Back to Chapter List

Chapter 1 What is Income Tax? How to calculate the tax I am liable to pay?

Income Tax is a tax on your income that is imposed by the Government of India. Government needs revenues for maintaining infrastructure, providing social welfare services and for meeting the expenses of defence and internal security. Before you get into the calculation of tax, first understand who has to file tax returns. That is where the discussion begins.

Who is required to file Income Tax returns?

It is essential to file tax returns under the following conditions…

  • If your gross total income (before allowing any deductions under section 80C to 80U) exceeds Rs. 2,50,000 then you are required to file IT returns. This limit is Rs. 3 lakh for senior citizens and Rs. 5 lakh for super-senior citizens (above the age of 80).
  • If the assessee is a company or a firm irrespective of whether it has made a profit or a loss during the financial year, it needs to file returns.
  • If you want to claim tax refund, it is essential to file tax returns. Also if you want to carry forward a loss under a head of income filing of returns is required.
  • If you have exempt capital gains above Rs. 2.50 lakh even if no tax is payable under Section 54EC or similar exemptions you need to file returns.
  • Return filing is mandatory if you are a Resident Indian and have an asset or financial interest in an entity located outside of India. This is not applicable if you are an NRI.
  • In the absence of all these conditions, you still have to file returns if you want to submit the document as proof of income for loan applications or visa applications.

Understanding Financial Year and Assessment Years

When it comes to filing returns, there are two important concepts that have to be understood i.e. Assessment Year and Financial Year. The financial year is also popularly known as Previous Year. For example, the income that you earn between April 01, 2017, and March 31, 2018, will be your previous year (financial year) 2017-18 for the purpose of tax payment. This will correspond to the assessment year 2018-19. The return for the financial year 2017-18 will have to be filed by you before July 31, 2018.

How much tax do I have to pay?

Having understood the concept of financial year and assessment, the next question is how much tax has to be paid? There are different rates for different categories but the largest number of taxpayers is in the under-60 category males. The following are the tax rates for this category of males under the age of 60.

Applicable Tax Rates for the financial year 2017-18 (AY 2018-19)
Income Slab Applicable tax rate
Up to Rs. 2,50,000 per annum No tax
Rs. 2,50,001 - Rs. 5,00,000 5%
Rs. 5,00,001 - Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

The above rates are the flat rates of tax. In addition, all tax payers will be subject to an education cess of 2% and secondary and higher education cess of 1%. (The cess now stands combined to a flat rate of 4% from Financial Year 2018-19 onwards). If your net taxable income is more than Rs50 lakh for the year then there is a surcharge of 10% payable on your tax and if your annual taxable income is more than Rs100 lakh, i.e. Rs1cr, then the surcharge applicable is 15%. For the higher income groups, the cess will be calculated on the total of tax and surcharge.

How do the calculations work out for the three income groups?

Particulars Taxable income of Rs. 18 lakh Taxable income of Rs. 60 lakh Taxable income of Rs. 1.1cr
Net Taxable Income Rs. 18,00,000 Rs. 60,00,000 Rs. 1,10,00,000
Assessment Year 2018-19 2018-19 2018-19
Tax Calculation
First Rs. 2.50 lakh Nil Nil Nil
Rs. 2.50 lakh - Rs. 5 lakh Rs. 12,500 Rs. 12,500 Rs. 12,500
Rs. 5 lakh - Rs. 10 lakh Rs. 1,00,000 Rs. 1,00,000 Rs. 1,00,000
Above Rs. 10 lakh Rs. 2,40,000 Rs. 15,00,000 Rs. 30,00,000
Income Tax Rs. 3,52,500 Rs. 16,12,500 Rs. 31,12,500
Surcharge on Income Tax (0% / 10% / 15%) N.A. Rs. 1,61,250 Rs. 4,66,875
Education Cess (2%) Rs. 7,050 Rs. 35,475 Rs. 71,588
Secondary Education Cess (1%) Rs. 3,525 Rs. 17,738 Rs. 35,794
Total Tax Payable Rs. 3,63,075 Rs. 18,26,963 Rs. 36,86,757
Effective Tax Rate (%) 20.17% 30.45% 33.52%

In taxation parlance, this is called progressive taxation, which means as your income level goes up, your effective tax rate also goes higher.

Arriving at the taxable income

We have seen the calculation of the tax based on different levels of taxable income. But the big question is how did we arrive at the taxable income in the first place? You start with your total income earned and then take all the exemptions along the way before arriving at your net taxable income. These are the steps based on which the calculation of taxable income is worked out.

  • Firstly, the salary income is considered as the starting point. Effective from the financial year 2018-19, the total income will be net of Rs. 40,000 standard deductions.
  • Once the salary income is calculated, the other sources of income like capital gains and other income are computed.
  • The calculation of income from house property is slightly more complicated. If you have one self-occupied property, then you can claim the interest paid on home loan up to Rs. 2 lakh per annum. This can be shown as loss on house property and adjusted against your total income.
  • When the above heads of income are added up, you have the total income. From the total income so calculated, deductions under Section 80C, Section 80D, Section 80E and others are deducted within their prescribed limits. The balance is the total taxable income. It is on this taxable income that the tax payable is calculated.

Key changes to Income Tax rules from FY2018-19

The Union Budget 2018 made some key changes to the calculation of income tax on your total income. While the tax rates and the slabs were left untouched, the following changes were made which will have an impact on calculation of total income tax.

  • The Union Budget reintroduced the Standard Deduction at the flat rate of Rs. 40,000 per annum. Apart from the salary earners, pensioners will also be able to claim the standard deduction. This can be claimed flat without submitting any bills.
  • In lieu of the introduction of standard deduction, the budget has done away with the exemption for transport allowance and medical reimbursement. Currently, medical allowance up to Rs. 15,000 per month and transport allowance up to Rs. 19,200 per month can be claimed as tax-free against bills produced. Now both these allowances will be taxable.
  • The education cess of 2% and the higher education cess of 1% has bee now combined into a single “Health and Education Cess” at an enhanced rate of 4%. This will be charged on the tax payable.
  • Long term capital gains (LTCG) on equities and equity mutual funds re-introduced in this budget at a flat rate of 10% without the benefit of indexation. This 10% tax will be levied on annual capital gains above Rs. 1 lakh.
  • For senior citizens, the limit for exempt interest income has been raised from Rs. 10,000 to Rs. 50,000 per annum. Also, no TDS will be deducted from interest payment up to Rs. 50,000 per annum.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20