. and are usually exempt from tax unless specified otherwise.

Income Tax Slabs – Depending on the income earned and the age there are four slabs under which the incomes tax rates are applicable.

  • No tax or Nil
  • Income taxed at 10%,
  • Income taxed at 20%
  • Income taxed at 30%.

The Income categories for these slabs are divided into three groups based on age

  • Below 60 Years of age
  • Between 60 -80 years of age (Senior Citizens)
  • Above 80 years of age (Very Senior Citizens)

Income Heads

First we need to list down all Incomes. Incomes may classified under different heads as per the Income Tax Act. They are the following

Income from Salary

Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The aggregate of these incomes after exemptions is taxable. There are certain allowances under this head which are taxable after a limit. There has to be an employer employee relationship for Income to be under this Head.

Income from House Property

Any Residential or Commercial property you own is taxed. Even if the property has not been let out it is considered as earning rental income. However it is taxed on its capacity to ear rental income and not actual rent.

Income from Business or Profession

This income is under the head “Profits and Gains of Business or Profession”. Here income from any trade, commerce, manufacturing etc. is taxable after deducting specified expenses

Income from Capital Gains

Any income from transfer of assets like property, financial investments, jewellery etc. comes under the head of Capital Gains.

Income from Other sources

Any income that is not chargeable under the above four heads and not exempt from tax is placed under this head. E.g. Bank Deposits, Lottery etc.

The sum of the income under the above heads is the Gross Income.

Deductions

Deductions are allowed from the Gross Income under Section 80 of the Income Tax Act for Tax Planning purposes to reduce your outflow of tax. These include investments in PPF, Sukanya Samriddhi account, ELSS, Insurance, NSC etc. to name a few. You could use the tax planning tool to find out more options under this section.

The Gross Income – Deductions = Taxable Income

The respective tax slabs are applied to this to calculate the Tax Payable. (Check Annexure)

Tax Deducted at Source (TDS) – TDS is deducted by banks on fixed deposits and by employers on your annual income. You can deduct all the TDS amounts from your Tax Payable amount.

The Tax Payable – TDS = Final Tax Payable.

Annexure

Tax Rates for Assessment Year 2016-2017

For Individuals below 60 years of age

Taxable Income

Tax Rate

Up to Rs. 2,50,000

Nil

Rs. 2,50,000 to Rs. 5,00,000

10% of the amount exceeding Rs 2,50,000

Rs. 5,00,000 to Rs. 10,00,000

Rs.25,000 + 20% of the amount exceeding 500,000

Above Rs. 10,00,000

Rs.125,000 + 30% of the amount exceeding 1,000,000

 

For Senior Citizens above 60 but below 80 years of age

Taxable Income

Tax Rate

Up to Rs. 3,00,000

Nil

Rs. 3,00,000 – Rs. 5,00,000

10% of the amount exceeding 300,000

Rs. 5,00,000 – Rs. 10,00,000

Rs.20,000 + 20% of the amount exceeding 500,000

Above Rs. 10,00,000

Rs.120,000 + 30% of the amount exceeding 1,000,000

 

For Super Senior Citizens above 80 years of age

Taxable Income

Tax Rate

Up to Rs. 5,00,000

Nil

Rs. 5,00,000 – Rs. 10,00,000

20% of the amount exceeding 500,000

Above Rs. 10,00,000

Rs.100,000 + 30% of the amount exceeding 1,000,000

In addition to the above tax rates there is an Education Cess (3%) and Surcharge if Taxable Income Exceeds 1 Crore.

a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

b) Education Cess:  The amount of income-tax and the applicable surcharge shall be further increased by education cess calculated at the rate of two per cent of such income-tax and surcharge.

c) Secondary and Higher Education Cess: The amount of income-tax and the applicable surcharge shall be further increased by secondary and higher education cess calculated at the rate of one per cent of such income-tax and surcharge.

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