Before you file your income tax returns, know the difference between Gross Taxable Income and Net Taxable Income. Gross Taxable Income is the income before deductions and Net Taxable Income is the income after deductions. Although, you pay taxes on net taxable income, gross taxable income needs to be reported as well. In order to file your income tax return, collect all the information required to file it and then compute your total taxable income from these 5 sources:
#1. Income from salary:
To calculate your salary income ask your employer for your TDS certificate, Form 16 and salary slips. These will have details of your salary, reimbursements, allowances and tax deducted at source. From these documents add up all the compensations made by your company to you such as basic salary, dearness allowed, house rent allowance, and any reimbursements which will be mentioned in Form 16 Part B, add any bonuses received and this will be your gross taxable income from salary. After deducting any exemptions (such as exemption on HRA) or deductions (such as standard deduction) from your Gross Salary Income you’ll arrive at the net taxable income from salary.
#2. Income from house property:
This is the rent that you receive from house property and even if you haven’t rented it out, you’re still supposed to calculate income from it (this will be 0 or negative in most cases). Here’s how you do that:
First figure the Fair Market Value (expected rent from similar property) and Municipal Valuation (valuation as per municipal authorities). Take the higher value of the two and this is your expected rent. Compare this expected rent with the actual rent received/receivable for the year and the higher of the two will be the GROSS ANNUAL VALUE (GAV) of the house property.
Note: If property is covered under Rent Control Act, then Expected rent cannot exceed the Fair Market Value.
Deduct municipal taxes actually paid during the year from GAV and that’s the net annual value (NAV). Now from this NAV deduct any other deductions under section 24, deduct a standard deduction of 30% and deduct any annual interest paid on the amount of loan taken, if any, to purchase the house and that will be your income from house property.
Note: In case of self-occupied property, the GAV would be taken as nil and maximum deduction of interest paid would be limited to Rs. 200000.
#3. Income from capital gains:
Computation of this income depends on the nature and number of transactions and it’s a little complex. That’s why it is recommended to consult a CA for calculating tax on income from capital assets.
Capital assets are investments owned by an individual such as a share certificate, properties, bonds etc. Any gains made from selling these assets are termed as capital gains and are divided as ‘Short Term Capital Gains (STCG)’ and ‘Long Term Capital Gains (LTCG)’. Usually STCG are the gains made on selling these assets within a year of buying them. While, LTCG gains are gains made on selling these assets after a year of buying them. However for few assets like real estate and gold, STCG are the gains made on selling them within 3 years of buying them and LTCG are gains made on selling them after 3 years of buying them.
#4. Income from business
In case it’s a small business you can calculate income from business on your own. But for bigger businesses with complex transactions hiring a CA to calculate your taxable income makes sense. That’s because under the IT act several provisions deal with the allowances and disallowances of various expenses and incomes. A CA is acquainted with all these provisions and can audit your business accounts according to them.
#5. Income from other sources:
All incomes not mentioned in the above 4 categories come under this head. This usually includes any income from interest on bank deposit accounts, dividends from shares and mutual funds and any monetary gifts that are taxable. You can get these amounts from the credit entries in your savings account and in case of an FD you will have to ask for interest certificates or if tax has been deducted at source then ask for the TDS certificate. For dividends on shares as well, if tax has been deducted at source ask for a TDS certificate. Once that’s done, subtract the deductions available under Income Tax act for which you are eligible to arrive at the Net Taxable Income.
Once you’ve totaled income from all these sources set off losses:
To reduce your tax liability you can set off any losses incurred in the current year or losses brought forward. As per IT laws you can set off the losses under one head of income from income under the same head or other heads of income, provided:
* Loss from business isn’t set off from income from salary.
* Long term capital losses isn’t set off against any other head of income.
* Short term capital losses can be set off against any other short term capital gains as well as long term capital gains, but not against any other head of income
* Losses from owning and maintaining race horses can’t be set off against any other head of income
Once you’ve computed the gross total income divide it into 2 parts:
- Income from salary, income from business, income from house property, income from other sources are NORMAL INCOME which will be subject to tax according to the various tax slabs.
- Remaining Income such as short term capitals gains will be subject to 15% tax, long term capital gains at 20% (except those that are exempted from being taxed) and income from lottery or horse racing will be taxed at 30%.
Note: After 1st April 2018, long term capital gains above Rs. 1, 00,000 from equity shares and equity mutual funds will be taxed at 10%. Until then they are tax free.
Deduct any tax saving investments to reduce your taxable income:
If you’ve made any investments under Section 80 , deduct it from your gross income and the remaining income will be taxed at the prevailing rates. If you’re salaried make sure you inform your accounts department about these investments before so they don’t deduct more tax from your salary. Note: These deductions cannot be claimed on capital gains.
Using this information calculate your tax liability with this simple calculator. If you’re still liable to pay any more tax then pay it physically via cheque or online using challan ITNS 280. Once that’s done choose a way to file your returns! For any questions, comment below to let us know.