With the New Year just around the corner, companies are also asking their employees to submit their tax declarations in order to enable them deduct tax as per the provisions of the Income Tax in the remaining three months of the financial year 2015-16. Many of my friends have been asking me to help them compute their tax liabilities and fill up their tax declarations. So, I just thought why not write a post about it.

A penny saved is a penny earned.” It is an old proverb, but certainly holds very true in the area of personal finance especially. Being a qualified Chartered Accountant, I have seen many income tax returns, which could have saved income tax by doing some tax planning but due to ignorance of the legal machinery revolving around the income tax, the individual ends up paying higher income taxes. The first step in tax planning is knowing what your tax liability currently is and till what extent it can be reduced. This post will be more focused on former question to have a basic knowledge of the tax calculations and later on, in the posts to follow, the latter portion of the tax planning shall be covered.

Steps to Calculate your Income Tax
The process consists of three simple steps as illustrated in the image.

tax-001

Let’s discuss each step now.
1. Compute the Gross Total Income

The process of calculating the tax liability begins with computation of your Gross Total Income (GTI). It requires you to calculate the total income expected to be earned during a financial year, from various sources of income. For the sake of simplicity, the income is classified under five categories under Income Tax namely

  1. income from salaries when you are employed under someone else,
  2. income from house property, when you let out your house property,
  3. profits and gains from business and profession, when you undertake some business activity,
  4. capital gains, when you sell some capital asset including shares, mutual funds, house etc. and
  5. income from other sources, which covers miscellaneous incomes including interest from FDs, RDs, savings account, gifts etc.

Gross Total Income is therefore the total income earned by you before availing any deductions under the Income Tax Act, 1961.

2. Calculate the Deductions Available
After having calculated the Gross Total Income, the next step calls for calculating the deductions available from Income to calculate the total income. Income Tax Act, 1961 provides for various deductions from the GTI which should be accounted for reducing the taxable income. The deductions cover investments in tax saving instruments (including investments in eligible stocks under Rajeev Gandhi Equity Savings Scheme (RGESS)), five year bank FDs, 3 year lock-in equity mutual funds (ELSS), National Saving Certificates (NSC), Public Provident Fund (PPF) etc.), donations, life insurance premium payment, medical premium payment, interest paid on education loan, interest on housing loan etc.

All these deductions usually come with some lock-in period or other restrictive covenants. I shall be covering these deductions in detail in later posts in the ‘Personal Finance‘ section. So, after calculating the deductions available, the same are deducted from Gross Total Income to compute Total Income.

3. Calculate the Net Tax Payable
Income Tax is then calculated on the total income as per the rates as announced by the Finance Minister in his annual budget and then passed by the Parliament. For the income earned during the financial year 2015-16, the rates for men and women assessees below the age of 60 are as below:

Net Taxable Income

Income Range (in Rs.)

Rate

Upto Rs. 2,50,000

0 – 2,50,000

Nil

Next Rs. 2,50,000

2,50,001 – 5,00,000

10%

Next Rs. 5,00,000

5,00,001 – 10,00,000

20%

The Balance Taxable Income

10,00,001 and above

30%

For senior citizens with age 60-80 years, the exemption limit is Rs. 3,00,000 and tax liability starts thereafter. For very senior citizens who are 80+, the limit is Rs. 5,00,000.

Further, since FY 2014-15 and also for the present financial year, a tax rebate u/s 87A upto a maximum of Rs. 2,000 is available for the assessees having taxable income below Rs. 5,00,000. However, if you have income higher than Rs. 5,00,000 for the year, no tax rebate is available.

The tax so calculated shall be increased by 3% to contribute for education in the country. This extra tax is collected in the name of 2% Education Cess and 1% Secondary and Higher Education Cess. So, if the tax payable as per the above table is Rs. 5,000, the total tax payable shall be Rs. 5,150 after increasing it 3% towards education cess. The resultant figure that you get is the total income tax payable on the income earned for the year.

So, now that you have taken the first step towards tax planning, the rest steps will certainly be easier for you to climb. It’s always hard to take the first step.

Picture11

And well, still if you have any doubts, the questions are most welcome in the comments below.

6 thoughts on “Calculating Your Income Tax Liability”

  1. Thanks for this post. Very nicely explained. I almost understood everything.
    Though I have asked these questions before but…
    1. If I started earning in 2015, do I have to pay income tax?
    2. When is the last date for that?
    3. About how much interest i get on FDs and savings, how to calculate all such stuff?

    1. Hi Manpreet, glad that you liked the post. And for your queries, here are the replies:
      1. If I started earning in 2015, do I have to pay income tax? Yes, whenever you earn something, you are liable to compute tax and file returns. The earnings cycle for computation is from April to March. so, check your liability for income earned in between that period.
      2. When is the last date for that? As per the income tax rules, you need to pay off your taxes before you file your return which is to be filed in majority of cases till July 31 of the next year. So, I should say you still have 7 more months to pay your taxes.
      3. About how much interest i get on FDs and savings, how to calculate all such stuff? Well, for interest on FDRs, you can get an interest certificate from the bank after the financial year ends and include that interest in your Income Tax Return as your income. Savings Account interest is visible in your bank account statement. Banks generally credit it on quarterly or half-yearly basis. So, just check your account statement to check that.

      Happy Financial Planning. 🙂

  2. Hi Simardeep,

    You explained the things in very lucid manner. Actually, most of us are unaware about the Tax planning and the management. Yes, its true a right information about tax can save you money which can be further invested in other assets.

    Thanks for sharing the post!

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