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Computation of Income Tax – FAQs & Examples

  • When do I have to pay the taxes on my income?

​​​​The taxes on income can be finalized only on the completion of the previous year. However, to enable a regular flow of funds and for easing the process of collection of taxes, Income-tax Act has provisions for payment of taxes in advance during the year of earning itself or before completion of previous year. It is also known as Pay as your earn concept.

Taxes are collected by the Government through the following means:

  1. Voluntary payment by taxpayers into various designated Banks such as Advance tax, Self-Assessment tax, etc.
  2. Taxes deducted at source
  3. Taxes collected at source ​​
  • Under how many heads the income of a taxpayer is classified?

​​​​ ​​​S​ection 14​ of the Income-tax Act has classified the income of a taxpayer under five different heads of income, viz.:

  1. Salaries
  2. Income from house property
  3. Profits and gains of business or profession
  4. Capital gains
  5. 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?

Total Income is the income on which tax liability is determined. It is necessary to compute total income to ascertain tax liability .Section 8​0C to 80U p​rovides 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 secti​on 80C to 80U) = 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 s​ection 80C to​​​ 80U) (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. ​

Note: If the eligible assessee has opted for concessional tax regime under section 115BAA, 115BAB, 115BAC and 115BAD, the total income of assessee is computed without claiming specified exemptions or deductions:

  • 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).​

  • 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 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.

  • Is there any limit of income below which I need not pay tax?

​​​At this moment (i.e., for the financial year 2020-21​) 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 the total tax liability?

​​​​After ascertaining the total 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. Following table will help in understanding the manner of computation of the total tax liability of the taxpayer.

Computation of total 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
Total of head wise income XXXXX
Set off of cosses XXXXX
Gross Total Income XXXXX
Less : Deductions under Chapter VI-A (i.e., under section 80C to 80U)) (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: Health & Education cess @ 4% on tax liability after surcharge XXXXX
Tax liability before rebate under sections 86section 89sections​ 9090A and 91 (if any) (*) XXXXX
Less : Rebate under sections 86,  section 89sections​ 9090A and 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​ 9090A 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 refundab​le 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).​

  • Can a partnership firm or HUF claim rebate under section 87A?

Rebate under section 8​7A is available only to a resident individual, hence, any person other than a resident individual cannot claim rebate under section 87A. ​

  • What is surcharge and how it is computed?

Surcharge is an additional tax levied on the amount of income-tax. In case of individuals/HUF/AOP/BOI/artificial juridical person, surcharge is levied @ 10% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakh but doesn’t exceeds Rs. 1 crore.

Surcharge is levied @ 15% of income-tax where the total income of the taxpayer exceeds Rs. 1 crore but doesn’t exceeds Rs. 2 crore.(*).

Surcharge is levied @ 25% of income-tax where the total income of the taxpayer exceeds Rs. 2 crore but doesn’t exceeds Rs. 5 crore(*).

Surcharge is levied @ 37% of income-tax where the total income of the taxpayer exceeds Rs. 5 crore(*).

In case of Firm, co-operative society and local authority surcharge is levied at 12% if total income 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. 44,00,000. 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 individuals surcharge is levied @ 10​% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakh. In this case, total income of Mr. Kapoor is below Rs. 50 lakh, hence, he will not be liable to pay surcharge. ​​

  • What is marginal relief and how it is computed?

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. 50 lakh, Rs. 1 crore, Rs. 2 crore, Rs. 5 crore or Rs. 10 crore, as the case may be.

Thus, while computing surcharge, in case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person) having total income of more than Rs. 50 lakh 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. 50 lakh by more than the amount of income that exceeds Rs. 50 lakh.

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. Mukesh is salaried employee (age 40 years). His total income from salary for the year 2019-20 amount to Rs. 51,00,000. Will he liable to pay surcharge, if yes, then how much and will he get the benefit of margin relief?

**

Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person), surcharge is levied @ 10% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakh. In this case, total income of Mr. Mukesh exceeds Rs. 50 lakh and hence he will be liable to pay surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 50 Lakh. 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 (*) 13,42,500
Add: Surcharge (@10% on the amount of income-tax of Rs. 13,42,500 1,34,250
Tax liability after surcharge (i.e., normal tax liability) 14,76,750

(*) The normal tax rates for the financial year 2019-20 applicable to an individual below the age of 60 years are as follows:

  • Nil upto income of Rs. 2,50,000
  • 5% 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. 50 lakh (at the above discussed rates) 13,12,500
Add: Income above Rs. 50 lakh 1,00,000
Tax liability under marginal relief 14,12,500

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 14,76,750 and tax liability under marginal relief comes to Rs. 14,12,500. It can be observed that tax liability under marginal relief is lower and, hence, Rs. 14,12,500 will be the tax liability before cess. Total tax liability will be computed as follows:

Rs.
Tax liability after marginal relief (*) 14,12,500
Add: Health & education cess @ 4% 56,500
Tax liability 14,69,000

(*) In this case, surcharge paid by Mr. Mukesh will be Rs. 70,000 computed as follows:

Rs.
Tax liability (before cess) on Rs. 51,00,000 after considering the provisions of marginal relief 14,12,500
Tax liability (before cess) at normal rates on Rs. 51,00,000 if surcharge is not levied 13,42,500
Surcharge (i.e. increase in tax liability) 70,000

Illustration for better understanding

Mr. Raja is businessman (age 35 years). His total income for the year 2020-21 amounted to Rs. 1,02,00,000. 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 (i.e. Individuals/HUF/AOP/BOI/artificial juridical person), surcharge is levied @ 10% 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 (*) 28,72,500
Add: Surcharge (@15% on the amount of income-tax of Rs. 28,72,500 ) 4,30,875
Tax liability after surcharge (i.e., normal tax liability) 33,03,375

(*) The normal tax rates for the financial year 2020-21 applicable to an individual below the age of 60 years are as follows:

  • Nil upto income of Rs. 2,50,000
  • 5% 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) 28,12,500
Add: Surcharge on income-tax @ 10% (if income is Rs. 1 crore) 2,81,250
Add: Income above Rs. 1 crore 2,00,000
Tax liability under marginal relief 32,93,750

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 33,03,375 and tax liability under marginal relief comes to Rs. 32,93,750. It can be observed that tax liability under marginal relief is lower and, hence, Rs. 32,93,750 will be the tax liability before cess. Total tax liability will be computed as follows:

Rs.
Tax liability after marginal relief (*) 32,93,750
Add: Health & education cess @ 4% 1,31,750
Tax liability 34,25,500

Illustration for better understanding

Mr. Karan is a businessman (age 35 years). His total income for the year 2020-21 amounted to Rs. 1,07,00,000. 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 (i.e. Individuals/HUF/AOP/BOI/artificial juridical person) surcharge is levied @ 15% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, total 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 (*) 30,22,500
Add: Surcharge (@15% on the amount of income-tax of Rs. 30,22,500) 4,53,375
Tax liability after surcharge (i.e., normal tax liability) 34,75,875

(*) 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) 28,12,500
Add: Income above Rs. 1 crore 7,00,000
Tax liability under marginal relief 35,12,500

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 34,75,875 and tax liability under marginal relief comes to Rs. 35,12,500. It can be observed that normal tax liability (i.e. without marginal relief) is lower and, hence, Rs. 34,75,875 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. 4,53,375

34,75,875
Add: Health & education cess @ 4% 1,39,035
Tax liability 36,14,910
  • What is alternate minimum tax?

​​For details on alternate minimum tax (AMT) refer to tutorial on “Minimum Alternate Tax and Alternate Minimum Tax”

TaxClue Teamhttp://taxclue.in
Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building.

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