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Home > Business > Special

Calculate your income in 10 minutes!

Sunil Dhawan and Swami Saran Sharma, Outlook Money | February 07, 2007

'I'm spending a year dead for tax reasons.'  

This is what the tax noose made English writer Douglas Adams say. Many, like Adams, would do anything to escape the pain of taxes. While knowing the tax process does not take the pain away, it does give a better grip on the tax cuts that we get.

For incomes to be taxed, they first need to be classified under various categories to allow us to count them better. Incomes like those from agricultural activity and dividends (from mutual funds and stocks) are not part of income that is counted for taxation. Incomes are classified under five heads in India.

Here's a quick guide to doing what you believed was too tough for you. This is not an exhaustive list of what you can include under each head, but you would be 90 per cent there. For the rest, call the friendly neighbourhood CA.  

1. Salary income

First, you have to find out the "income chargeable under the head salaries." For this, you need to know your gross salary, which normally includes basic salary, commissions earned, taxable allowances, taxable perquisites and retirement benefits.

Subtract certain deductions like conveyance allowance (up to Rs 800 per month) from this. The balance is charged under the head salary income. 

  • Total taxable income: Your 'basic salary' is fully taxable. Further, any amount of dearness allowance, commissions and bonuses, city compensatory allowances, overtime allowance and even lunch allowance that you get is fully taxable.
  • House rent allowance: HRA is exempted up to a certain limit provided you are actually paying house rent. The lowest of three amounts, actual HRA received or rent paid in excess of 10 per cent of basic salary or 50 per cent of your basic salary (40 per cent of your basic salary if you reside in a city other than Mumbai, Kolkata, Delhi and Chennai), would determine how much is to be exempted. The balance is taxable.

  • Conveyance allowance: Up to Rs 800 per month is exempt from tax.
  • Leave travel allowance: This is a reimbursement for travel expenses that you and your family members incur within India while you are on leave. While LTA can be paid to you every year, it is treated as tax-free only for two journeys in a block of four years. Both these journeys can be made in any one of the four years or spread out over the four years.
  • Medical allowance: Reimbursement of medical expenditure incurred by you and your family is tax-free to the extent of Rs 15,000 per annum. Remember, all reimbursements need to be supported by bills or other documents.
  • Perquisites. Perquisites are benefits that your employer gives you in addition to your regular salary. These are usually in the form of accommodation or car or concessional loans. The total of all perquisite values is added to the salary and tax is calculated on the usual slabs.
  • Premium paid by your employer under group insurance or medical insurance premium paid by your employer escapes the tax net. However, you need not worry about calculating all this. Your employer will give you Form 12 BB, which will show you the value of perk as part of your salary.
  • You will also get Form 16, which shows the 'income chargeable under the head salaries' and TDS, taking into account all the allowances and deductions. If there is no deduction of tax at source for you, your employer will give you a certificate of salary earned during the financial year instead of Form 16

American journalist Bill Vaughan had remarked, "The tax collector must love poor people, he's creating so many of them." You might want to agree after seeing what taxes have done to your income.

2. Income from house property

Rental income from a residential or commercial property that you own is liable to be taxed.

Even if the property is not rented out, it will be treated as rented out and the rental income will be liable to be taxed. What is taxed under this head is not the actual rent but the inherent capacity of the property to earn income. This is known as the property's "annual value".

The gross annual value is the highest of these: the municipal value, the actual rent, or the fair rental value.

To calculate your gains, see the worksheet. Preferential treatment is given to one self-occupied house which has not been let out at any time. In this case, the annual value is taken as 'nil.' The interest payable on home loans taken on or after 1 April 1999 is tax-deductible up to Rs 150,000 a year.

3. Capital gains

If you hold a house, commercial property, gold or silver for more than 36 months, they are termed as long-term assets. If you hold them for 36 months or less, they are short-term assets.

However, shares and units of equity mutual funds are short-term assets if you hold them for a year or less and long-term assets if you hold them for more than a year.

To calculate your gains, see the worksheet. Short-term capital gains are included in your gross total income and, after deductions, are taxed as per your tax slab.

Other than for listed securities, long-term gains are taxed at 20 per cent with indexation. Gains from equity shares or units of equity mutual funds are tax-free in the long term and taxed at 10 per cent in the short term.

4. Gains from business and profession

Income earned from your profession, or through business, is taxed under the head 'profits and gains from business and profession'. The income chargeable to tax is the difference between gross receipts and the expenses incurred to earn that income.

A person carrying a profession of law, medicine, engineering, architecture or technical consultancy, whose total gross receipts from that profession exceed Rs 150,000 per annum, is required to maintain books of accounts.

5. Other incomes

Any income that does not fall under the four heads of income mentioned above is taxed under the head 'Income from other sources'.

An example of such income is interest from bank deposits or national savings certificates.

6. Computation of Gross total income.

1 + 2 + 3 + 4+ 5 = 6 = Gross Total Income


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