Computation of Total Income And Tax Payable By An Individual - Step By Step Procedure-edueasify

Computation of Total Income And Tax Payable By An Individual: Income tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. The following steps have to be followed for computing the total income of an individual assessee. Let’s check the Computation of Total Income And Tax Payable By An Individual – Step By Step Procedure.

Step to be Followed for Computation of Total Income And Tax Payable

  • Step 1 – Determination of Residential Status
  • Step 2 – Classification of Income under five Heads
  • Step 3 – Computation of Income under each Head
  • Step 4 – Clubbing of Income of Spouse, Minor Child, etc.
  • Step 5 – Set off Current Year Losses and Brought Forward Losses
  • Step 6 – Computation of Gross Total Income
  • Step 7 – Deductions from Gross Total Income
  • Step 8 – Computation of Total Income
  • Step 9 – Application of Rates of Tax on Total Income in case of an Individual
  • Step 10 – Surcharge and Rebate
  • Step 11 – Health and Education Cess on Income Tax
  • Step 12 – Examine the Applicability of AMT
  • Step 13 – Examine whether or not to exercise the option under section 115BAC for availing concessional Tax Slab Rates
  • Step 14 – Credit for Advance Tax, TDS, and TCS
  • Step 15 – Tax Payable/ Tax Refundable
  • Step 16 – Return of Income

Let’s Check the Steps in detail for the Computation Of Total Income And Tax Payable by an Individual

Computation Of Total Income And Tax Payable by an Individual-edueasify

By reading the below-mentioned steps, you are able to file your own Income Tax Return. Recently, New Income Tax Rule specified some situations where the Filling of income tax returns is mandatory. so, check that you are falling into that category or not.

Step 1: Determination of Residential Status

The residential status of an individual has to be determined to ascertain which income is to be included in computing his total income (TI). In the case of an individual, the duration for which he is present in India in the relevant previous year or relevant previous year and the earlier previous years, as the case may be, determines his residential status.

Based on the days spent by him in India, he may be a resident or a non-resident.

  • Resident
    • Resident and ordinarily resident
    • Resident but not ordinarily resident
  • Non-resident

An Indian citizen who is a deemed resident in India would be a resident but not ordinarily resident in India.

Step 2: Classification of Income under Five Heads

An individual may earn income from different sources. Under the Income-tax Act, 1961, for computation of TI, all income of an individual taxpayer can be classified into five different heads of income.

  1. Salaries
  2. Income from house property
  3. Profits and gains of business or profession
  4. Capital Gains
  5. Income from other sources

Step 3: Computation of Income under each Head

Compute the Income under each head by subtracting the exemptions and deductions allowable under that head.

Step 4: Clubbing of Income of Spouse, Minor Child, etc.

In the case of individuals, income tax is levied on a slab system on the total income. The tax system is progressive i.e., as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child, etc. to minimize their tax burden.

In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising from certain persons (like a spouse, minor child, etc.) has to be included in the income of the person who has diverted his income for the purpose of computing tax liability.

Step 5: Set off current year Losses and Brought Forward Losses

An assessee may have different sources of income under the same head of income. He may have profited from one source and lost from the other. Similarly, an assessee can have a loss under one head of income and profits under another head of income.

There are provisions in the Act for allowing inter-source and inter-head adjustment in certain cases.  The losses are allowed to be set off in the following series

  • Inter-source set-off of losses
  • Inter-head set-off of losses
  • Set-off of brought forward losses
  • Set-off of unabsorbed depreciation
  • Carry forward losses and unabsorbed depreciation.

Step 6: Computation of Gross Total Income

Gross Total income = Add Income computed under each head → apply clubbing provisions → apply the provisions for set-off and carry forward of losses.

Step 7: Deductions from Gross Total Income

There are deductions under Chapter VI-A prescribed from Gross Total Income. These deductions are of the following types.

    • Deductions in respect of certain payments
    • Deductions in respect of certain incomes
    • Deductions in respect of other incomes
    • Other deductions

Step 8: Computation of Total Income

Now, Compute your Total Income by deducting all the applicable Deductions under Chapter VI-A from the Gross Total Income.

Total Income should be Rounded off to the nearest multiple of 10.

Step 9: Application of Rates of Tax on Total Income in case of an Individual

Total income (in)

Rate of Tax

  • Up to Rs. 2,50,000 (in case of an individual below 60 years)
  • Up to Rs. 3,00,000 (in case of an individual who is 60 years or more but less than 80 years and resident in India)
  • Up to Rs. 5,00,000 (in case of an individual who is 80 years or more and resident in India)

Nil

Rs. 2,50,001/ 3,00,001, as the case may be to Rs. 5,00,000

5%

Rs. 5,00,001 to Rs. 10,00,000

20%

Above Rs. 10,00,000

30%

Read: Taxation of Gifts | Section 56(2)(X) of the IT Act, 1961

Step 10: Surcharge and Rebate

The rate of Surcharge on Income Tax is applicable as follows while Computation of Total Income And Tax Payable By An Individual.

Sr. No Particulars Rate of Surcharge on Income Tax
1 Where the TI (including dividend income and capital gains chargeable to tax u/s 111A and 112A) > Rs. 50 lakhs but < Rs. 1 crore

10%

2 Where the TI (including dividend income and capital gains chargeable to tax u/s 111A and 112A) > Rs. 1 crore but < Rs. 2 crore

15%

3 Where TI (excluding dividend income and capital gains chargeable to tax u/s 111A and 112A) > Rs. 2 crores but < Rs. 5 crores

25%

The rate of surcharge on the income tax payable on the portion of dividend income and capital exceeding gains chargeable to tax u/s 111A and 112A

Not Exceeding 15%

4 Where TI (excluding dividend income and capital gains chargeable to tax u/s 111A and 112A) > Rs. 5 crores

37%

The rate of surcharge on the income tax payable on the portion of dividend income and capital exceeding gains chargeable to tax u/s 111A and 112A

Not Exceeding 15%

5 Where TI (excluding dividend income and capital gains chargeable to tax u/s 111A and 112A) > Rs. 2 crores in cases not covered under 3 and 4 above

15%

Rebate under section 87A: Rebate of up to Rs. 12,500 for resident individuals having total income of up to 5 lakh However, rebate u/s 87A is not available in respect of tax payable @10% on long-term capital gains taxable u/s 112A.

Also Check: TDS on Virtual Digital Asset | Section 194S

Step 11: Health and Education cess on Income Tax

Health and Education cess is added at 4% of income-tax and surcharge if applicable.

Total Tax Liability = (Tax on Total Income at applicable rates + Surcharge at applicable rates, + HEC@4%)- Rebate u/s 87A, if Total Income < Rs. 5 lakhs.

Step 12: Examine the Applicability of AMT

    • If an Individual is claiming deduction u/s 10AA or u/s 35AD or section 80JJAA, 80QQB, and 80RRB and his adjusted Total Income exceeds Rs. 20 lakhs, AMT provisions will apply.
    • Compute AMT (18.5% of adjusted total income plus surcharge, if applicable plus HEC @ 4%)
    • if AMT > tax computed as per regular provisions, adjusted Total Income would be deemed to be Total Income.
    • Tax is leviable @ 18.5% of adjusted total income plus surcharge if applicable plus HEC @ 4%.
    • Tax credit to be C/F = AMT less tax computed as per regular provisions.
    • Individuals exercising options u/s 115BAC are not liable to alternate minimum tax u/s 115JC.

Step 13: Examine whether or not to exercise the option under section 115BAC for availing concessional tax slab rates

As per section 115BAC, individuals have an option to pay tax in respect of their total income other than income chargeable to tax at a special rate at the following concessional rate. If they do not avail of certain exemptions.

    • The standard deduction under salary head,
    • Interest on housing loan on the self-occupied property,
    • deduction under Chapter VI-A,
    • Set off of b/f loss, and Depreciation if they relate to any of the above deductions,
    • Set off of loss from house property against income under any other heads

Total income (in)

Rate of Tax

Upto Rs. 2,50,000.00

Nil

From Rs. 2,50,001.00 to Rs. 5,00,000.00

5%

From Rs. 5,00,001.00 to Rs. 7,50,000.00

10%

From Rs. 7,50,001.00 to Rs. 10,00,000.00

15%

From Rs. 10,00,001.00 to Rs. 12,50,000.00

20%

From Rs. 12,50,001.00 to Rs. 15,00,000.00

25%

Above Rs. 15,00,000.00

30%

Surcharge would be attracted at the same rates and above the same thresholds of total income as under the regular provisions of the income tax act, of 1961. Further, HEC @ 4% would be attracted on income tax so calculate plus surcharge, if applicable.

Examine the tax liability computed under the regular provision of the act with the tax liability computer under section 115BAC. Thereafter, if the Tax Liability is lower as per the provisions u/s 115BAC, then opt to pay tax as per section 115BAC.

Step 14: Credit for Advance Tax, TDS, and TCS

Net Tax Liability = Total tax Liability- TDS- TCS- Advance Tax Paid

Step 15: Tax Payable and Refundable

    • Net Tax Liability should be rounded off to the nearest multiple of Rs. 10.
    • The Assessee has to pay the amount of tax payable at the timing of the return of income.
    • If any refund is due, Assessee will get the same after filing the return of income.

Step 16: Return of Income

The Income Tax Act,1961 contains provisions for the filing of the return of income. Return of Income is the format in which the assessee furnishes information as to his total income and tax payable.

The act has prescribed the due dates for filing a return of income in the case of a different assessee. In the case of an Individual, the due date for filing a return of income is 31st July.

An individual is required to file a return of income in the form of ITR 1/2/3/4 as the case may be, as applicable to him. if his total income exceeds the basic exemption limit or he fulfills the other conditions.

Recommended Blog: Income Tax Return Filling is Mandatory in 10 Cases

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