Comptation of total income and tax payable by an individual – step by step procedure

The residential status of an individual has to be determined to ascertain which income is to be included in his total income (TI). In case of an individual, the duration for which he is present in India in the relevant previous year or relevant previous year and the earlier previous years, as the case may be, determine his residential status. Based on the days spent by him in India, he may be resident or a non-resident.

An individual may earn income from different sources. Under the Income-tax Act, 1961, for computation of TI, all income of an individual tax payer can be classified into five different heads of income.

• Salaries
• Income from house property
• Profits and gains of business or profession
• Capital gains
• Income from other sources

Income under each head (–) exemptions (–) deductions allowable under that head

In case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e., as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability

An assessee may have different sources of income under the same head of income. He may have profit from one source and loss from the other. Similarly, an assessee can have loss under one head of income and profits under another heads of income. There are provisions in the Act for allowing inter-head adjustment in certain cases. The losses is allowed to be set off in the following series :

• Inter-source set-off of losses
• Inter-head set-off of losses
• Set-off of brought forward losses
• Set-off of unabsorbed depreciation

Thereafter, unabsorbed losses and unabsorbed depreciation would be carried forward.

Gross Total Income = Add income computed under each head → Apply clubbing provisions → Apply the provisions for set-off and carry forward of losses

There are deductions under Chapter VI-A allowable from Gross Total Income. These deductions are of following types:

• Deductions in respect of certain payments
• Deductions in respect of certain incomes
• Deductions in respect of other incomes
• Other deductions

Total Income = Gross total income (–) Deductions under Chapter VI-A
Total Income should be rounded off to the nearest multiple of 10

Surcharge

Health and Education cess – 4% of income-tax and surcharge, if applicable
Total Tax Liability = Tax on total income at applicable rates (+) Surcharge, at applicable rates, if total income > 50 lakhs, or (+) HEC@4% (-) Rebate u/s 87A, if total income ≤ 5 lakh

• If an individual is claiming dedn u/s 10AA or u/s 35AD or section 80JJAA, 80QQB & 80RRB and his adjusted TI > 20 lakhs, AMT provisions will apply.
• Compute AMT [18.5% of adjusted TI plus surcharge, if applicable plus HEC @4%]. • If AMT > tax computed as per regular provisions, adjusted TI would be deemed to be TI.
• Tax is leviable @18.5% of adjusted total income plus surcharge, if applicable plus HEC @4%.
• Tax credit can be c/f for maximum 15 A.Ys. = AMT less Tax computed as per regular provisions. Individuals exercising option u/s 115BAC are not liable to AMT u/s 115JC.

As per section 115BAC, individuals have an option to pay tax in respect of their TI (other than income chargeable to tax at special rates under Chapter XII) at following concessional rates, if they do not avail certain exemptions/ deductions like LTC, std deduction under the head “Salaries”, int. on housing loan on self-occupied property, deductions under Chapter VI-A (other than 80CCD(2) or section 80JJAA), set-off of b/f loss or depreciation, if they relate to any of the above deductions, set-off of loss from house property against income under any other head, etc.

Surcharge would be attracted at the same rates and above the same thresholds of TI as applicable under the regular provisions of the Income-tax Act, 1961. Further, HEC @4% would be attracted on income-tax so calculated plus surcharge, if applicable.
Examine the tax liability computed under the regular provisions of the Act (including provisions relating to AMT, if applicable) with the tax liability computed u/s 115BAC. Thereafter, if tax liability is lower as per the provisions u/s 115BAC, then opt to pay tax as per section 115BAC.
Note – If an individual having income from business or profession exercises option to pay tax u/s 115BAC in a P.Y., then, the said provisions would apply for all subsequent PYs. An individual not having income from business or profession can exercise the option to pay tax u/s 115BAC for each P.Y. He may exercise the option in a particular P.Y., but may not do so in another P.Y., depending on whether or not exercising the option is beneficial to him in the respective P.Y.

Tax payable/ Tax refundable = Total tax liability (-) TDS (-) TCS (-) Advance tax paid

• Tax payable/ Tax refundable should be rounded off to the nearest multiple of 10.
• The assessee has to pay the amt of tax payable (called self- assessment tax) at the time of filing of return of income.
• If any refund is due, assessee will get the same after filing the return of income.