Prior to filing the Income Tax Return (ITR) before July 31, individuals need to calculate the total taxable income to be able to estimate the correct amount of tax that needs to be paid. An individual can earn income from different sources such as salary, house property, and investments in shares and mutual funds.
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The total taxable income is calculated based on the source of income of the individual, which as per tax law can be divided into the following heads:
Income from salary
Calculating total taxable income from salary can be easily done through Form 16. All salaried individuals receive Form 16, which is a certificate of their salary components and TDS deducted and deposited by the employer in a financial year.
If a salaried individual opts for the old tax regime, he/she can claim certain tax exemptions by providing documentary proof. These exemptions and deductions include standard deduction of Rs 50,000, house rent allowance and leave travel concession.
Those who do not receive Form 16 can also calculate their taxable salary income from their salary slips. Taxable income of a pensioner is calculated under the head 'Income from salary'.
Income from property
House properties are divided into three categories – self-occupied property, rental property and deemed to be let out – for the purpose of calculating taxes.
An individual can claim any two houses as self-occupied property and income from these are considered to be nil.
To calculate income from rental property, the individual will have to find out the fair rent or the expected rent from a similar property and municipal value. The higher of the two values is considered to be the expected rent of the property.
This amount is compared with the actual rent received and the higher value is taken as the Gross Annual Value (GAV) of the house. The Net Annual Value of the property is GAV minus municipal taxes paid during the year. Thirty percent of the Net Annual Value is deducted as standard deduction for expenses incurred from maintaining the property.
An individual can also deduct the total amount of interest paid on the home loan if the property was purchased with the help of any such borrowing. The final figure is the income from house property.
Capital gains
The sale of capital assets such as house, mutual fund or shares attracts short-term and long-term capital gains tax which is calculated based on the period for which the asset was held by the individual. There are different income tax rates for capital gains ranging from 10 to 20 percent.
Business and profession
Income that an individual earns from freelancing or some other business or profession like lawyers and CAs come under this category. Here, individuals can claim profits/gains or losses for running a business such as travelling expenses, stationary expenses and overhead expenses.
Income from other sources
Interest earned from bank accounts, fixed deposits, Post Office savings scheme, dividends from company shares or family pension fall under income from other sources.
Calculating tax liability
Once the individual calculates the income earned from all the sources, he/she will have to compute the 'Gross taxable income' for the financial year. Those who are still following the old tax regime can claim deductions under Section 80C, 80D, 80CCD, 80GG etc from the gross taxable income. After subtracting the deductions, the individual will get the net taxable income on which the tax will be calculated.
