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5 Steps to Calculate Individual Tax Liability
Tax payable is dependent on parameters like nature of income, sources, age of the taxpayer, eligible exemptions/investments.
The Income Tax Act, 1961 is a comprehensive statute that governs taxation in India. Levy of tax depends on the residential status of a taxpayer during every tax year (April – March). Indian residents must pay tax on the global income in India i.e. income earned in India and abroad. Non-residents must pay taxes only on the Indian income.
Step 1: Calculate your gross income
There are five heads of income:
|
Head of income |
Income covered |
|
Salary |
Income from salary and pension, includes items like house rent allowance, gratuity etc. There are rules prescribed for certain exemptions and valuations of perquisites |
|
Business and Profession |
Profits earned by self-employed individuals, lawyers, etc. |
|
House Property |
Renting a house property |
|
Capital Gains |
Income generated from transfer of mutual fund, shares, house, etc. |
|
Other Sources |
Income from savings bank account, interest on fixed deposits, etc. |
Step 2: Arrive at your net taxable income
Certain tax deductions reduce your taxable income by investing/saving. Some illustrative examples are: -
|
Type |
Eligibility p.a. |
|
Standard Deduction |
Rs.50,000 can be availed by all salaried taxpayers irrespective of making investment or expenditure. |
|
Section 80C |
You can claim up to Rs.1.5 lakh for investments/expenses like PPF, PF, housing loan, term insurance premium, children tuition fees etc. |
|
Section 80CCD(1B) |
For investments in NPS, you can claim Rs.50,000 deduction, over and above Rs.1.5 lakh limit under section 80C. |
|
Section 80D |
Premiums paid towards the health insurance policy of your family and parents. |
|
Section 80TTA |
Savings account interest up to Rs.10,000. |
|
Section 24 |
In case of a home loan, the interest portion of the EMI paid for the financial year can be deducted, up to a maximum of Rs.2 lakh |
Step 3: Arriving at your net taxable income and calculating your gross tax liability
By subtracting, all the eligible deductions from the gross taxable income, you get the net taxable income on which tax is payable basis your tax slab which are: -
|
Total income in Rs. |
Tax rates |
|
Up to 250,000(a)(b) |
NIL |
|
250,001 to 500,000(c) |
5% |
|
500,001 to 1,000,000 |
20% |
|
1,000,001 and above(d) |
30% |
New tax regime:
Alternatively, an individual may opt to compute tax in new tax regime. A new tax regime is beneficial for those people who do not want to use various deductions and exemptions like HRA, Standard deduction, LTA etc. An individual can choose any of the tax regimes each year as per the benefits and change it each year. The new tax regime has a lower tax rate but fewer deductions, while the old one has a higher tax rate, but more deductions are allowed.
|
Total Income in Rs. |
Tax Rates(d) |
|
Up to 250,000 |
NIL |
|
250,001 to 500,000(c) |
5% |
|
500,001 to 750,000 |
10% |
|
750,001 to 1,000,000 |
15% |
|
1,000,001 to 1,250,000 |
20% |
|
1,250,001 to 1,500,000 |
25% |
|
1,500,001 and above(d) |
30% |
a) For resident individual aged sixty or above but less than eighty, basic exemption limit is Rs. 300,000.
b) For resident individual aged eighty or above, basic exemption limit is Rs. 500,000.
c) Rebate from tax of up to Rs. 12,500 or 100 per cent of the tax whichever is less is available for resident individual whose total income does not exceed Rs. 500,000.
d) Tax rates will further increase by applicable Surcharge (subject to marginal relief) and Health and Education Cess (‘Cess’) as outlined below:
Exceptions to the Tax slab:
All income is not taxed on slab basis. Capital gains is an exception and are taxed depending on the asset you own and how long you’ve had it. The holding period determines if an asset is long term or short and also differs for different assets.
Step 4: Arrive at your net tax liability
If your taxable income is more than Rs.5 lakhs, add the health and education cess of 4% to your tax to see the final amount payable. High income earners will pay surcharge as under: -
|
Total income in Rs. |
Surcharge* |
|
Exceeds 5,000,000 but lesser than 10,000,000 |
10% |
|
Exceeds 10,000,000 but lesser than 20,000,000 |
15% |
|
Exceeds 20,000,000 but lesser than 50,000,000 |
25% |
|
Exceeds 50,000,000 |
37% |
*Subject to marginal relief. Surcharge is computed on tax plus cess.
Step 5: Deduct pre-paid taxes
Deduct pre-paid taxes e.g., TDS, TCS, advance tax paid for the year etc. The resulting tax payable will be rounded off and must be paid as self-assessment tax before submitting the return of income.
Example: Suppose a person earns a salary of Rs. 12 lacs and invests Rs. 1.5 lacs towards tax-saving mutual funds. We can calculate the tax liability of that person as below:
|
Particulars |
Tax under old regime (Rs.) |
Tax under new regime (Rs.) |
|
Gross taxable income |
12,00,000 |
12,00,000 |
|
Less: |
|
|
|
Deductions under chapter VI-A – 80C |
(1,50,000) |
- |
|
Taxable Income |
10,50,000 |
12,00,000 |
|
Tax amount for Rs. 0 - 2.5 lacs |
0 |
0 |
|
Tax amount for Rs. 2.5 lacs – Rs. 5 lacs |
Tax @5% = 0.05*(500000- 250000) = 12,500 |
12,500 |
|
Tax amount for Rs. 5 lacs – Rs. 7.5 lacs |
Tax @20% = 0.2* (7,50,000 -5,00,000) = 50,000 |
Tax @10% = 0.1* (7,50,000 -5,00,000) = 25,000 |
|
Tax amount for Rs. 7.5 lacs – Rs. 10 lacs |
Tax @20% = 0.2* (10,00,000 -7,50,000) = 50,000 |
Tax @15% = 0.1* (10,00,000 -7,50,000) = 37,500 |
|
Tax amount for Rs. 10 lacs – Rs. 10.5 lacs |
Tax @30% = 0.3* (10,50,000 -10,00,000) = 15,000 |
|
|
Tax amount for Rs. 10 lacs – Rs. 12 lacs |
|
Tax @20% = 0.2* (12,00,000 -10,00,000) = 40,000 |
|
Total Tax amount |
127,500 |
115,000 |
|
Add: Education cess |
5,100 |
4,600 |
|
Total tax liability |
132,600 |
119,600 |
Note: The above tax liability has been calculated assuming that the individual is below the age of 60 years.
Key Learnings:
- In India, tax rates are progressive and higher-income attracts higher taxes.
- One can reduce their tax liability by doing permitted investments or spending as per various sections like 80 C, 80 D, etc.
- If you are eligible to pay tax, ensure you pay them and file timely returns to avoid any interest/penalties and other consequences.
Note:
Please be informed that we have considered the tax rates applicable for the financial year 2021-22, but the rates and clauses may change over time. The details mentioned in this chapter is for educational purpose only. We would advise you to consult a tax advisor before making any transaction.
Disclaimer:
ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, filing of tax related services are not Exchange traded products and hence, all disputes with respect to this activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Information mentioned herein is based on the prevailing tax laws and tax laws are subject to change from time to time. Investors accessing this information do hereby agree to consult with a qualified tax advisor prior to taking any investment/ tax related decisions. Please verify the veracity of all information on your own before considering it as final tax computation. The contents herein mentioned are solely for informational and educational purpose.
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