Income Tax Calculation – Simplified

Salaried employees who are totally new to the world of income tax, thinks that income tax liability calculation is the hardest thing they could ever understand. But, you should know about calculating income tax so that you can decide your own when to make your actual income tax return.

According to Income-Tax Act, 1961, the taxpayer is required to file return for each of the tax years, income tax return gives the particulars of earnings and the taxes on those earnings. It also has the details of the income tax already paid by you (taxpayer).

Income calculation is the first step for tax saving. You should first assess how much you have to pay to the government as income tax, and then only you can plan to save.

Before starting to calculate your income tax, you must be clear about the incomes that you have or you have earned. At the outset, you have to add all the incomes that you have which is said Gross total Income.

Income to be added include your compensation or salary (including the basic, dearness allowance (DA), bonus, commission, allowances, festival bonus etc.) plus any interest that you have earned from your savings bank account, fixed deposits or any other debt instrument.

There are certain types of incomes which are not chargeable to tax at all and you can deduct it from your Gross total Income before calculating your tax liability like LTA / LTC, HRA, Transportation Allowance, Medical reimbursements etc. But, to avail this benefit, you need to meet certain conditions.

After this, certain investment amounts, expenses amounts etc. are deductible from your taxable income and in this too you need to meet certain conditions.

Among all the deductions available in different sections the most popular deductions are available under section 80C of the Income Tax Act, 1961.

Under section 80C you can claim deduction by investing in specified instruments like Provident Fund (PF), Voluntary Provident Fund (VPF), Life Insurance Premiums etc.

Your Gross total income gets reduced from the amount of deduction you claim and the income remaining after these deductions is known as Total Income or Taxable Income.
Total Income/Taxable Income = Gross Total Income – Deduction
You have to calculate and pay income tax on Total Income.

Now, to calculate income tax you have to understand concept of slabs / brackets and rates. Income upto a certain limit is tax free that means no tax has to be paid if your income is below that limit (it is also known as Basic Exemption Limit). This limit is different for different assessee, which is given below (relevant for Financial year 2010-11):

For resident woman below 65years – Rs. 190000
For any other individual (below 65 years) and every HUF – Rs. 160000/-
For resident senior citizen (who is 65years or more)-Rs. 240000/-

Once your income crosses this basic exemption limit, then the income above that limit is taxed. The rate of income tax varies from different range of income. Each of these limits or the range of incomes that have different income tax rates applicable is called an income tax slab or an income tax bracket. These slabs and the rates can be changed every year in the budget.

As earlier said, out of the total tax payable by you, some might already have been paid by you. Thus after calculating, tax liability deduct TDS (TDS deducted by your employer or deducted by bank etc. ) if any and Advance Tax if any paid by you.

Tax Payable = Total Tax Liability – TDS – Advance Tax
So, the tax remaining is to be paid by you at the end of the year.

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