{"id":215,"date":"2009-03-05T22:23:29","date_gmt":"2009-03-05T16:53:29","guid":{"rendered":""},"modified":"2009-06-12T13:30:26","modified_gmt":"2009-06-12T08:00:26","slug":"Calculating-your-income-tax-liability-first-step-to-saving-tax","status":"publish","type":"post","link":"http:\/\/www.raagvamdatt.com\/Calculating-your-income-tax-liability-first-step-to-saving-tax\/","title":{"rendered":"Calculating your income tax liability \u2013 first step to saving tax"},"content":{"rendered":"<p>Are you totally new to the world of income tax? Don\u2019t know how to calculate your income tax liability, and getting confused? Ever wondered \u201chow much income tax do I need to pay\u201d?<\/p>\n<p>Here is a step by step guide that teaches you how to calculate your income tax \u2013 while also explaining the concept of income tax slabs \/ brackets. There is also an illustrative example!<br \/>\n<!--more--><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<table>\n<tr><!-- Row 1 --><\/p>\n<td>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/* 250_250_In_Article *\/\ngoogle_ad_slot = \"4765524919\";\ngoogle_ad_width = 250;\ngoogle_ad_height = 250;\n\/\/-->\n<\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<\/td>\n<p><!-- Col 1 --><\/p>\n<td>\n<p>Each year, we have to file an income tax return that gives the particulars of our earnings and the taxes on those earnings. It also has the details of the income tax already paid by us.<\/p>\n<p>(Confused about which income tax return (ITR) form to fill up? Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article133.html\"><b><u>Income Tax (IT) Return Filing \u2013 Which ITR form to use?<\/u><\/b><\/a>\u201d)<\/p>\n<\/td>\n<p><!-- Col 2 --><br \/>\n  <\/tr>\n<\/table>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>But if you want to save income tax, you need to assess how much you owe the government as income tax &#8211; even before you fill the income tax return. After all, if you don\u2019t know how much you have to pay, how can you plan to save?<\/p>\n<p>So, let\u2019s learn how to calculate your income tax liability.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Let\u2019s keep it simple<\/b><\/p>\n<p>We would take the case of a salaried person, who also has interest income \u2013 this situation is applicable to most of us, and therefore would be a good example to understand how income tax is calculated.<\/p>\n<p>(Tax calculation for long term or short term capital gains is slightly different. If you are interested in knowing about it, please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article148.html\"><b><u>Long Term and Short Term Capital Gain &#8211; Income Tax Calculation<\/u><\/b><\/a>\u201d)<\/p>\n<p>Note: Here, we are learning to calculate the overall income tax liability. We are not doing it in the format of an income tax return (ITR). If you want to know how to do that, please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article147.html\"><b><u>How to fill Income Tax Return Form 1 (ITR1) &#8211; Instructions and Video Tutorial<\/u><\/b><\/a>\u201d or \u201c<a href=\"http:\/\/raagvamdatt.com\/Article152.html\"><b><u>How to fill Income Tax Return Form 2 (ITR2) Instructions<\/u><\/b><\/a>\u201d.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Aggregating the Income<\/b><\/p>\n<p>First of all, we need to add all the incomes that we have.<\/p>\n<p>This would of course include your compensation or salary (including the basic, dearness allowance or DA, commission, bonus, house rent allowance or HRA, etc.). Please also add any amount paid to you annually \u2013 like a diwali bonus, or a leave travel allowance (LTA).<\/p>\n<p>Add to this any interest that you have earned. This could be from your savings bank account (SBA), bank fixed deposits (FD), company FDs, or any other debt instrument.<\/p>\n<p>This would give you your total income on which you need to pay tax.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Income Tax Exemptions<\/b><\/p>\n<p>Certain types of income are not chargeable to tax at all. You can reduce it from your income before you calculate your tax liability.<\/p>\n<p>Please note that to avail of some of the deductions, you need to meet certain conditions.<\/p>\n<p>This would include things like:<\/p>\n<ul>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article200.html\"><u>LTA \/ LTC (Leave Travel Allowance \/ Concession)<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article174.html\"><u>HRA (House Rent Allowance)<\/u><\/a><\/li>\n<li>Transportation Allowance<\/li>\n<li>Medical reimbursements<\/li>\n<\/ul>\n<p>The amount remaining is the amount chargeable to income tax.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Deductions from Income<\/b><\/p>\n<p>Certain amounts are deductible from your taxable income if you meet certain conditions \u2013 the condition might be related to making investments in certain instruments, or making repayment of certain loans, or related to disability, etc.<\/p>\n<p>The most popular deductions are available under section 80C. Here, you invest in some specified investment avenues (like PF, PPF, life insurance premiums, etc.), and you can deduct the invested amount from your taxable income.<\/p>\n<p>But before that, make all the non-section 80C deductions. Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article214.html\"><b><u>Reached Section 80C limit? You can still save more income tax!<\/u><\/b><\/a>\u201d to know about the applicable deductions.<\/p>\n<p>Now, deduct the amount you invested in section 80C instruments. Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article123.html\"><b><u>Saving Income Tax \u2013 Understanding Section 80C Deductions<\/u><\/b><\/a>\u201d to know about section 80C deductions.<\/p>\n<p>The income remaining after these deductions is the income on which you have to calculate and pay income tax.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Calculating Income Tax \u2013 The concept of slabs \/ brackets and rates<\/b><\/p>\n<p>In India, the <b><i>income tax is applied in a progressive way<\/i><\/b>. This means that income upto a certain limit (say, Rs. 1,50,000) is tax-free \u2013 no tax is levied if your income is below that level.<\/p>\n<p>Once your income crosses this limit, a tax is levied on the remaining income in a <b><i>gradually increasing magnitude<\/i><\/b>. Thus, after the limit of tax free income, your income is taxed at a low rate, say 10%, upto a certain limit (say, Rs. 3,00,000).<\/p>\n<p>If your income is more than that limit, then the income above that limit is taxed at a higher rate (say, 20%) upto a certain limit (say, Rs. 5,00,000).<\/p>\n<p>If your income is more than this limit, then all the income above this limit is taxed at the highest rate (say, 30%).<\/p>\n<p>Each of these limits or the range of incomes that have different income tax rates applicable is called <b><i>an income tax slab or an income tax bracket<\/i><\/b>. These slabs and the rates applicable to them can be changed every year in the budget.<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article206.html\"><b><u>Income Tax (IT) Slabs \/ Brackets and rates<\/u><\/b><\/a>\u201d to know the currently applicable IT slabs)<\/p>\n<p>Please note that progressively higher income tax rates are applicable only to the income above the limit of the previous level, and not on the entire income. That is, <b><i>a higher income tax rate is applicable only to the income falling in that slab, and not on the entire income<\/i><\/b>.<\/p>\n<p>Let us understand all this using an example.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>Example<\/b><\/p>\n<p>Let\u2019s say your monthly basic salary is Rs. 25,000. You get a dearness allowance (DA) of Rs. 10,000 per month, a special allowance of Rs. 2,000 per month, house rent allowance of Rs. 1,500 per month and a transport allowance of Rs. 500 per month.<\/p>\n<p>You also get a yearly bonus of Rs. 25,000.<\/p>\n<p>You stay in a rented place, and pay a rent of Rs. 2,000 per month. You have contributed Rs. 1,800 every month to your PF, and pay a premium of Rs. 5,000 every year for your life insurance.<\/p>\n<p>You also made a donation of Rs. 5,000 to a charity.<\/p>\n<p>(Assumption: You are a 35 year old male \u2013 this is important because the tax slabs are different for men and women. They are also different for senior citizens.)<\/p>\n<p>Here, your <b><i>total income<\/i><\/b> would be:<\/p>\n<p>(Rs. 25,000 + Rs. 10,000 + Rs. 2,000 + Rs. 1,500 + Rs. 500) * 12<br \/>\n+ Rs. 25,000<br \/>\n= Rs. 4,93,000.<\/p>\n<p>Now, let\u2019s <b><i>subtract the exempt incomes<\/i><\/b> from this.<\/p>\n<p>The Rs. 500 per month transport allowance is exempt from tax in this case. The HRA would also be exempt from income tax.<\/p>\n<p>Thus, income subject to tax is:<\/p>\n<p>Rs. 4,93,000 \u2013 ((Rs. 500 + Rs. 1,500) * 12)<br \/>\n= Rs. 4,69,000.<\/p>\n<p>Let\u2019s consider the <b><i>non-section 80C deductions<\/i><\/b> now.<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article214.html\"><b><u>Reached Section 80C limit? You can still save more income tax!<\/u><\/b><\/a>\u201d to know about the applicable deductions)<\/p>\n<p>The donation you made to the charity would be deductible by 50%.<\/p>\n<p>Thus, income subject to tax is:<\/p>\n<p>Rs. 4,69,000 \u2013 (50% of Rs. 5,000)<br \/>\n= Rs. 4,66,500.<\/p>\n<p>Now is the turn to consider <b><i>Section 80C deductions<\/i><\/b>.<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article123.html\"><b><u>Saving Income Tax \u2013 Understanding Section 80C Deductions<\/u><\/b><\/a>\u201d to know about section 80C deductions)<\/p>\n<p>In our example, the PF contribution and life insurance premium payment would be counted towards this.<\/p>\n<p>Thus, income subject to tax is:<\/p>\n<p>Rs. 4,66,500 \u2013 (Rs. 1,800 * 12) \u2013 Rs. 5,000<br \/>\n= Rs. 4,39,900.<\/p>\n<p>This is the amount on which income tax is payable.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>Let\u2019s <b><i>calculate the income tax<\/i><\/b> on this amount as per the prevailing slabs for FY 2008-09 AY 2009-10.<\/p>\n<p>(Confused by terms like FY and AY? Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article117.html\"><b><u>Income Tax (IT) Jargon \u2013 Financial Year (FY), Assessment Year (AY) and Previous Year (PY)<\/u><\/b><\/a>\u201d to understand them better)<\/p>\n<p>(Please read \u201c<a href=\"http:\/\/raagvamdatt.com\/Article206.html\"><b><u>Income Tax (IT) Slabs \/ Brackets and Rates<\/u><\/b><\/a>\u201d to know the currently applicable IT slabs)<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b><i>Slab 1: Rs. 0 to Rs. 1,50,000: 0% tax<\/i><\/b><\/p>\n<p>Thus, tax payable for the first Rs. 1,50,000 of your income is <b>Rs. 0<\/b>.<\/p>\n<p><b><i>Slab 2: Rs. 1,50,001 to Rs. 3,00,000 : 10% tax<\/i><\/b><\/p>\n<p>Tax payable for income from Rs. 1,50,001 to Rs. 3,00,000 is:<\/p>\n<p>10% of (Rs. 3,00,000 \u2013 Rs. 1,50,000) = <b>Rs. 15,000<\/b>.<\/p>\n<p><b><i>Slab 3: Rs. 3,00,001 to Rs. 5,00,000 : 20% tax<\/i><\/b><\/p>\n<p>Tax payable for income from Rs. 3,00,001 to Rs. 4,39,900 is:<\/p>\n<p>20% of (Rs. 4,39,900 \u2013 Rs. 3,00,000) = <b>Rs. 27,980<\/b>.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>Thus, <b><i>tax payable<\/i><\/b> is:<\/p>\n<p>Rs. 0 + Rs. 15,000 + Rs. 27,980<br \/>\n= Rs. 42,980.<\/p>\n<p>An <b><i>education cess of 3%<\/i><\/b> would be payable on this amount.<\/p>\n<p>Thus, <b><i>total tax payable<\/i><\/b> is:<\/p>\n<p>Rs. 42,980 + 3% of Rs. 42,980<br \/>\n= Rs. 44,270.<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-8580636079496870\";\n\/\/ArticleLinkList\ngoogle_ad_slot = \"0928256543\";\ngoogle_ad_width = 468;\ngoogle_ad_height = 15;\n\/\/--><\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"http:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p><b>A note on Tax Deducted at Source (TDS) and Advance Tax<\/b><\/p>\n<p>Please note that out of the total tax payable by you, some might already have been paid by you!<\/p>\n<p>This would be in the form of TDS done by your employer for your salary, or can be the TDS deducted by your bank on the FD interest that you earned during the year.<\/p>\n<p>Apart from this, you might also have paid an advance tax.<\/p>\n<p>Thus, the tax payable by you (if any) at the end of the year would be:<\/p>\n<p>Tax amount calculated above<br \/>\n<b><i>less<\/i><\/b> any TDS<br \/>\n<b><i>less<\/i><\/b> any advance tax paid by you<\/p>\n<table width=\"100%\" border=\"0\" cellpadding=\"2\" cellspacing=\"2\" bgcolor=\"#ffffff\">\n<tr  >\n<td>\n<\/td>\n<td>\n<\/td>\n<\/tr>\n<\/table>\n<p>Other articles you might be interested in:<\/p>\n<ul>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article214.html\"><u>Reached Section 80C limit? You can still save more income tax!<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article213.html\"><u>Deduction of expenses on medical treatment \u2013 Section 80DDB<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article212.html\"><u>Are you disabled? Save income tax under section 80U<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article211.html\"><u>Deduction for rent paid \u2013 Section 80GG<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article210.html\"><u>LIC launches \u201cJeevan Varsha\u201d \u2013 Close Ended Money Back Plan with guaranteed additions<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article209.html\"><u>Fixed Deposits (FD) for saving income tax through section 80C<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article208.html\"><u>Tata Capital Debenture Issue \u2013 A review<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article207.html\"><u>Make donations, save income tax \u2013 Section 80G<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article206.html\"><u>Income Tax (IT) Slabs \/ Brackets \u2013 FY 2008-09 AY 2009-10<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article205.html\"><u>Have a disabled dependent? Save income tax using section 80DD<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article204.html\"><u>Income Tax (IT) benefit of an education \/ study loan \u2013 Section 80E<\/u><\/a><\/li>\n<li><a href=\"http:\/\/raagvamdatt.com\/Article203.html\"><u>Should you invest in Sec 54EC LTCG tax saving bonds?<\/u><\/a><\/li>\n<\/ul>\n<p>\n","protected":false},"excerpt":{"rendered":"<p>Are you totally new to the world of income tax? Don\u2019t know how to calculate your income tax liability, and getting confused? Ever wondered \u201chow much income tax do I need to pay\u201d? Here is a step by step guide that teaches you how to calculate your income tax \u2013 while also explaining the concept [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts\/215"}],"collection":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/comments?post=215"}],"version-history":[{"count":0,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/posts\/215\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/media?parent=215"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/categories?post=215"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.raagvamdatt.com\/wp-json\/wp\/v2\/tags?post=215"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}