scorecardresearchIncome tax filing: How to assess your taxable income?

Income tax filing: How to assess your taxable income?

Updated: 11 Jul 2022, 03:30 PM IST
TL;DR.
There may be myriad income sources from which you may earn. The trick is to identify these sources and then label them accordingly. Once you have decided on your income sources, calculating tax liability then becomes easy. 
Know how to identify and classify your income for income tax liability

Know how to identify and classify your income for income tax liability

Tax is always calculated on the income earned. This is why you must be clear about how much you have earned and its sources. Many investors are not sure about how they must assess their taxable income and under what categories for taxation purposes. To understand how many types of income are there, you must be able to classify the earnings from rent, salaried income, capital gains, interest income, etc.

The Income Tax laws mandate that income be divided into the following parts for the calculation of taxes.

Income from salary

You are paid by the company or the organization you work for. This monthly compensation is called “Salary” in Income Tax parlance. You will easily find details of the total taxable income under the head “Salary” in Form 16. The form also contains details of tax deducted at source (TDS) every time your salary is paid apart from the deductions and exemptions claimed under the old income tax regime. The employer must issue Form 16 if tax has been deducted during the financial year. Investors opting for the next income tax regime will not benefit from the tax exemptions and deductions aimed to provide relief to those paying taxes on their salaried income.

Income from house property

To understand how to evaluate the income from house property, we must first understand the concept of house property through three different lenses. These include:

  • Self-occupied property
  • Rental property
  • Deemed to be let out

It is okay if you have only one self-occupied property to show as the department does not levy tax on its income. Irrespective of where you live, income from your house property will not be taxed. However, if you are repaying an ongoing home loan on your self-occupied property, then you can claim deductions up to 2 lakh and 1.5 lakh on the interest and principal components of your home loan, respectively. However, if the property is empty and not used for living, the Department will consider this property as “Deemed to be let out”. The tax will be calculated accordingly.

Income from capital gains

This is the income earned from the sales of capital assets including your house, mutual funds (debt & equity), shares & stocks, gold, etc. There are two types of capital gains, viz., short-term capital gains and long-term capital gains. The income from capital gains is determined based on how long you have been holding those assets before the sale. The holding period of every asset class is different and, therefore, different income tax rates for both long-term capital gains and short-term capital gains.

The following table includes different asset classes and different income tax rates for all of them.

Asset class Income tax rate for short-term capital gainsIncome tax rate for long-term capital gains
Equity shares on which Securities Transaction Tax is paid15% if shares are sold before completion of one year10% (Without indexation) if shares are sold after one year
Equity mutual funds 15% if the mutual fund is sold before completion of one year10% (Without indexation) if the mutual fund is sold after one year
Debt mutual funds As per the income tax slab rates applicable, if funds are redeemed before the completion of three years20% (with indexation), if funds are redeemed after completion of three years
PropertyAs per the income tax slab rates applicable, if the property is sold before the completion of two years20% (with indexation), if the property is sold after the completion of two years
Gold As per the income tax slab rates applicable, if gold is sold before the completion of three years20% (with indexation), if gold is sold after completion of three years
Foreign company shares As per the income tax slab rates applicable, if funds are redeemed before the completion of three years20% (with indexation), if shares are sold after three years
International equity fundsAs per the income tax slab rates applicable, if funds are redeemed before the completion of three years20% (with indexation), if funds are redeemed after the completion of three years

Income from business and profession

Not all have access to a fixed income source, for example, freelancers, or doctors and lawyers engaged in private practice. These professionals are required to report their income under the heading “Income from Business and Profession”. You must notify the Department regarding any gains or losses made on running this business or on being engaged in this profession. You can claim deductions on the amount spent on running these businesses including travelling expenses, overhead expenses, stationery expenses, etc. 

Income from other sources

Not all income can be classified under the aforementioned heads, which is why the Department has in place this head under which you can include and calculate all your other income. This kind of income usually includes income from bank account savings, post office savings scheme gains, bank fixed and recurring deposits, family pension, pensions received from an insurance company, etc. You can also include the dividend income earned from shares and mutual funds in this category. 

Assessing tax liability

Calculate all the income earned and received under various heads. Then, calculate the tax liability. To evaluate the next tax liability, you may consider seeking deductions and exemptions under various sections, thus, enabling you to arrive at the net tax liability on the income earned. 

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First Published: 11 Jul 2022, 03:30 PM IST