Procedure For Computing The Total Income

Procedure for Computing Total Income

1. Identification of Income Sources:

Gather information and documentation related to all sources of income earned during the relevant tax year.

This may include income from employment, business or profession, investments, rental property, capital gains, interest, dividends, and any other income sources.

2. Gross Total Income (GTI):

Calculate Gross Total Income (GTI) by aggregating income from all sources before any deductions or exemptions are applied. 

This involves adding up all types of income earned during the tax year, including salaries, wages, business profits, rental income, interest, dividends, and capital gains.

3. Deductions and Exemptions:

Identify and apply deductions, exemptions, and allowances allowed under tax laws to arrive at the Adjusted Gross Total Income (AGTI). 

Common deductions and exemptions may include:

Deductions under Section 80C for investments in specified instruments such as Provident Fund, Life Insurance Premiums, Equity Linked Saving Schemes (ELSS), etc.

Deductions under Section 80D for health insurance premiums paid.

Deductions under Section 80G for donations made to specified charitable organizations.

Exemptions for allowances such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), etc.

Other deductions and exemptions available under specific sections of the Income Tax Act.

4. Taxable Income Calculation:

Calculate the Taxable Income by subtracting deductions and exemptions from Gross Total Income. The resulting figure represents the income on which tax liability will be calculated.

5. Applying Tax Slabs and Rates:

Determine the applicable tax slabs and rates based on the total taxable income and the individual's or entity's tax status (e.g., individual, HUF, company, etc.). 

Tax rates may vary depending on the total income level and tax residency status.

6. Tax Computation:

Compute the tax liability by applying the applicable tax rates to the taxable income. 

This involves multiplying the taxable income by the corresponding tax rates and adding any applicable surcharge, cess, or other levies as per the tax laws.

7. Final Tax Liability:

Determine the final tax liability by summing up the tax calculated on various income sources, after considering any tax credits, advance tax payments, or tax deducted at source (TDS).

8. Filing Tax Return:

Prepare and file the income tax return (ITR) with the tax authorities, reporting the total income, deductions, exemptions, and tax liability calculated during the computation process.