A Step-by-Step Guide to Calculate Your Taxable Income in 2024

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Jul 15th 2024

Finance

Guide to Calculate Your Taxable Income in 2024

Calculating income tax in India is overwhelming for salaried individuals. It is a crucial part of personal finance management and involves various steps such as determining taxable salary, understanding applicable tax rates and factoring in exemptions and deductions. This understanding is essential for individuals to efficiently plan their finances and ensure compliance with tax regulations.

This guide will walk you through each step of calculating income tax on your salary, making it easier to understand the process. We will also provide a detailed example to help illustrate how it works in practice. By the end, you will have a clear understanding of how to calculate your income tax and be better equipped to handle your financial obligations.

What is the Meaning of Taxable Income?

Taxable income is the annual income of an individual or organization after deducting eligible tax deductions. It is the income that is used as a basis for calculating income tax. This includes various forms of income such as salaries, wages, commissions, bonuses and tips. Knowing one’s taxable income is crucial as it enables individuals to determine the final tax amount owed or to be refunded by applying the relevant tax rates and subtracting the taxes already paid.

The taxable income in India applies to various entities such as Hindu Undivided Families (HUFs), firms, companies and other artificial judicial persons. The amount of tax imposed varies based on the income earned and is regulated by the Indian Income Tax Act of 1961. This taxation system plays a crucial role in generating funds for public services in the country.

How is Taxable Income Different from Gross Income?

Gross income serves as a comprehensive measure of an individual’s or business’s total earnings before any deductions, serving as a key factor in determining tax liability. This figure encompasses all forms of income, encompassing not only salaries and wages but also income generated from investments, rental properties, business operations and other non-exempt revenue streams.

Gross income encompasses all the money earned or received in a year, but not all of it is subject to taxes. Taxable income is the portion of gross income that is considered taxable by the government, after applying deductions and exemptions. These deductions can effectively lower your tax liability by reducing the amount of income the government taxes.

Why Calculating Taxable Income Matters?

Calculating the taxable income is essential for several reasons - it not only determines the amount of tax you owe but also plays a crucial role in helping you plan for the future.

Tax Bill Accuracy: Knowing your taxable income is crucial for accurately calculating your tax liability. This helps you avoid penalties and interest that may occur from underpaying, as well as the disadvantage of giving the government an interest-free loan if you overpay
Tax Planning: Understanding taxable income enables individuals to make well-informed decisions year-round, ultimately leading to a significant reduction in their tax obligations. By skillfully, taking advantage of deductions and credits, as well as strategically timing income and expenses, individuals can effectively minimize the amount of tax they owe. A notable example is the act of contributing to a retirement account, which not only benefits one’s financial future but also serves to decrease their taxable income for the current year.

What are the Components of Taxable Income in India?

We have listed the components of taxable income in India:

Salary
Bonus
Wages
Pensions
Interest and dividends
Business income or self-employment income
Gains from sale of property or securities
Employee bonuses
Estate and trust income
Lottery
Gambling winnings
Severance pay
Tips and gratuities
Tips and gratuities
Alimony
Prizes
Royalties and license receipts
Taxable scholarships and grants
Rents (gross rent)

Step-by-Step Process to Calculate Taxable Income in 2024

This guide is designed to assist you in calculating the amount of taxes (taxable income) you owe on your salary.

Step 1 - Add Up Your Earnings:

Please ensure that you have all your pay stubs or Form 16 from the previous year before proceeding further. It is important to include all sources of income from your job such as base salary, bonuses and allowances when calculating your total income.

Step 2 - Subtract Tax-Free Amounts:

Certain allowances such as house rent allowance (HRA) and travel allowance (LTA) may qualify for tax exemptions. It is important to be aware of the specific rules and regulations for HRA exemptions, so it is advisable to consult the tax department for detailed information.

Step 3 - Reduce Your Taxable Income:

To calculate your taxable income, subtract the standard deduction of 52,000 rupees from your total salary. Additionally, you can deduct any professional tax you have paid during the year.

Step 4 - Include Other Income:

Aside from your primary income, it is important to include any additional sources of earnings such as interest, fees or rental payments. These supplementary income streams can significantly impact your overall financial situation and should be accounted for when assessing your financial status.

Step 5 - Your Taxable Income:

The gross taxable income obtained by following these steps is utilized in the computation of your income.

Step 6 - Tax Breaks (Optional):

You can significantly lower your taxable income by taking advantage of tax deductions available for investments and expenses. By exploring options such as Section 80C and 80D, you can effectively reduce the amount of tax you owe. Therefore, it is important to consider these deductions to optimize your tax planning and financial strategy.

Step 7 - Net Taxable Income:

The net taxable income is the amount left after all deductions have been applied and it is the basis on which your tax liability is calculated. It represents the actual income that is subject to taxation.

How Can I Reduce Taxable Income Legally?

You may be interested in exploring strategies to minimize your annual income tax obligations. The Income Tax Act, of 1961, offers tools and investment options under section 80C that can help reduce taxable income legally. Additionally, other sections allow for tax deductions on specific expenses and income streams incurred throughout the year.

1. Long-Term Investments

Public Provident Fund (PPF): Invest for 15 years (extendable) with a minimum of ₹500 per year. Earn interest currently at 7.1% per annum. Get tax benefits on contributions and earned interest.
National Savings Certificate (NSC): Invest for 5 years with a minimum of ₹1,000. Earn interest currently at 7.9% per annum. Get tax benefits on the investment amount and earned interest.

2. Traditional Tax Saving Options

Tax-Saving Fixed Deposits (FDs): Invest for 5 years (extendable) with a bank. Interest rates vary. Get tax benefits on the investment amount.
Senior Citizen Savings Scheme (SCSS): For retirees, invest ₹1,000 to ₹15 lakh for 5 years (extendable). Earn tax-free interest up to ₹10,000 per year.

3. Government Schemes for Specific Groups

Sukanya Samriddhi Yojana: Invest for your girl child up to 21 years. Minimum ₹250. Earn interest at 7.6% currently. Get tax benefits on investments, withdrawals, and maturity amounts.

4. Mutual Funds

Equity Linked Saving Schemes (ELSS): Invest for a minimum of 3 years. Higher potential returns compared to other options. Get tax benefits on investment up to ₹1.5 lakh per year.

5. Retirement Planning

National Pension Scheme (NPS): Invest for retirement. Offers tax benefits and potential for high returns.

6. Other Deductible Expenses

Home Loan Principal Payment (up to ₹1.5 lakh)
Education Loan Interest (no maximum limit)
Medical Insurance Premiums (up to ₹50,000 or ₹1 lakh in some cases)
Donations to Charitable Institutions (under Section 80G)
House Rent Paid (up to ₹60,000 annually)
Interest Income from Savings Account (up to ₹10,000)
Medical Expenses for Dependents (depending on disability)
Medical Expenses for Self (if disabled)
Donations to Political Parties (up to 10% of gross income)

Conclusion

The government also provides numerous tax benefits to both resident and non-resident individuals as well as institutions. Therefore, it is more advantageous to capitalize on all the available options rather than merely lamenting about them. By being fully informed about your rights, you can potentially save a significant amount of taxes in India.

Saving tax in India is necessary due to the unavoidable nature of taxes. One effective way to achieve this is by investing in mutual funds, stocks and bonds. Mortgage interest and capital gains also fall under the category of tax-saving methods. Nevertheless, it requires considerable time and effort to effectively manage and save taxes.

Frequently Asked Questions (FAQs)

1. What is taxable income?

Taxable income refers to the portion of your income that is subject to income tax. It is determined by subtracting eligible deductions and exemptions from your total income. This includes earnings from different sources such as salary, capital gains, rental income and investment interests.

2. How do I calculate my gross income?

Gross Income for salaried individuals comprises basic salary, dearness allowance, house rent allowance, city compensatory allowance and taxable allowances or benefits from the employer. It also includes gratuities, bonuses and overtime pay.

For individuals with income from other sources, you'll need to consider income from freelancing, rental properties, dividends, interest on fixed deposits, and capital gains from the sale of assets.

3. What deductions can I claim against my gross income?

The Indian Income Tax Act (1961) provides provisions for deductions on a wide range of investments and expenses. These deductions serve as valuable opportunities for individuals to reduce their taxable income and save on taxes. Among the numerous deductions available, a few common ones include -

Investments made under Section 80C include contributions to the Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), and payment of tuition fees for your children. These investments provide tax benefits up to Rs. 1.5 lakh and can help in reducing your taxable income.
Section 24 specifically addresses the repayment of the principal amount on a home loan
Health insurance premiums for self, spouse and dependant parents are deductible under Section 80D
Donations to charities are eligible for tax benefits under Section 80G

4. How can I calculate my final tax liability?

After calculating your gross income and deducting expenses, you will find your taxable income. This is used to determine your basic tax liability based on the applicable tax slab. In addition, a 4% health and education cess is imposed on the tax amount.

You may be eligible for rebates or have already paid tax at source (TDS) through your salary or other income sources. These amounts can be deducted from your basic tax liability to determine your final tax payable or refundable amount.

5. Should I choose the old or new tax regime?

It is important to carefully consider the impact of the new tax regime introduced by the Indian government in 2020. The regime offers lower tax rates but eliminates deductions available under the old regime, such as the Section 80C deductions. Take the time to analyze your income sources, potential deductions and tax brackets under both regimes before making a decision. Online tax calculators can be helpful tools for comparing the tax liability under both options.

6. What if I have income from freelance work?

Declare your freelancing income under “Income from Business and Profession” and deduct legitimate business expenses like travel costs and office supplies to reduce your taxable income. Keep thorough records of all income and expenses to ensure accurate tax filing.

7. How do I report capital gains from selling assets?

Capital gains are the profits made from selling assets like stocks or real estate. The tax implications vary depending on the type of asset and how long it was held for. Short-term capital gains from stocks or mutual funds are subject to a flat rate of 15%. Long-term capital gains, on the other, can be offset by exemption limits. For detailed advice on reporting capital gains, it is recommended to consult our tax advisor.

8. What happens if I miss the tax filing deadline?

In India, income tax returns must be filed by 31st July of the assessment year to avoid late filing penalties. The longer you delay, the higher the penalty amount. To avoid penalties, it is best to file your return well before the deadline.