Computation of Taxable Income and Tax under
Income Tax Act 1961
[As amended by Finance Act, 2015]
Reference: www.Incometaxindia.gov.in
Taxable Income
- Under how many heads the income of a taxpayer is classified for computing Taxable Income?
Section 14 of the Income-tax Act has classified the income of a taxpayer under five different heads of income, viz.:
- Salaries
- Income from house property
- Profits and gains of business or profession
- Capital gains
- Income from other sources
- What is gross total income?
Total income of a taxpayer from all the heads of income (as discussed in previous FAQ) is referred to as Gross Total Income.
- What is the difference between gross total income and total income (Taxable Income) ?
Taxable Income
Section 80C to 80U provides certain deductions which can be claimed from Gross Total Income (GTI). After claiming these deductions from GTI, the income remaining is called as Total Income. In other words, GTI less Deductions (under section 80C to80U) = Total Income (TI). Total income can also be understood as taxable income. Following table gives a better understanding of the difference between GTI and TI :
Computation of gross total income and Taxable Income
Particulars Amount Income from salary XXXXX Income from house property XXXXX Profits and gains of business or profession XXXXX Capital gains XXXXX Income from other sources XXXXX Gross Total Income XXXXX Less : Deductions under Chapter VI-A (i.e. under section 80C to80U) (XXXXX) Total Income (i.e., taxable income) XXXXX Note : Inter source losses, inter head losses, brought forward losses, unabsorbed depreciation, etc., (if any) will have to be adjusted (as per the Income-tax Law) while computing the gross total income.
- How to round off total income before computing tax liability?
As per section 288A, total income computed in accordance with the provisions of the Income-tax Law, shall be rounded off to the nearest multiple of ten. Following points should be kept in mind while rounding off the total income:
- First any part of rupee consisting of any paisa should be ignored.
After ignoring paisa, if such amount is not in multiples of ten, and last figure in that amount is five or more, the amount shall be increased to the next higher amount which is in multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is in multiple of ten and the amount so rounded off shall be deemed to be the total income of the taxpayer.
Illustration for better understanding
If the taxable income of Mr. Keshav is Rs. 2,52,844.99, then first paisa shall be ignored, i.e., 0.99 paisa shall be ignored) and the remaining amount of Rs. 2,52,844 shall be rounded off to Rs. 2,52,840 (since last figure is less than five). If the total income is Rs. 2,52,845 or Rs. 2,52,846.01, then it shall be rounded off to Rs. 2,52,850 (since the last figure is five or above).
- Can I claim deduction for my personal and household expenditure while calculating my taxable income or profit?
Taxable income
No, you cannot claim deduction of personal expenses while computing the taxable income.
While computing income under various heads, deduction can be claimed only for those expenses which are provided under the Income-tax Act.
- Most of my income is given away in charity and I am left with just enough money to meet my personal requirements. What will be considered as my Taxable Income?
What is done after the income is earned by you will not give you tax exemption. However, contribution to approved institutions will give you the benefit of deduction from taxable income under section 80G subject to limits specified therein.
- My daughter stays in USA. She owns a house in India and has let it out. She has asked tenants to pay rent to me. She has not received any rent. what is her Taxable Income? Is she still liable to tax? What if she transfers the house to me?
Rental income is charged to tax in the hands of the owner of the property. Your daughter is the owner of the house , she is earning Taxable Income and, therefore , she is liable to pay tax, even though you receive rent. If the house is transferred to you, then you will become the owner and you will have to pay Income-tax on the rental income.
- Is there any limit of income below which I need not pay tax?
Taxable income and Slab rates
At this moment (i.e., for the financial year 2015-16) Individual, HUF, AOP, and BOI having income below Rs. 2,50,000 need not pay any Income-tax. In respect of resident individuals of the age of 60 years and above but below 80 years, the basic exemption limit is Rs. 3,00,000 and in respect of resident individuals of 80 years and above, the limit is Rs. 5,00,000. For other categories of persons such as co-operative societies, firms, companies and local authorities, no basic exemption limit exists and, hence, they have to pay taxes on their entire income chargeable to tax.
- How to compute Taxable Income and total tax liability?
After ascertaining the total income (Taxable Income) , i.e., income liable to tax, the next step is to compute the tax liability for the year. Tax liability is to be computed by applying the rates prescribed in this regard. For rates of tax, refer “Tax Rate” section. Following table will help in understanding the manner of computation of the total tax liability of the taxpayer.
Computation of total income (Taxable Income) and tax liability for the year
Particulars Amount Income from salary XXXXX Income from house property XXXXX Profits and gains of business or profession XXXXX Capital gains XXXXX Income from other sources XXXXX Gross Total Income XXXXX Less : Deductions under Chapter VI-A (i.e., under section 80C to80U)) (XXXXX) Total Income (i.e., taxable income) XXXXX Tax on total income to be computed at the applicable rates (for rates of tax, refer “Tax Rate” section) XXXXX Less : Rebate under section 87A (discussed in later FAQ) (XXXXX) Tax Liability After Rebate XXXXX Add: Surcharge (discussed in later FAQ) XXXXX Tax Liability After Surcharge XXXXX Add: Education cess @ 2% on tax liability after surcharge XXXXX Add: Secondary and higher education cess @ 1% on tax liability after surcharge XXXXX Tax liability before rebate under sections 86, section 89, sections 90, 90A and 91 (if any) (*) XXXXX Less : Rebate under sections 86, section 89, sections 90, 90Aand 91(if any) (*) (XXXXX) Tax liability for the year before pre-paid taxes XXXXX Less: Prepaid taxes in the form of TDS, TCS and advance tax (XXXXX) Tax payable/Refundable XXXXX (*) Rebate under section 86 is available to a member of association of persons (AOP) or body of individuals (BOI) in respect of income received by such member from the AOP/BOI.
Rebate (i.e., relief) under section 89 is available to a salaried employee in respect of sum received towards arrears of salary, gratuity, etc.
Rebate under sections 90, 90A and 91 is available to a taxpayer in respect of double taxed income, i.e., income which is taxed in India as well as abroad.
Note : For provisions relating to Minimum Alternate Tax (MAT) in case of corporate taxpayers and Alternate Minimum Tax (AMT) in case of non-corporate taxpayers refer tutorial on “MAT/AMT”.
- How to round off the tax liability?
As per section 288B, tax payable by the taxpayer or tax refundable to the taxpayer shall be rounded off to the nearest multiple of ten, following points should be kept in mind while rounding off the tax :
- First any part of rupee consisting of any paisa should be ignored.
- After ignoring paisa, if such amount is not a multiples of ten, and the last figure in that amount is five or more, the amount shall be increased to the next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is a multiple of ten; and the amount so rounded off shall be deemed to be the tax payable by the taxpayer or refundable to the taxpayer.
Illustration for better understanding
If the tax liability or refund due to Mr. Keshav is Rs. 2,52,844.99, then first paisa shall be ignored, (i.e., 0.99 paisa shall be ignored) and the remaining amount of Rs. 2,52,844 shall be rounded off to Rs. 2,52,840 (since last figure is less than five). If the tax liability or refund due is Rs. 2,52,845 or Rs. 2,52,846.01, then it shall be rounded off to Rs. 2,52,850 (since the last figure is five or above).
- What is rebate under section 87A and who can claim it?
Taxable Income and Rebate sec 87A
An individual who is resident in India and whose total income (Taxable Income) does not exceed Rs. 5,00,000 is entitled to claim rebate under section 87A. Rebate under section 87A is available in the form of deduction from the tax liability. Rebate under section 87A will be lower of 100% of income-tax liability or Rs. 2,000. In other words, if the tax liability exceeds Rs. 2,000, rebate will be available to the extent of Rs. 2,000 only and no rebate will be available if the total income (i.e. taxable income) exceeds Rs. 5,00,000.
Illustration for better understanding
Mr. Raja (age 35 and resident in India) is a salaried employee. His taxable salary for the year 2015-16 amounted to Rs. 5,84,000. He has deposited Rs. 94,000 in public provident fund untitled for deduction under section 80C. The employer has deducted tax of Rs. 22,660 from his salary. What will be his tax liability for the year?
**
Particulars Amount Income from salary 5,84,000 Income from house property Nil Profits and gains of business or profession Nil Capital gains Nil Income from other sources Nil Gross Total Income 5,84,000 Less : Deductions under section 80C on account of investment in PPF 94,000 Total Income (i.e., taxable income) 4,90,000 Tax on taxable income to be computed by applying the applicable rates (*) 24,000 Less : Rebate under section 87A (**) 2,000 Tax Liability After Rebate 22,000 Add: Surcharge ($) Nil Tax Liability After Surcharge 22,000 Add: Education cess @ 2% on tax liability after surcharge 440 Add: Secondary and higher education cess @ 1% on tax liability after surcharge 220 Tax liability before rebate under sections 86, section 89, sections 90, 90A and 91 (if any) 22,660 Less : Rebate under sections 86, section 89, sections 90, 90Aand 91 (if any) Nil Tax Liability for the Year Before Pre-paid Taxes 22,660 Less: Prepaid taxes in the form of TDS 22,660 Tax payable/Refundable Nil (*) The tax rates for the financial year 2015-16 applicable to an individual below the age of 60 years are as follows :
- Nil upto income of Rs. 2,50,000
- 10% for income above Rs. 2,50,000 but upto Rs. 5,00,000
- 20% for income above Rs. 5,00,000 but upto Rs. 10,00,000
- 30% for income above Rs. 10,00,000.Apart from above, education cess @ 2% and secondary and higher education cess @ 1% will be levied on the amount of income-tax. Applying the above normal tax rates, tax on income (before cess) will come to Rs. 24,000.(**) Rebate under section 87A will be Rs. 2,000, being lower of following :(a) Tax on total income, i.e., Rs. 24,000; or(b) Rs. 2,000($) Surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, the total income is below Rs. 1 crore and, hence, no surcharge will be levied.Illustration for better understanding Mr. Kapoor (age 35 years and resident in India) is running a medical store. Taxable business income for the year amounted to Rs. 5,84,000. He does not have any other income. He deposited Rs. 50,000 in public provident fund. Can he claim rebate under section 87A?**Rebate under section 87A is available to an individual who is resident in India and whose total income does not exceed Rs. 5,00,000. In this case, the gross total income of Mr. Kapoor is Rs. 5,84,000 and he has deposited Rs. 50,000 in PPF and, hence, total income i.e. taxable income will come to Rs. 5,34,000 (Rs. 5,84,000 less Rs. 50,000). Rebate under section 87A is available only if the total income does not exceed Rs. 5,00,000. In this case, the total income exceeds Rs. 5,00,000 and, hence, he cannot claim rebate under section 87A.
- Can a partnership firm or HUF claim rebate under section 87A?
Rebate under section 87A is available only to an individual, hence, any person other than an individual cannot claim rebate undersection 87A.
- Can a non-resident claim rebate under section 87A?
Rebate under section 87A is available only to an individual who is resident in India, hence, non-residents cannot claim rebate undersection 87A.
- What is surcharge and how it is computed?
Surcharge is an additional tax levied on the amount of income-tax. In case of taxpayers other than company surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore (*).
In case of a domestic company surcharge is levied @ 7% on the amount of income-tax if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and @ 12% on the amount of income-tax if total income exceeds Rs. 10 crore (*).
In case of a foreign company surcharge is levied @ 2% on the amount of income-tax if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and @ 5% on the amount of income-tax if total income exceeds Rs. 10 crore (*).
(*) A taxpayer can claim marginal relief from the amount of surcharge, subject to certain conditions. Refer to next FAQ for concept of marginal relief.
Illustration for better understanding
Mr. Kapoor is a doctor, his total income for the year amounted to Rs. 84,00,000. Will he be liable to pay surcharge, if yes, then how much?
**
Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers other than company surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, total income of Mr. Kapoor is below Rs. 1 crore, hence, he will not be liable to pay surcharge.
- What is marginal relief and how it is computed?
Taxable income and marginal relief
The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above Rs. 1 crore or Rs. 10 crore, as the case may be. Thus, while computing surcharge, in case of taxpayers (other than a company) having total income of more than Rs. 1 crore, marginal relief shall be available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
In case of a company, surcharge is levied @ 7% (2% in case of foreign company) on the amount of income-tax if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and @ 12% (5% in case of foreign company) on the amount of income-tax if total income exceeds Rs. 10 crore. Hence, in case of company whose total income exceeds Rs. 1 crore but does not exceeds Rs. 10 crore, marginal relief will be computed as discussed above, but in the case of company having total income above Rs. 10 crore marginal relief is available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.
Illustration for better understanding
Mr. Raja is businessman (age 35 years). His total income for the year 2015-16 amounted to Rs. 1,01,00,000. Will he be liable to pay surcharge, if yes, then how much and will he get the benefit of marginal relief?
**
Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers other than company, surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, total income of Mr. Raja exceeds Rs. 1 crore and hence he will be liable to pay surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e.liability after marginal relief) will be as follows :
(1) Normal tax liability (i.e. without marginal relief)
Tax on total income before surcharge (*) 28,55,000 Add: Surcharge (@ 12% on the amount of income-tax of Rs. 28,55,000) 3,42,600 Tax liability after surcharge (i.e., normal tax liability) 31,97,600 (*) The normal tax rates for the financial year 2014-15 applicable to an individual below the age of 60 years are as follows :
- Nil upto income of Rs. 2,50,000
- 10% for income above Rs. 2,50,000 but upto Rs. 5,00,000
- 20% for income above Rs. 5,00,000 but upto Rs. 10,00,000
- 30% for income above Rs. 10,00,000.Apart from above rates, cess will be computed separately.(2) Tax liability under marginal relief (i.e. after marginal relief)
Tax on Rs. 1 crore (at the above discussed rates) 28,25,000 Add: Income above Rs. 1 crore 1,00,000 Tax liability under marginal relief 29,25,000 Conclusion
Normal tax liability (i.e. without marginal relief) comes to Rs. 31,97,600 and tax liability under marginal relief comes to Rs. 29,25,000. It can be observed that tax liability under marginal relief is lower and, hence, Rs. 29,25,000 will be the tax liability before cess. Total tax liability will be computed as follows :
Rs. Tax liability after marginal relief (*) 29,25,000 Add: Education cess @ 2% 58,500 Add: Secondary and higher education cess @ 1% 29,250 Tax liability 30,12,750 (*) In this case, surcharge paid by Mr. Raja will be Rs. 70,000 computed as follows :
Rs. Tax liability (before cess) on Rs. 1,01,00,000 after considering the provisions of marginal relief 29,25,000 Tax liability (before cess) at normal rates on Rs. 1,01,00,000 if surcharge is not levied 28,55,000 Surcharge (i.e. increase in tax liability) 70,000 Illustration for better understanding
Mr. Karan is a businessman (age 35 years). His total income i.e Taxable Income for the year 2015-16 amounted to Rs. 1,06,00,000.Will he be liable to pay surcharge, if yes, then how much and will he get the benefit of marginal relief?
**
Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers other than company surcharge is levied @ 12% on the amount of income-tax where the total income i.e Taxable Income of the taxpayer exceeds Rs. 1 crore. In this case, total income/Taxable Income of Mr. Karan exceeds Rs. 1 crore and hence he will be liable to pay surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e.liability after marginal relief) will be as follows :
(1) Normal tax liability (i.e., without marginal relief)
Tax on total income before surcharge (*) 30,05,000 Add: Surcharge (at 12% on the amount of income-tax of Rs. 30,05,000) 3,60,600 Tax liability after surcharge (i.e., normal tax liability) 33,65,600 (*) Tax rates are discussed in previous illustration.
(2) Tax liability under marginal relief (i.e. after marginal relief)
Tax on Rs. 1 crore (at the rates discussed in previous illustration) 28,25,000 Add: Income above Rs. 1 crore 6,00,000 Tax liability under marginal relief 34,25,000 Conclusion
Normal tax liability (i.e. without marginal relief) comes to Rs. 33,65,600 and tax liability under marginal relief comes to Rs. 34,25,000. It can be observed that normal tax liability (i.e. without marginal relief) is lower and, hence, Rs. 33,65,600 will be the tax liability before cess. Total tax liability will be computed as follows :
Rs. Normal tax liability i.e. tax liability after surcharge of Rs. 3,60,600
33,65,600 Add: Education cess @ 2% 67,312 Add: Secondary and higher education cess @ 1% 33,656 Tax liability 34,66,568 - What is minimum alternate tax?
At times it may happen that a taxpayer, being a company, may have generated income during the year, but by taking the advantage of various provisions of Income-tax Law (like exemptions, deductions, depreciation, etc.), it may have reduced its tax liability or may not have paid any tax at all. Due to increase in the number of zero tax paying companies, MAT was introduced by the Finance Act, 1987 with effect from assessment year 1988-89. Later on, it was withdrawn by the Finance Act, 1990 and then reintroduced by Finance (No. 2) Act, 1996, wef1-4-1997. The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law. Since the introduction of MAT, several changes have been introduced in the provisions of MAT and today it is levied on companies as per the provisions of section 115JB.
Basic provisions of MAT As per the concept of MAT, the tax liability of a company will be higher of the following:
• Tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., tax computed on the taxable income of the company by applying the tax rate applicable to the company. Tax computed in above manner can be termed as normal tax liability.
• Tax computed @ 18.5% (plus surcharge and cess as applicable) on book profit (manner of computation of book profit is discussed in later part). The tax computed by applying 18.5% (plus surcharge and cess as applicable) on book profit is called MAT.
Illustration
The taxable income of Essem Minerals Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 8,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of Essem Minerals Pvt. Ltd. (ignore cess and surcharge)? ** The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 8,40,000 will amount to Rs. 2,52,000 (plus cess). Book profit of the company is Rs.18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400. Thus, the tax liability of Essem Minerals Pvt. Ltd. will be Rs. 3,40,400 (plus cess as applicable) being higher than the normal tax liability
- What is alternate minimum tax?
Taxable income and Alternate Minimum tax
The provisions of MAT are applicable to a corporate taxpayer only. The provisions relating to AMT are applicable to non-corporate taxpayers in a modified pattern in the form of Alternate Minimum Tax, i.e., AMT. Thus, it can be said that MAT applies to companies and AMT applies to a person other than a company. The provisions relating to AMT are given in sections 115JC to 115JF.
Basic provisions relating to applicability of the AMT to different taxpayers The provisions of AMT will apply to every non-corporate taxpayer who has claimed (i) deduction under section 80H to 80RRB (except 80P), (ii) deduction under section 35AD and (iii) deduction under section 10AA. Thus, the provisions of AMT are not applicable to a noncorporate taxpayer who has not claimed any deduction under above discussed sections. However, following points should be kept in mind in this regard.
• The provisions of AMT shall apply to an individual or a Hindu undivided family or an association of persons or a body of individuals (whether incorporated or not) or an artificial juridical person only if the adjusted total income of such person exceeds Rs. 20,00,000.(Section 115JEE)
• The provisions of AMT shall apply to every other person (i.e., other than an individual or a HUF or an AOP/BOI or an artificial juridical person) irrespective of its income. For definition of a person refer to section 2(31).
Rate of AMT
In case of non-corporate taxpayer, AMT is levied @ 18.5% of adjusted total income (discussed later). Surcharge and cess as applicable will also be levied.
Meaning of adjusted total income
In case of a non-corporate taxpayer, adjusted total income is computed in following manner :
Particulars (Rs.)
Taxable income of the taxpayer XXXX
Add: Amount of deduction claimed under
section 80H to 80RRB (except 80P) XXXX
Add: Amount of deduction claimed under
section 35AD (as reduced by the amount
of depreciation allowable in accordance with
the provisions of section 32) XXXX
Add: Amount of deduction claimed under
section 10AA XXXX
Adjusted total income XXXX