Will you be filing ITR for the first time in 2020? You first need to know your total taxable income, followed by the computation of income tax as per the applicable tax slab. While calculating income tax manually might appear daunting, it isn’t as complicated if you thoroughly understand the computation process.
Every individual under 60 years with an annual income of more than Rs 2.5 lakh is required to file Income Tax Return (ITR) as per the Income Tax Act. For seniors between 60 and 80 years, this limit is above Rs 3 lakh, and for super seniors above 80 years, it is above Rs 5 lakh. In fact, even people falling under the nil tax bracket are advised to file ITR.
To successfully and accurately file ITR, one should first know his/her total taxable income for the year. The annual income will decide the tax slab an individual falls under and the rate at which the tax will be calculated. So, how to calculate income tax? Here are the things you should know.
Different sources of income
According to the IT Act, an individual can have five different sources of income. They are:
- Salary - Income earned through salary
- House property - Generally consists of rental income earned from house property
- Business or profession - Income earned from business or profession
- Capital gains - Long-term and short-term capital gains from the sale of capital assets
- Other sources - All the other incomes, like interest, dividends, taxable gifts, etc. that cannot be categorised under the four sources listed above
Any income an individual earns can only be categorised under these five sources.
Computing gross total income and claiming deductions
The Gross Total Income (GTI) is calculated by setting off any losses under any of the income heads and then adding the income from all the five sources. Once you have the GTI, the next step is to claim relevant deductions from the income.
Chapter VI-A of the IT Act offers a wide range of deductions from Section 80C to Section 80U. You can claim deductions under relevant sections, and this will help you reduce your GTI and the income tax you are required to pay.
Understanding income tax slabs
The GTI left after claiming deductions will be your total taxable income for the year. Income tax slabs in India are divided based on income in the financial year. The income range also differs for different age groups. There are three different age groups:
- Under 60 years
- Between 60 and 80 years
- Above 80 years
For instance, for an individual under 60 years, the tax slabs are as follows:
| Tax slabs | Tax rates |
|---|---|
| Annual income of up to Rs 2.5 lakh | Nil |
| Annual income between Rs 2.5 lakh and Rs 5 lakh | 5% tax on the income above Rs 2.5 lakh + 4% cess |
| Annual income between Rs 5 lakh and Rs 10 lakh | Rs 12,500 + 20% tax on the income above Rs 5 lakh + 4% cess |
| Annual income above Rs 10 lakh | Rs 1,12,500 + 30% tax on the income above Rs 10 lakh + 4% cess |
Based on your total taxable income and income tax slab, you can calculate your tax liability. For instance, if your taxable income is Rs 800,000, income tax computation will be as follows:
| Taxable income | Rs 8,00,000 |
| Income tax on income of up to Rs 2.5 lakh | Rs 0 (nil income tax for income of up to Rs 2.5 lakh) |
| Income tax on income from Rs 2.5 lakh to Rs 5 lakh | Rs 12,500 (5% of Rs 2.5 lakh as income is above Rs 5 lakh) |
| Income tax on income between Rs 5 lakh and Rs 10 lakh | Rs 60,000 (20% of income above Rs 5 lakh, which is Rs 3 lakh in this case) |
| Total income tax liability | Rs 72,500 |
There is also a 4% cess applicable to the tax amount. So, the total tax liability of an individual with a taxable income of Rs 8 lakh is Rs 75,400 [Rs 72,500 + Rs 2,900 (4% of Rs 72,500)].
Filing ITR
Now that you know how income tax is calculated, the next step is to file ITR. By filing ITR, you will know whether you are eligible for a tax refund or need to pay additional taxes. You can compare your income tax liability with the income tax already paid in the form of Tax Deducted at Source (TDS)/Tax Collected at Source (TCS), advance tax or self-assessment tax.
If the total tax paid is higher than your tax liability, you will be eligible for a tax refund. If the tax liability is higher than what is already paid, you can pay the difference while filing ITR.
Calculating your income tax liability
While the manual calculation of income tax is manageable if you have a single source of income and not claiming deductions, things can get challenging for multiple income sources and deductions. In such cases, you can consider using an online income tax calculator.
The calculator will allow you to add income from all the different sources and claim all the relevant deductions, making it easier for you to know your income tax liability. Moreover, the calculation will also be quick and free from errors that manual calculations are generally prone to.
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