Computation of Total Income and Tax liability of Individuals
Income-tax is levied on an assessee’s total income. Total income has to be computed as per the provisions contained in the Income-tax Act, 1961. The following steps has to be followed for computing the total income of an assessee:
Step 1 – Determination of residential status
- Resident and ordinarily resident
- Resident but not ordinarily resident
Note – An Indian citizen who is a deemed resident in India would be a resident but not ordinarily resident in India.
Step 2 – Classification of income under five heads
- Income from house property,
- Profits and gains of business or profession
- Capital Gains
- Income from other sources
Step 3– Computation of income under each head
Income under each head – exemptions – deductions
Step 4 – Clubbing of income of spouse, minor child etc.
Step 5 – Set-off current year losses and brought forward losses
- Inter-source set-off of losses
- Inter-head set-off of losses
- Carry forward for set-off of losses
Step 6 – Computation of Gross Total Income
Gross Total Income = Add income computed under each head →Apply clubbing provisions →Apply the provisions for set-off and carry forward of losses
Step 7 – Deductions from Gross Total Income
- Deductions in respect of certain payments
- Deductions in respect of certain incomes
- Deduction in respect of other incomes
- Other deductions
Step 8 – Computation of Total income
- Gross Total Income – Deduction under Chapter VI-A
- Rounded off to the nearest multiple of Rs. 10
Step 9 – Application of rates of tax on total income in case of an individual
Step 10 – Surcharge and Rebate
It may be noted that the enhanced rates of surcharge@25% and 37% will not apply in respect of dividend income, long-term capital gains taxable u/s 112A and short-term capital gains taxable u/s 111A.
Rebate under section 87A: Rebate of up to Rs. 12,500 for resident individuals having total income of up to Rs. 5 lakh.
Step 11 – Health and Education cess on Income-tax:
|Health and Education cess||4%of income-tax and surcharge, if applicable|
|Tax on total income at applicable rates||xxx|
|+ Surcharge, at applicable rates, if total income >Rs. 50 lakhs||xxx|
|– Rebate u/s 87A, if total income ≤ Rs.5 lakh||(xxx)|
|Total Tax Liability||xxx|
Step 12 – Examine the applicability of AMT
- If an individual is claiming deduction under section 10AA or under section 35AD or section 80JJAA, 80QQB & 80RRB and his adjusted total income exceeds Rs. 20 lakhs, AMT provisions will apply.
- Compute AMT [18.5% of adjusted total income]
- If AMT >tax computed as per regular provisions, adjusted total income would be deemed to be total income.
- Tax is leviable @18.5%
- Tax credit to be c/f = AMT less Tax computed as per regular provisions.
- Individuals or HUFs exercising option u/s 115BAC are not liable to alternate minimum tax u/s 115JC.
Step 13 – Examine whether or not to exercise the option under section 115BAC for availing concessional tax slab rates
As per section 115BAC, individuals or HUFs have an option to pay tax in respect of their total income (other than income chargeable to tax at special rates under Chapter XII) at following concessional rates, if they do not avail certain exemptions/deductions like LTC, standard deduction under the head “Salaries”, interest on housing loan on self-occupied property, deductions under Chapter VI-A (other than 80CCD(2) or section 80JJAA) etc. –
|(ii)||FromRs. 2,50,001 to Rs.5,00,000||5%|
|(iii)||From Rs.5,00,001 to Rs.7,50,000||10%|
|(iv)||From Rs.7,50,001 to Rs. 10,00,000||15%|
|(v)||From Rs.10,00,001 to Rs.12,50,000||20%|
|(vi)||From Rs. 12,50,001 to Rs.15,00,000||25%|
Examine the tax liability computed under the regular provisions of the Act (including provisions relating to AMT, if applicable) with the tax liability computed under section 115BAC. Thereafter, if tax liability is lower as per the provisions under section 115BAC, then opt to pay tax as per section 115BAC.
Note – If an individual or HUF having income from business or profession exercises option to pay tax under section 115BAC in a previous year, then, the said provisions would apply for all subsequent previous years,
An individual or HUF not having income from business or profession can exercise the option to pay tax under section 115BAC for each previous year. He may exercise the option in a particular previous year, but may not do so in another previous year, depending on whether or not exercising the option is beneficial to him in the respective previous year.
Step 14 – Credit for advance tax, TDS and TCS
Net Tax Liability =Total tax liability- TDS – TCS – Advance tax paid
Step 15 – Tax payable/ Tax refundable
- Net tax liability should be rounded off to the nearest multiple of Rs. 10.
- The assessee has to pay the amount of tax payable (called self-assessment tax) at the time of filing of the return
- If any refund is due, assessee will get the same after filing the return of income.