Computation of Income Tax – FAQs & Examples

What are the payment deadlines for income tax?

The payment deadlines vary based on the type of taxpayer. For individuals earning income from business or profession, advance tax installments are typically due on June 15, September 15, December 15, and March 15. Salaried individuals often have taxes deducted at source by their employers. The deadline for filing Income Tax Returns (ITR) is usually July 31, unless extended by the tax department.

How is tax liability computed?

To calculate tax liability, determine your total income for the financial year, including income from salary, business, profession, house property, capital gains, and other sources. Deduct applicable exemptions, deductions, and allowances from your total income to arrive at the taxable income. The tax rates and slabs based on your income category will then determine the amount of tax you owe.

What are deductions and how can I benefit from them?

Deductions are provisions that reduce your taxable income, thereby reducing your overall tax liability. Common deductions include investments in instruments like the Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension Scheme (NPS), and payment of Life Insurance Premiums. Other deductions may include expenses like tuition fees, medical insurance premiums, and home loan interest payments.

How can I maximize tax benefits?

Maximizing tax benefits involves strategic planning. Take advantage of deductions under various sections such as 80C, 80D, 80G, and more. Plan your investments and expenses in a way that optimizes your tax benefits and helps reduce your tax liability. Consult a tax professional or chartered accountant to explore suitable options based on your financial situation.

What should I consider when filing my Income Tax Return (ITR)?

When filing your ITR, ensure that you report all your sources of income accurately. Avail the deductions and exemptions applicable to you. Double-check your ITR before submission to avoid errors or omissions that could result in penalties or additional tax demands. It is advisable to file your ITR well before the deadline to avoid any last-minute rush or technical glitches.

Should I seek professional advice for income tax computation?

Seeking professional advice is beneficial, especially if you have complex income sources or are unsure about certain tax provisions. A tax professional or chartered accountant can provide expert guidance, help you understand the intricacies of income tax computation, and ensure that your tax planning and filing are done correctly.

What is a surcharge and how it is computed?

The surcharge is an additional tax levied on the base income tax liability of certain individuals or entities. It is typically imposed on high-income earners or entities with substantial income. The surcharge rate varies depending on the income level and the applicable tax rules of the country.

The computation of surcharge differs across jurisdictions, but it is usually calculated as a percentage of the income tax liability before considering any deductions or exemptions. The surcharge rate increases with higher income brackets, resulting in higher tax liability for individuals falling within those brackets.

For example, in India, the surcharge rate is applied to individuals with taxable income exceeding a specified threshold. The surcharge rates can vary from year to year and are progressive, meaning that the rate increases with higher income levels. The surcharge is calculated on the total tax liability, including applicable cess or education and health cess, if any.

We have mentioned all the surcharge rates applicable to the different entitled and individuals in tabular form for a clear understanding. 

What is marginal relief?

Marginal means a provision that provides relaxation on the applicable surcharge provided to taxpayers whose taxable income is more than the prescribed limit. Marginal relief can only be utilized on the surcharge, not on health or education cess. 

What is the difference between gross total income and total income?

Gross Total Income: Gross total income refers to the total income earned by an individual or entity from all sources before any deductions or exemptions are applied. It includes income from various heads such as salary, business or profession, house property, capital gains, and other sources. Gross total income is calculated by summing up the income from all these sources.

Total Income: Total income, on the other hand, is the income remaining after deductions and exemptions are applied to the gross total income. Deductions and exemptions are allowed under income tax laws to reduce taxable income and provide relief to taxpayers. Some common deductions include those for investments in specific schemes like provident funds, life insurance premiums, medical expenses, and deductions for education loans.

To calculate the total income, deductions, and exemptions under various sections of the income tax laws are subtracted from the gross total income. The resulting amount is the total income, which is used to determine the income tax liability of an individual or entity.

How to Compute the total tax liability?

The first step is to determine your residential status for the financial year. It can be classified as Resident, Non-Resident, or Resident but Not Ordinarily Resident, which has implications on the tax rates and income that is taxable.

Then calculate your gross total income by summing up income from all applicable sources, such as salary, business or profession, house property, capital gains, and other sources.

After that, identify and claim deductions and exemptions available under various sections of the Income Tax Act, such as deductions for investments, insurance premiums, medical expenses, education loans, and exemptions for allowances like House Rent Allowance (HRA) and Leave Travel Allowance (LTA).

Thereafter deduct the eligible deductions and exemptions from the gross total income to arrive at the total income.

Post the above step, determine the applicable tax slab based on your total income and the individual income tax rates specified by the income tax department. The tax slabs and rates may vary depending on the residential status and age category.

Next, calculate the tax liability by applying the respective tax rates to the income falling within each tax slab. Add up the tax amounts from all slabs to arrive at the total tax liability.

Consider additional components such as Health and Education Cess, which are applicable as a percentage of the total tax liability. Also, if applicable, compute surcharge based on specific criteria like high-income levels.

Lastly, reduce the total tax liability by considering any tax deducted at source (TDS) or advance tax payments made during the financial year. If TDS or advance tax is higher than the calculated tax liability, you may be eligible for a tax refund.

What is the rebate under section 87A for F.Y 2023-24 and who can claim it?

Individuals who are residents of India and have a total income not exceeding Rs. 5,00,000 can claim a rebate under section 87A. This rebate is provided as a deduction from the tax liability. The rebate amount under section 87A is the lower of 100% of the income-tax liability or Rs. 12,500. 

In simpler terms, if the tax liability is more than Rs. 12,500, the rebate will be limited to Rs. 12,500. However, if the total income (i.e., taxable income) exceeds Rs. 5,00,000, no rebate will be available.

A resident individual who chooses the new tax scheme under Section 115BAC(1A) and has a total income up to Rs. 7,00,000 is eligible for a maximum rebate of Rs. 25,000 under Section 87A. 

However, if the total income exceeds Rs. 7,00,000 and the tax payable on that income exceeds the difference between the total income and Rs. 7,00,000, the individual can claim a rebate with marginal relief. 

The marginal relief rebate is available for the amount by which the tax payable on the total income exceeds the difference between the total income and Rs. 7,00,000.

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