Income tax calculations can overwhelm you and you may leave it to your chartered accountants to take charge. But, it is important for you to be aware of your finances so that you can take smart decisions that will help your money grow. You too can calculate your taxable income after deducting all the exemptions and deductions that apply to your income amount. The income here doesn’t just include the money you receive from the company you work for. There are other sources the government considers as income as well. Let’s look at these before moving on to how you should calculate how much of it is taxable.
Types of income to calculate
1. Money received as salary
This will include everything that your company gives you: your basic salary, bonuses, travel allowance, dearness allowance, house rent allowance (HRA) and any other component mentioned in your CTC. Once you get a gross amount, deduct your HRA exemptions or any other exemptions along with reimbursements from this.
2. Rental income
If you own property that you have rented out, the monthly income you receive from your tenant is also taxable. To calculate the income received, you will need to compare the rent you receive with the expected rent. You can calculate the expected rent by comparing the fair market value of the property with the municipal value. Between your actual rent and expected rent, whichever amount is higher, becomes your gross annual value (GAV) of the property. Subtract the municipal tax to arrive at the net annual value (NAV) of your property.
3. Capital Gains income
This is the profit you make on selling assets such as shares or property. Divide your profit into long-term capital gains and short-term capital gains before adjusting them with deductions under the relevant sections of the Income Tax Act.
4. Other sources
This will include any income you receive from your investments such as fixed deposits, savings account or even the money made on gambling. To make it simpler, this is income that does not fit under any of the sub-heads mentioned previously.
How to calculate your taxable income
1) Calculate gross income
Once you add up all the money received from the various incomes mentioned above, you arrive at your gross annual income.
2) Calculate your taxable income
Once you know your gross income, you subtract any relevant deductions to be made under the Income Tax Act. This would include the deduction benefits for investing in the Public Provident Fund (PPF), paying for health insurance, etc. Once you get the taxable income, find out which tax bracket your income falls under and then apply the appropriate income tax rate.
To do all this is a more organised fashion, you can use the online Income and Tax calculator available on the IT Department’s website. Don’t shirk off paying your income tax because it will cause problems for you later. Follow these tips or sit with a chartered accountant and understand ways in which you can legitimately reduce your taxable income.
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