How to calculate taxable income for ITR filing The Income Tax Act, 1961 has divided the income into five categories. Depending on the sources of the incomes, the income tax return form will be decided. Read on to know how to calculate taxable income for ITR filing
An individual has to calculate total income from all sources before filing an income tax return (ITR). The Income Tax Act, 1961, has divided the sources of income into five categories:Income from salaryIncome from house propertyIncome from capital gainsIncome from business and professionsIncome from other sourcesDo note that while calculating taxable income, one needs to know the income tax regime opted for. This is because certain tax exemptions and deductions can be claimed only if the individual is planning to opt for the old tax regime. Individuals opting for the new tax regime will not be eligible to claim certain tax exemptions and deductions.
It is important for an individual to calculate the total taxable income under each income head mentioned above to choose the correct ITR form to file the tax returns. The gross total taxable income will be calculated on the basis of the income calculated under each income head.
Also Read: Which ITR form is applicable to your incomes?
On this taxable income, an individual can claim deductions under sections 80C, 80D, etc. An individual arrives at the net taxable income after claiming the eligible tax deductions from gross taxable income. Tax exemptions on house rent allowance (HRA), leave travel allowance (LTA), interest paid on housing loan, etc., are claimed under the head of salary, i.e., while calculating net taxable income from each head of the salary.
Here is how an individual can calculate the net taxable income under each head to arrive at gross taxable income.
Income from salary
If an individual has received a salary in FY 2022-23 (April 1, 2022, to March 31, 2023), such income will be taxable under this head. Form 16 shows the taxable income under the head salary for such a person. It is a TDS certificate issued by the employer containing details of the tax deducted from salary in each quarter, total salary paid, income tax regime chosen, tax exemptions and deductions claimed, if eligible.An employer has to mandatorily issue this in the TRACES format if tax is deducted on salary. TRACES is a income tax department’s website where a person (employer here) who has deducted tax is required to file TDS return. Once the TDS return is filed, deductor will download TDS certificate (Form 16) from that website to issue it to the deductee (employee).
Also Read: What to check in Form 16 for ITR filing
Some of the common tax exemptions that can be deducted from salary income are HRA, LTA and standard deduction of Rs 50,000. Government employees are eligible to claim deduction on entertainment allowance. These tax exemptions are available if an individual opts for the old tax regime. One must have documentary evidence to claim these tax exemptions as the income tax department can ask for proof at the time of processing the income tax return. Do note that standard deduction of Rs 50,000 does not require any documentary proof.
If you have not received Form 16 from your employer, use your salary slips to determine the total salary amount received in the financial year. Further, you will be required to manually calculate the tax exemptions.
Also Read: How to file ITR without Form 16?
Income from house property
The income under this head is calculated if an individual wants to claim deduction on interest paid on a housing loan, if there is rental income or is liable to pay tax on deemed rent. A house property can be categorised as one of the following:a) Self-occupied property
b) Rental property
c) Deemed to be let out
Self-occupied property is one that is occupied by the individual. For income tax purposes, an individual can choose any house as a self-occupied house, irrespective of whether he/she is residing in it or not. Income from self-occupied property will be nil. An individual can claim any two houses as self-occupied property if he/she has more than two houses.
For self-occupied property having a home loan, a deduction of up to Rs 2 lakh on interest paid can be claimed under this head.
A house property that has been given on rent during the financial year is called a rental property. A house property which is empty and does not qualify as self-occupied will be called deemed to be let out.
An individual can claim standard deduction of 30% and municipal taxes paid as deductions on rental or deemed rental property, apart from deduction of interest paid on home loan.
Also Read: How to calculate income from house property for ITR filing
Also Read: How to calculate income from house property in new tax regime
Also Read: How to calculate deemed rental value from house property
Income from capital gains
Capital gains arise when an individual sells assets such as a house, mutual fund units or equity shares, among others, in a financial year. There are two types of capital gains — short-term capital gains (STCG) and long-term capital gains (LTCG). The type of capital gains depends on how long the individual has held the asset. The holding period varies for each asset class. The income tax rates also vary for STCG and LTCG depending on the assets.Income tax rate of capital gains for different asset class For FY 2022-23 (AY 2023-24)
Asset
Income tax rate for STCG
Income tax rate for LTCG
Equity shares on which STT paid
15% if shares are sold before one year of purchase
10% (without indexation) if shares are sold after one year*
Equity mutual funds
15% if mutual fund is sold before one year of purchase
10% (without indexation) if mutual fund is sold after one year*
Debt mutual funds
As per the income tax slab rates applicable, if funds are redeemed before three years
20% (with indexation), if funds are redeemed after three years
Property
As per the income tax slab rates applicable, if property is sold before two years
20% (with indexation), if property is sold after two years
Gold
As per the income tax slab rates applicable, if gold is sold before three years
20% (with indexation), if gold is sold after three years
Foreign company shares
As per the income tax slab rates applicable, if funds are redeemed before three years
20% (with indexation), if shares are sold after three years
International equity funds
As per the income tax slab rates applicable, if funds are redeemed before three years
20% (with indexation), if funds are redeemed after completion of three years
*LTCG up to Rs 1 lakh in a financial year is exempted from tax.
(The above tax rates are exclusive of cess and surcharge.)
The Budget 2023 revised the taxation rules for debt mutual funds. Any investment in debt mutual funds from April 1, 2023, will be taxable at income tax rates applicable on the income of the individual. There will be no LTCG benefit available for redemption on these debt mutual funds. However, investments made in debt mutual funds till March 31, 2023, are eligible to indexation benefits at the time of redemption.
Also Read: No LTCG benefits on these debt mutual funds from April 1, 2023
Income from business and profession
Individuals working as freelancers or professionals (such as lawyers.) or having income from business are required to report income under this head.Any profits/gains or losses made from running a business are required to be reported here.
Income tax laws allow an individual with business income to claim several expenses to run a business. Some of the examples are travelling expenses, stationary expenses and overhead expenses.
Income from other sources
Any residual income not reported under any of the heads mentioned above will be reported under income from other sources. Incomes such as savings account interest income from banks, post office schemes, interest income from post office savings schemes, bank fixed deposits, family pension, pension received from insurance companies, dividends received from shares and mutual funds are reported under this head.Gross total income
The total income arrived from aggregating the income from all the heads is called gross total income. On this income, an individual can claim eligible deductions under Section 80C, Section 80D, 80TTA, etc., provided the individual has opted for the old tax regime.Once the eligible deductions are claimed, an individual arrives at the net taxable income. The tax liability will be calculated on the net taxable income.
On the tax liability, an individual will also have to calculate cess and surcharge (if applicable).
Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp. click here!
This story originally appeared on: India Times - Author:Faqs of Insurances
