Gross Income vs Taxable Income

Gross income refers to the total earnings an individual receives before any deductions like taxes or exemptions are applied. It includes income from all sources such as salaries, bonuses, rental income, interest, and dividends. Understanding gross income is essential as it forms the basis for calculating taxable income, helping you plan your finances effectively.

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Gross income, also known as gross total income, is the total earnings an individual or business receives before any deductions or taxes. 

It includes income from multiple sources, such as:

1. Salaries and Wages: This includes all compensation received from employment, such as basic salary, bonuses, and commissions.
2. Business and Professional Income: Earnings from business activities or professional services.
3. Capital Gains: Profits from the sale of assets like stocks, bonds, or real estate.
4. Rental Income: Includes the income you receive from renting out properties.
5. Dividends and Interest: Income from investments in stocks, and deposits in savings accounts and term deposits. 
6. Other Sources: Includes income from sources that is not categorised above.

Taxable income is the portion of your gross income on which taxes are levied after accounting for deductions and exemptions. It is calculated by subtracting eligible deductions, such as Section 80C investments and exemptions, from your gross income, including allowances like House Rent Allowance (HRA). Knowing your taxable income ensures accurate tax liability calculations, helping you avoid penalties.

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Follow these steps to determine your taxable income:

1. Determine Gross Income
   Add up all sources of income to calculate your gross total income.
2. Subtract Deductions
   Deduct eligible expenses such as retirement savings, home loan interest, medical insurance premiums, etc. Under Section 80C of the Income Tax Act, several deductions are available to reduce tax liability.
3. Apply Exemptions
   Account for applicable exemptions, such as house rent allowance (HRA) under Section 10(13A), subject to specific conditions.
4. Calculate Taxable Income
   After subtracting deductions and exemptions from your gross income, the remaining amount is your taxable income.
   Note: Keep in mind the tax regime under which you are filing:
   1. The old tax regime offers numerous deductions.
   2. The new tax regime provides lower tax rates with limited deductions available.

By understanding these differences, you can better manage your income and taxes while planning for future financial goals.

Gross income and taxable income are crucial concepts for effective financial planning. While gross income reflects your total earnings, taxable income determines your tax liability. By leveraging deductions and exemptions, you can optimise your taxable income and reduce your taxes.

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