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Taxable Income

Taxable income refers to the total income earned in a financial year, which may include various income sources and is reduced by eligible deductions and expenses

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Taxable income is the portion of an individual’s or business’s earnings used to calculate tax liability. Derived from gross income, it includes salaries, wages, and investment gains, adjusted for deductions. This figure determines how much tax is owed to the government for a specified tax period.

Key takeaways

  • Taxable income is the portion of earnings used to determine an individual’s or business’s tax liability.
  • It includes wages, salaries, investment income, and other earnings, minus eligible deductions.
  • This figure is used by tax authorities to calculate the amount owed for a given tax period.
  • Investments like fixed deposits can help reduce taxable income under Section 80C, up to Rs. 1.5 lakh.

What Is taxable income?

Taxable income is the portion of an individual’s or business’s earnings subject to taxation by authorities. It includes wages, salaries, investment returns, and other income, adjusted for deductions and exemptions, to determine the final taxable income.

Taxable income in India

In India, taxable income refers to the portion of an individual’s or business’s earnings subject to income tax as per government regulations. It is calculated by adjusting total earnings, including salaries, business profits, and investment income, for allowable deductions under various sections of the Income Tax Act, such as Section 80C. The taxable amount determines the applicable tax rate, which varies across different income slabs. Proper tax planning can help reduce taxable income and lower tax liability.

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How to calculate taxable income

Calculating taxable income is an essential step in determining how much tax an individual or business owes to the government. It involves assessing total income and adjusting it for exemptions, deductions, and allowances as per tax laws. By understanding the process, taxpayers can ensure compliance while exploring opportunities to minimise their tax liability. Below are the steps to calculate taxable income effectively.
 

Steps to calculate taxable income
 

Step 1: Determine total gross income

Start by calculating the total gross income, which includes all earnings such as salaries, wages, bonuses, business income, rental income, and investment returns. Include income from all taxable sources as per the applicable tax regulations.
 

Step 2: Subtract exemptions

Identify and subtract income that qualifies for exemptions. In India, certain income types, such as agricultural income or gifts under a specific limit, may be exempt from taxation. Ensure to review the tax laws to claim applicable exemptions.

 

Step 3: Deduct standard deductions


Apply the standard deduction allowed under tax laws. For example, salaried employees in India are eligible for a standard deduction of Rs. 50,000. This reduces the gross income to arrive at the adjusted income figure.

 

Step 4: Account for deductions under tax-saving sections


Utilise deductions under various sections of the Income Tax Act, such as Section 80C, 80D, and 80E. Investments in instruments like fixed deposits, Public Provident Fund (PPF), and National Pension System (NPS) can reduce taxable income. For instance, under Section 80C, taxpayers can claim deductions up to Rs. 1.5 lakh.

 

Step 5: Compute the final taxable income

After accounting for exemptions and deductions, the remaining amount is your taxable income. This figure determines the tax slab applicable to the taxpayer, based on which the final tax liability is calculated.

 

Example calculation

Consider a salaried individual earning a gross income of Rs. 8,00,000 per annum. After applying a standard deduction of Rs. 50,000 and claiming Rs. 1.5 lakh under Section 80C for tax-saving investments, the taxable income becomes Rs. 6,00,000. The taxpayer’s final tax liability will then depend on the applicable income tax slab.

 

Benefits of calculating taxable income

  1. Compliance: Ensures accurate reporting of income to avoid penalties for incorrect filing.
  2. Tax planning: Helps in identifying deductions and exemptions to optimise savings.
  3. Clarity: Provides a clear understanding of financial obligations and potential savings opportunities.

By following these steps and leveraging deductions, taxpayers can effectively calculate taxable income and ensure they meet their tax obligations while reducing their liability.

Also read: How to Check PF Claim Status

Sources of taxable income

Sources of taxable income include wages, salaries, business profits, rental income, interest, dividends, and capital gains. These earnings are subject to adjustments for exemptions and deductions.

Income from business and investments

Income from business and investments is a significant component of taxable income. Business income includes profits earned from operations, while investment income comprises interest, dividends, and capital gains. Proper financial planning and strategic investment can help optimise returns while minimising tax liabilities.

Income from partnerships

Income from partnerships refers to the share of profits allocated to each partner based on the partnership agreement. This income is considered taxable and must be reported on the individual partner’s tax return. While the partnership itself is not taxed, the distributed income is subject to taxation at the individual partner's applicable tax rate.

Employee compensation

Employee compensation includes all forms of payment provided by an employer to an employee for services rendered. This typically includes salaries, wages, bonuses, commissions, and benefits such as allowances. Most forms of employee compensation are considered taxable income and must be reported when filing taxes. Deductions like the standard deduction may reduce the taxable amount.

Other sources

Other sources of taxable income include rental income, royalties, capital gains from the sale of assets, and winnings from lotteries or gambling. Additionally, certain retirement benefits, interest from savings accounts, and foreign income may also qualify as taxable. These sources must be reported during tax filing, adjusted for applicable exemptions and deductions. Understanding these income streams ensures accurate reporting and effective tax planning, helping individuals manage their liabilities in compliance with tax laws.

Taxable income examples

Taxable income encompasses various forms of earnings that are subject to taxation. Understanding examples of taxable income helps individuals and businesses identify what must be reported for tax purposes. Examples include:

  1. Salaries and wages
  2. Business profits
  3. Rental income
  4. Dividends
  5. Capital gains
  6. Interest income
  7. Bonuses
  8. Royalties
  9. Freelance earnings
  10. Lottery winnings
  11. Retirement benefits

Taxable income slab rates

Taxable income slab rates in India vary based on an individual’s income and age group, providing progressive taxation. For individuals below 60 years, the rates differ across income brackets. Senior citizens (60-79 years) and super senior citizens (80 years and above) enjoy higher exemption limits. The new tax regime and old tax regime offer varying rates, allowing taxpayers to choose the system that suits them.

 

Old Tax Regime

Income Slab (Rs.)

Individuals Below 60 Years

Senior Citizens (60 to 80 Years)

Super Senior Citizens (Above 80 Years)

Up to 2,50,000

Nil

Nil

Nil

2,50,001 – 3,00,000

5%

Nil

Nil

3,00,001 – 5,00,000

5%

5%

Nil

5,00,001 – 10,00,000

20%

20%

20%

Above 10,00,000

30%

30%

30%

 

New Tax Regime

Income Slab (Rs. )

Tax Rate

Up to 3,00,000

Nil

3,00,001 – 7,00,000

5%

7,00,001 – 10,00,000

10%

10,00,001 – 12,00,000

15%

12,00,001 – 15,00,000

20%

Above 15,00,000

30%

 

Note: Under the New Tax Regime, a rebate under Section 87A is available for individuals with taxable
 

Also Read: How to Generate UAN Number Online

Conclusion

Understanding taxable income is crucial for effective financial planning and compliance with tax laws. By identifying income sources and leveraging deductions, individuals and businesses can reduce taxable income and optimise tax savings. Proper planning ensures accurate reporting and minimises tax liabilities.

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Frequently asked questions

What is the taxable income?

Taxable income is the portion of an individual’s or business’s earnings subject to tax after adjusting for allowable deductions and exemptions.

Is 5 lakh income tax free?

Under the new tax regime, income up to Rs. 3 lakh is tax-free. Income between Rs. 3 lakh and Rs. 5 lakh is taxed at 5%.

Which amount is taxable income?

Taxable income is your gross income minus allowable deductions, including earnings from salaries, wages, and other income sources for the full financial year.

What is the limit of taxable income?

The basic exemption limit for taxable income in India depends on the age and tax regime selected. Under the old regime for FY 2024–25, it is Rs. 2.5 lakh for individuals below 60, Rs. 3 lakh for senior citizens (60–80 years), and Rs. 5 lakh for super senior citizens (above 80 years). Under the new tax regime, the exemption limit is Rs. 3 lakh for all individuals.

What is the maximum tax-free income in India?

Under the new tax regime for FY 2025–26, individuals can earn up to Rs. 12 lakh tax-free with the rebate under Section 87A. For salaried employees, this limit goes up to Rs. 12.75 lakh after including the standard deduction.

What is the taxable income in India?

Taxable income includes earnings from salary, house property, business or profession, capital gains, and other sources such as interest or dividends, after deductions and exemptions.

What is not included in taxable income?

Incomes like agricultural income, certain gifts and inheritances, interest from EPF/PPF, scholarships, life insurance payouts, and tax-free bonds are exempt and not counted as taxable income.

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As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.

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