Income-tax is a tax levied on the total income of the previous year of every person (Section 4).
A person includes:
- An individual
- Hindu Undivided Family (HUF)
- Association of Persons (AOP)
- Body of Individuals (BOI)
- A firm
- A company
- Etc.
(1) Total Income and Tax Payable
Income-tax is levied on a person's total income. This has to be computed as per the rules laid down in the Income-tax Act, 1961.
Let’s go through the steps to compute the total income of an individual — with examples included.
Step 1 – Determination of Residential Status
Your residential status determines how much of your income is taxable in India.
Example: If Mr. Raj, an Indian citizen, lives and works in Dubai for most of the year and visits India for only 90 days, he may be considered non-resident. Only his income earned or received in India would be taxable in India.
Step 2 – Classification of Income Under Different Heads
Income is grouped into 5 categories:
- Salaries
- Income from House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
Example: Mrs. Anjali earns ₹8,00,000 as salary, ₹1,20,000 from renting out a flat, ₹15,000 interest from fixed deposits, and ₹50,000 profit from sale of mutual funds.
Her income is divided like this:
- Salaries: ₹8,00,000
- House Property: ₹1,20,000
- Capital Gains: ₹50,000
- Other Sources: ₹15,000
Step 3 – Computation of Income Under Each Head
Each head has specific rules. Standard deductions, allowances, or expenses may be allowed.
Example: For Salaries, a standard deduction of ₹50,000 is allowed. So, from ₹8,00,000 salary → ₹7,50,000 is taxable.
Step 4 – Clubbing of Income (Spouse, Minor Child, etc.)
If you divert income to close relatives to reduce tax, some of that income may be “clubbed” back with your own.
Example: Mr. Kumar invests ₹5 lakhs in fixed deposits in his minor son’s name. Interest earned (say ₹25,000) will be clubbed with Mr. Kumar’s income.
Step 5 – Set-off or Carry Forward of Losses
Losses from one source can be adjusted against gains from another, subject to rules.
Example: Mr. Ravi has a ₹1,00,000 profit from shares (Capital Gain) and a ₹60,000 loss from a second property (House Property Loss). His net taxable income = ₹1,00,000 - ₹60,000 = ₹40,000
Step 6 – Computation of Gross Total Income
Add up income from all heads after adjustments:
- Salaries: ₹7,50,000
- House Property: ₹1,20,000
- Capital Gains: ₹50,000
- Other Sources: ₹15,000 Gross Total Income = ₹9,35,000
Step 7 – Deductions from Gross Total Income
You can claim deductions under sections like 80C, 80D, 80G etc.
Example: Mrs. Anjali invested ₹1,50,000 in PPF (80C) and paid ₹20,000 towards health insurance premium (80D). Total deductions = ₹1,70,000
Step 8 – Total Income
Subtract deductions from Gross Total Income:
₹9,35,000 – ₹1,70,000 = ₹7,65,000
Rounded off to nearest ₹10 → ₹7,65,000
Step 9 – Apply Tax Rates
Now apply slab-wise tax rates. For individuals under 60 (FY 2025-26 – old regime):
- Up to ₹2,50,000: Nil
- ₹2,50,001–₹5,00,000: 5% = ₹12,500
- ₹5,00,001–₹10,00,000: 20% of ₹2,65,000 = ₹53,000 Total = ₹65,500
Step 10 – Surcharge and Rebate (Section 87A)
Surcharge:
Applicable only if total income exceeds ₹50 lakhs.
Rebate u/s 87A:
Available if income is ≤ ₹5,00,000. In our example (₹7,65,000) – Not eligible.
Step 11 – Health and Education Cess
Cess @4% on ₹65,500 = ₹2,620 Total Tax Payable = ₹68,120
Step 12 – Advance Tax & TDS
If total tax exceeds ₹10,000 in a year, advance tax applies.
Example: If Mr. Ramesh earns ₹10,00,000 annually, he must pay advance tax in 4 installments. His employer may deduct TDS from salary to cover this.
Step 13 – Tax Payable or Refundable
Finally, subtract TDS or advance tax already paid.
Example: Mrs. Anjali’s TDS from salary = ₹65,000
Her total tax = ₹68,120
Tax Payable = ₹3,120
She must pay this as self-assessment tax before filing her return.
If she had already paid more than required, she would get a refund.
