As responsible citizens of this country, it is our duty to pay taxes on time. But what we need to determine in this regard is how much we have to pay and where we can avail tax deductions.
Moreover, we need to keep an eye on tax rates and changes in tax forms which vary year to year. While the first-timers may find the whole thing to be a little hectic, calculation of taxable income is easy when you know where to start and what to consider while you are calculating tax returns for a financial year.
In this article, we sum up everything that you need to know for calculating Income Tax for 2018-2019.
Where to start?
Basically, one has to calculate income tax on the basis of his/her salary. There are a few income slabs and the rate of tax depends on the particular slab that your annual income falls into. Therefore, you need to calculate your total taxable income by applying the tax rate on your salary. The taxpayer needs to apply deductions such as LTA exemptions, HRA, investments, interest on home loan etc. on the total taxable income to find out the net taxable income which he has to pay. There are 5 sources of income which are as follows:
- Income from salary– To calculate income tax from salary, you will have to ask your employer for your salary slip and Form 16 which will contain necessary information like the basic salary, the reimbursement and allowances. Add the bonus received with all your emoluments to get a figure that equals your gross salary. The following items must be deducted from your gross salary to calculate the net taxable income:
- Exempted Portion of House Rent Allowance
- Transport Allowance
- Other reimbursements
It is to be noted that transport allowance (up to Rs. 19,200) and medical reimbursements (up to Rs. 15,000) for FY 2018-19 have been withdrawn. Furthermore, the maximum deduction one may claim from their gross salary is Rs. 40,000 in a year.
- Income from house property– A taxpayer must take into consideration his income from a house property he has let out which, in other words, would be his rental income. The taxpayer has to calculate the Gross Annual Value of the property he has let out by taking either Fair Market Value or Municipal Valuation, the higher of which is considered as expected rent and then by comparing the rent receivable with the expected figure. Deduct the municipal taxes paid from the Gross Annual Value to get Net Annual Value. Deducting the amount from NAV will show the loss or income from buying the property. One may also claim a deduction regarding the annual payment of interest on house loan up to a maximum of Rs. 2, 00,000.
- Income from capital gains– Computing capital gains accurately is a difficult task without any help from an expert as the treatment varies with the nature of the transaction. Here long term and short term gains made from the sale of assets capital in nature are considered.
- Income from Business– Calculating the income tax due for a financial year from a business is a challenging job in itself and it often requires the taxpayer to approach an expert with the matters relating to exemptions under various sections according to the Income Tax Act. However, let’s draw an outline of the process to understand how taxes for small businesses are calculated:
- Take profit (net value) earned by the business in a financial year as the net value.
- Deductions disallowed in the Income Tax Act have to be added back as they have been considered and recorded in the Profit and Loss Account.
- Cut out the expenditures allowed (section 32, 35 and 36) by subtracting them from the last figure.
- Consider putting all other income or the credit entries in your savings passbook (E.g. interest and dividend income, gifts) under the head ‘Income from OtherSources’. Collect interest certificates so as to account for accrued interests that your passbook wouldn’t reflect. In case tax has been deducted from the income accrued, a TDS certificate issued to you shall reflect the same.
- Consider deductions allowed to you under Income Tax Act and subtract them.
Deductions under Section 80
Now that we have a rough idea on calculating income taxes on income all 5 sources: salary, house property, business, capital gains and other sources, let’s take a look at the deductions that are allowed to us under Section 80 of Income Tax Act:
- Section 80C- Under this section, you mayclaim deductions up to Rs. 1, 50,000 for a financial year from your total income. Take into account your investments in LIC, mediclaim, PPF, ULIPs, EPF, NSC, senior citizen savings schemes etc. You can claim a deduction up to a maximum of Rs. 1, 50,000.
- Section 80CCC-This section provides certain deductions under pension schemes. This section only allows these deductions for individuals.
- Section 80CCD-This section provides deductions while filing tax returns in schemes relating to pension by the central government. There are three parts for this section- Section 80CCD (1), 80CCD (2) and 80CCD (1B). If you are voluntarily making contributions to NPS, you are eligible for a deduction up to a maximum of 10% of the salary under Section 80CCD (1) which shall also include dearness allowance. In case your employer contributes to your NPS account, you are eligible to claim deductions under Section 80CCD (2). Under section 80CCD (1B) one can avail additional deductions up to Rs. 50,000 for voluntary contributions towards NPS account.
- Section 80TTA-A maximum of Rs. 10,000 can be claimed as interest earned on a savings account. This income comes under ‘Income from other sources’.
- Section 80GG-This deduction may be availed in case the employee doesn’t receive HRA, provided he does not own any residential property in the city. The deductions that may be claimed are either of the three: (a) Rs. 5,000 per month (b) Rent paid minus 10% adjusted total income (c) 25% of adjusted total income.
There are other sections too (Section 80E, 80EE, 80CCG, 80D, 80DD, 80DDB, 80G, 80U and more) that specify the deductions eligible while filing income tax returns. It is necessary for the taxpayer to have a slight idea about the same so that he/she doesn’t end up paying more.