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 gains||Income tax rate for long-term capital gains|
|Equity shares on which Securities Transaction Tax is paid||15% if shares are sold before completion of one year||10% (Without indexation) if shares are sold after one year|
|Equity mutual funds||15% if the mutual fund is sold before completion of one year||10% (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 years||20% (with indexation), if funds are redeemed after completion of three years|
|Property||As per the income tax slab rates applicable, if the property is sold before the completion of two years||20% (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 years||20% (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 years||20% (with indexation), if shares are sold after three years|
|International equity funds||As per the income tax slab rates applicable, if funds are redeemed before the completion of three years||20% (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.