What is Taxable Income

Taxable income represents the part of your income on which you have to pay tax. As per the Income Tax Act, 1961, it covers most types of income sources, such as:

• Salary
• Business profits
• Rent
• Interest
• Dividends

However, some parts of your income are not taxed. These are called deductions and exemptions. They are allowed under tax laws and are subtracted from your total income before tax is calculated.

This rule applies to all types of taxpayers, including:

• Individuals (like salaried or self-employed people)
• Companies
• Hindu Undivided Families (HUFs)
• Local authorities (like municipal bodies)
• Groups of people (called the Body of Individuals or the Association of Persons)

What is taxable income?

Taxable income is the part of an individual’s or an entity’s total income on which tax must be paid. Please note that it is not the same as total income. That’s because certain parts of income are excluded before tax is calculated.

Let’s see how it works:

• Start with total income:
  • This includes salary, business profits, rent, interest, capital gains, or any other source of income.
• Subtract allowed deductions
  • These are specific expenses that tax laws let you remove from your total income.
  • You can claim them under Chapter VI-A of the Income Tax Act.
• Exclude exempt income
  • Certain income is considered tax-free [say under Section 10].
  • It does not form a part of the taxable income.

The amount left after removing deductions and exemptions is your taxable income.

Understanding taxable income

Taxable income includes both earned and unearned income:

• Earned income refers to money received from working, such as:
  • Salaries
  • Wages
  • Bonuses
  • Self-employment income
• Unearned income is related to money not directly earned from work (commonly known as passive income sources), such as:
  • Cancelled debts
  • Unemployment benefits
  • Strike benefits
  • Disability payments
  • Lottery winnings
  • Interest income
  • Dividends

At the same time, income from selling investments, such as stocks or property, is also taxable (as capital gains) if those assets increased in value before being sold.

Your 100% income is not taxable

Please note that your entire income is not taxable. The Income Tax Act, 1961, allows some income to be excluded from taxation through:

A) Deductions

B) Exemptions

There are two main types of deductions: Standard deduction and  Itemised deduction The standard deduction is a fixed deduction allowed from salary income (without needing to provide any proof of expenses). It is given to salaried employees and pensioners. Itemised deductions are specific deductions allowed under Chapter VI-A of the Income Tax Act. Taxpayers can claim them by providing proof of eligible investments or expenses.

Exemptions refer to specific types of income that are not included in your taxable income. These are entirely or partially free from tax. Exemptions reduce your total taxable income at the source level (even before deductions are applied). They are mainly covered under Section 10 of the Act.

 

Taxable income of businesses

Businesses do not report their total income as taxable income. Instead, they first subtract their business expenses from their total revenue. Some common business expenses allowed as deductions are:

• Rent
• Salaries
• Utilities
• Supplies
• Other operating costs

The result is business income. From this, the business can also subtract deductions allowed by tax law. The remaining amount after all deductions is the business’s taxable income.

Taxable income in India

In India, taxable income must be computed by:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Firms
• Body of Individuals (BOI)
• Local authorities
• Any other legal entity created by law (called artificial juridical persons)

The amount of tax a person or entity has to pay depends on how much income they earn. The more income you earn, the higher the tax rate you will fall under. This system is called progressive taxation.

All these rules are laid down in the Income Tax Act, 1961. It is the primary law that governs income tax in India.

Furthermore, the income tax collected by the government from taxpayers is used to fund public services, such as infrastructure (roads, bridges), education, healthcare, and more.

Sources of taxable income

Taxable income refers to the aggregate of all income that a person earns in a financial year (which is subject to tax). In India, this income can come from different sources. Let’s check them out:

Employee compensation

This is the most common source of taxable income. It includes:

• Salary
• Wages
• Bonuses
• Commissions
• Tips
• Any other payment made by an employer

This income falls under the head “Income from Salary” (Sections 15 to 17 of the Income Tax Act). Salaried individuals also receive Form 16 from their employer, which shows:

• Salary details
  and
• Tax deducted at source (TDS).

Additionally, if you receive any perquisites or benefits from your employer (like a company car, rent-free accommodation, or stock options), those are also taxable.

Income from business and investments

Any income you earn through business, freelancing, or profession (like a doctor, lawyer, or consultant) is taxable. This segment covers:

• Profits from selling goods
  or
• Income earned from offering professional services

Furthermore, if you own a property and earn rent from it, this income is taxable under the head “Income from House Property.” To reduce it, you can claim:

• Standard deduction of 30% on rental income under Section 24(a)
  and
• Home loan interest deduction under Section 24(b)

Income from partnerships

In India, a partnership firm is taxed as a separate entity. The firm pays tax on its income. But if you are a partner, any remuneration, interest on capital, or share of profit received from the firm must be declared in your personal return.

Please note that:

• Share of profit from the firm is exempt in the hands of the partner under Section 10(2A)
• Remuneration and interest are taxable as business income

Income from corporations

In India, companies pay tax separately as legal entities. They offer:

• Dividends to shareholders (taxable under “Income from Other Sources”)
• Salary or sitting fees to directors

All these incomes are taxable and must be reported in your income tax return (ITR).

Managing multiple income sources effectively often requires strategic financial planning, especially when considering major purchases like a home. A home loan from Bajaj Finserv not only helps you achieve homeownership but also provides significant tax benefits across multiple sections. Check your loan offers with Bajaj Finserv to see how much you can save on taxes while building your asset portfolio. You may already be eligible, find out by entering your mobile number and OTP.

How to calculate taxable income

The Indian tax system divides income into five heads. Every taxpayer must:

• Calculate their income under each head
• Adjust for deductions
• Then apply the correct tax rate

Let’s see how you can calculate taxable income as per the Income Tax Act, 1961:

Step 1: Identify your residential status

First, determine your residential status for the financial year (Resident, Non-Resident, or Resident but Not Ordinarily Resident). This affects which types of income are taxable in India.

• For residents, their global income is taxable.
• For non-residents, only income earned in India is taxable.

Step 2: Calculate gross total income under all heads

Next, compute income under each of the following five heads:

1. Income from Salary (Section 15–17)
2. Income from House Property (Section 22–27)
3. Profits and Gains from Business or Profession (Section 28–44)
4. Capital Gains (Section 45–55)
5. Income from Other Sources (Section 56)

Step 3: Add all incomes to arrive at gross total income

Aggregate the taxable income earned under all five heads. Use the following formula:

• Gross Total Income (GTI) = Salary Income + House Property Income + Business/ Profession Income + Capital Gains + Other Sources

Step 4: Choose a tax regime and deduct eligible deductions

As of FY 2023-24 (AY 2024-25), there are two tax regimes available to individuals and Hindu Undivided Families (HUFs). Let’s see what deductions are allowed under each:

A) Old tax regime

If you opt for the old tax regime, you can claim various deductions and exemptions allowed under Chapter VI-A, such as:

• Section 80C (Maximum Rs. 1,50,000):
  • Life insurance premium
  • Employees’ Provident Fund (EPF)
  • Public Provident Fund (PPF)
  • 5-year tax-saving fixed deposit
  • Equity Linked Saving Schemes (ELSS)
  • Tuition fees for children
  • Principal repayment on the home loan
• Section 80D
  • Health insurance premium for self, spouse, children, and parents
  • Up to Rs. 25,000 (Rs. 50,000 for senior citizens)
• Section 80E
  • Interest on education loan for higher studies
  • There is no upper limit of deduction.
  • You can claim it for a maximum of 8 years.

Additionally, you can also claim exemptions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and standard deduction of Rs. 50,000 from salary income.

B) New tax regime

If you choose the New Tax Regime (Section 115BAC), you get lower tax slab rates, but most deductions and exemptions are not allowed. The only deductions you can claim are:

• Standard deduction of Rs. 75,000
• Employer’s contribution to NPS [under Section 80CCD(2)]. It is limited to 10% of the salary.
• Deduction for Agniveer Corpus Fund under Section 80CCH (if applicable)

All other deductions under Chapter VI-A (like 80C, 80D, 80E, etc.) and exemptions (HRA, LTA, etc.) are not allowed in the new regime.

Step 5: Arrive at net taxable income

Reduce your taxable income with the eligible deductions and arrive at the “Net Taxable Income”. The formula you can use is:

• Net Taxable Income = Gross Total Income – Deductions

Round off the taxable income to the nearest Rs. 10 as per Section 288A.

Step 6: Compute tax payable on net taxable income

Apply the tax slab rates (based on the old regime or the new regime) to the net taxable income. Don’t forget to:

• Add surcharge (applicable only if your taxable income is more than Rs. 50 lakhs)
• Add health and education cess at 4% on the total tax

Step 7: Subtract TDS and advance tax paid

From the total tax liability, subtract:

• TDS (Tax Deducted at Source)
• Advance tax or self-assessment tax already paid

Step 8: Calculate your tax payable or refund

Please note that if the tax paid is more than the calculated tax liability, you get a refund. On the other hand, if the tax paid is less, you need to pay the balance as self-assessment tax.

Taxable income vs. nontaxable income

To accurately compute your income tax payable and remain compliant, you must understand the difference between taxable and non-taxable income. Let’s learn what these terms mean as per the Income Tax Act, 1961:

1. Taxable income

It is that part of your total income which is subject to tax as per the Income Tax Act. This income is computed under five heads of income and then aggregated to arrive at the “gross total income”. Next, deductions and exemptions are subtracted to arrive at “net taxable income”.

Some common examples of taxable income are:

• Salary Income: Basic salary, bonuses, commissions, allowances (except exempt ones)
• House Property Income: Rental income from owned property
• Business or Profession Income: Profits from business, freelancing, consultancy
• Capital Gains: Profit from the sale of property, shares, or mutual funds
• Other Sources: Interest from fixed deposits, dividends, winnings from lottery, gifts (above Rs. 50,000 from non-relatives)

These incomes are taxed at the applicable slab or income tax rate. They must be declared in the income tax return.

2. Non-taxable income

Non-taxable income (also called exempt income) is income that is not subject to tax (either fully or partially). These are listed under Section 10 of the Income Tax Act or other specific provisions. Such income does not form part of the taxable income when filing returns.

Some common examples of non-taxable income are:

• Agricultural income is 100% exempt under Section 10(1).
• Gratuity received on retirement is exempt up to limits under Section 10(10).
• Maturity amount from Life Insurance policies is exempt under Section 10(10D), subject to conditions.
• Long-term capital gains are exempt up to Rs. 1.25 lakh under Section 112A.
• Dividend from Indian Companies is exempt up to Rs. 5,000 (beyond that is taxable under ‘Other Sources’).

For more clarity, let’s study some key differences through the table below:

Criteria	Taxable income	Non-taxable income
Subject to Tax?	Yes	No
Declared in ITR?	Yes	Yes (in the exempt income section)
Basis of taxability	Included under the five heads of income	Specifically excluded under Section 10, 112A, and more.
Examples	Salary Rent Business profits Capital gains	Agriculture income LIC maturity Gratuity

 

What does taxable income mean?

Taxable income, as per the Income Tax Act, 1961, is the portion of your total income on which tax is calculated after subtracting eligible deductions and exemptions.

Primarily, it covers:

• Salary
• Rental income
• Profits and gains from business or profession
• Capital gains
• Interest income
• Dividend received

Your income from all sources is aggregated to arrive at gross taxable income. From this, deductions under Chapter VI-A (like Sections 80C, 80D) are subtracted. The resulting amount is your net taxable income, which is taxed as per the applicable slab rates under either the old or new tax regime.

What is non-taxable income?

Non-taxable income, as per the Income Tax Act, 1961, refers to income that is exempt from tax and not included in the total taxable income. It covers:

• Agricultural income (Section 10(1))
• Life insurance payouts (Section 10(10D))
• Gifts more than Rs. 50,000 from non-relatives
• Scholarships (Section 10(16))
• Leave Encashment at retirement (100% exempt for government employees and exempt up to Rs. 3 lakhs for non-government employees)

These incomes are either fully or partially exempt under various provisions and do not attract income tax when received.

How taxable income impacts your life

Understanding your taxable income is not just about paying taxes. It is about:

• Planning finances better: Knowing your taxable income helps you budget your expenses and savings.
• Saving through tax benefits: With tools like home loans and Section 80C investments, you can bring down your taxable income and save money.
• Avoiding penalties: Filing taxes on time ensures you do not face penalties or interest charges.

Can home loans reduce taxable income?

One of the smartest ways to reduce your taxable income is by taking a home loan. Here is how it works:

• Tax deduction on principal amount (Section 80C): The repayment of the principal amount on a home loan qualifies for deductions up to Rs. 1.5 lakh under Section 80C.
• Tax deduction on interest paid (Section 24): The interest paid on a home loan is deductible up to Rs. 2 lakh annually under Section 24.
• Additional deductions under Section 80EE or 80EEA: If you are a first-time homebuyer, you can claim an extra deduction of up to Rs. 50,000 under Section 80EE or Rs. 1.5 lakh under Section 80EEA, subject to conditions.

These substantial tax benefits make home loans one of the most effective wealth-building and tax-saving instruments available to Indian taxpayers. Bajaj Finserv offers competitive rates starting from 7.49%* p.a. with loans up to Rs. 15 crore*, making it easier to maximise these tax advantages. Check your loan offers with Bajaj Finserv to see how much you can save while building your dream home. You may already be eligible, find out by entering your mobile number and OTP.

Taxable income slabs in India (FY 2025-26)

Here is a quick look at the tax slabs for individuals under the new and old tax regimes:

New tax regime

Old tax regime

New Income Tax Slabs for FY 2024-25 (AY 2025-26)	New Income Tax Rate for FY 2024-25 (AY 2025-26)
From 0 to 3,00,000	Nil
From 3,00,001 to 7,00,000	5%
From 7,00,001 to 10,00,000	10%
From 10,00,001 to 12,00,000	15%
From 12,00,001 to 15,00,000	20%
From 15,00,001 and above	30%

 

 

Other topics you might find interesting
Income Tax Notice Section 142 1​	Section 80ccd 2 of Income Tax Act	Section 194h of Income Tax Act	Section 80ccd 1 of Income Tax Act
Section 148 of Income Tax Act	Section 80ggc of Income Tax Act	Section 80dd of Income Tax Act	Section 80e of Income Tax Act
Home Loan Interest Deduction	Section 80ccd 1b of Income Tax Act	Section 80ddb of Income Tax Act	Section 80g of Income Tax Act

 

Key tax-saving tips

• Invest wisely: Choose tax-saving instruments like ELSS funds, PPF, or fixed deposits.
• Plan for retirement: Contributions to schemes like the National Pension System (NPS) offer additional deductions.
• Use home loan benefits: A home loan not only helps you own a house but also gives significant tax benefits.
• Claim all allowable exemptions: Make sure you do not miss exemptions like HRA or LTA if applicable.

Conclusion

As per the Income Tax Act, 1961, taxable income is the part of your total income on which you have to pay tax. It includes income from salary, business, property, capital gains, and other sources. You can even reduce your taxable income by claiming deductions and exemptions. The quantum entirely depends on whether you choose the old or the new tax regime.

On the other hand, non-taxable income is exempt from tax. It includes items like agricultural income, gifts less than Rs. 50,000 (from non-relatives), life insurance payouts, and scholarships.

By knowing the difference between taxable and non-taxable income, you can accurately compute your income tax liability and remain compliant.

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