A Complete Guide to Income Tax in India

How to Calculate Your Income Tax?

 

For calculating your Income Tax Payable, there are certain broad steps to be undertaken.

• Step 1: Calculate your total income.

• Step 2: Deduct all allowable deductions from Income as a good tax planning practice.

• Step 3: Apply the appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.

• Step 4: Deduct the Tax Rebates allowable under the Income Tax Act.

• Step 5: Deduct taxes already paid by way of TDS, TCS and advance taxes from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable.

Let’s understand the steps in some detail.

Step 1: Calculate your Total income

Income is calculated under the following heads: 
  

Income from Salary – All income from an employer that is received as salary is to be offered as Salary income earned. This is detailed in the Form 16 given by the employer to the employee. 

Income from Capital Gains – Income earned on sale of capital assets is taxable under the head of Capital Gains. Capital Assets include assets such as land, building, jewellery, stocks, bonds, etc. 

Income from house property – Rental income earned from owned house property is taxable under this head. 

Income from business / profession – The profits and gains earned from any business or profession are taxable under this head. 

Income from other sources – All other income that is not included under the other heads of income fall under this residual head of income. This includes interest income, pensions received, dividend received, winnings from lottery or gambling, gifts received etc. The classification of income is important from the perspective of filing returns. All income is calculated on the basis of the financial year as defined in the Income Tax Act as the twelve-month period from April 1st of a year to March 31st of the following year. For example, financial year 2025-26 would mean the period between 1st April 2025 to 31st March 2026. 

 

Step 2: Deductions from Taxable Income

 

The Income Tax Act allows some deductions from the Income that has to be taxed. This is the step that can help you save a lot of tax on your income for the year. Sections 80C to 80U of the Income Tax Act, 1961 specifies these deductions. In addition, there are other deductions that you can avail of, such as Section 16 (tax deductions on salary income) or Section 24 (deduction on home loan interest if owner/family resides in the house).  

So, what are these deductions from taxable income and how can a person get the income tax benefits3 of these? 

Spend on a good life insurance policy- Not only does a good life insurance policy provide coverage to your loved ones in the event of your death, but it makes for good financial planning as well. The premium paid for life insurance policies of the taxpayer for self and for his dependent wife and children are deductible from tax under Section 80C (under old regime only). This amount is deductible if the annual premium is less than 10% of the sum assured if the policy has been issued after 1st April 2012. For policies issued prior to 1 April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured. Section 10(10D) of the Income Tax Act, 1961 provides for certain exemptions with respect to proceeds from life insurance policies. When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D). Also covered here are policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured. 

As per Union Budget 2023, proceeds from traditional life insurance products where annual premium exceeds Rs 5 lakhs  would be taxable (applicable for policies issued from 1 April 2023). For ULIP (Unit Linked Insurance Plan), proceeds would be taxable where annual premium exceeds Rs 2.5lakhs (applicable for policies issued from 1-Feb-2021). However, death benefits would continue to remain tax exempt under section 10(10D). So, as you can see payments paid towards life insurance policies have a twofold income tax benefit – tax deduction in the years of paying the premium as well as on the maturity proceeds. 

Tax Saving³ Investments under Section 80C - There are certain financial investments which has been listed by the Income tax laws as deductible from your taxable income. The key motive of this incentive seems to incentivize people to perform proper financial planning and structuring for present and future. The key point to be noted is that you are creating investments for yourself and receiving income tax benefits³ on them. However, this benefit is given to individuals and Hindu Undivided Families only. 

Investments can be made under section 80C to the extent of ₹1,50,000. Apart from this, investment in notified pension schemes provide additional benefit to the extent of ₹50,000 under section 80CCD(1B). This total of ₹2,00,000/- in investments can save you an amount of ₹60,000/- if you fall under the 30% tax bracket. 

Some of the key tax-saving investments provided under Section 80C are: 

Premiums paid towards Life Insurance (for self, spouse or dependent children), 

ULIP or deferred annuity plan deposit (for self, spouse, or dependent children) 

Fixed Deposits made for a period of five years, 

Public Provident Fund (PPF) contributions or contributions made by employee to approved Superannuation Fund 

Investments in NABARD Bonds, 

Investments with Post Office in their post office saving schemes for tax benefit, or senior citizen savings schemes (SCSS) 

Investments in National Savings Certificates – for current year investment and the accrued interest. 

Investment in tax saving mutual fund schemes which are linked to equity markets such as ELSS funds, notified pension funds or others. 

Certain expenses are also included such as for: 

Tuition fees paid for two children 

Repayment of Principal component of housing loan 

Stamp duty, Registration expense or other expenses for residential house 

Spend on a great health insurance policy for self and family: The health care costs have left no doubt in anyone’s mind that medical insurance is an absolute necessity for every single person. The lack of adequate medical insurance has brought many an unfortunate to the brink of financial ruin. The Government in its efforts to encourage the purchase of medical insurance has offered a tax exemption under section 80D. 

Under Section 80D an amount of ₹25,000/- is allowed as a deduction from taxable income when this amount is paid for medical insurance of self, spouse and children. In case of taxpayer being above the age of 60 years, higher deduction shall be available upto ₹50,000/-. 

For a person who pays for health insurance of dependent parents an additional ₹25,000/- is allowed as deduction. In case the parents are aged above 60 years, then a deduction upto ₹50,000/- is allowed. 

In total a maximum deduction of ₹1,00,000/- can be claimed under this section which gives a tax saving³ of over ₹30,000/- in the 30%slab. As you can see these savings can be quite substantial. Using an income tax calculator will help you know the benefit you can gain. 

You can also avail deduction of ₹5,000 for the cost incurred for preventive health check-ups for self, spouse, children or parents. The limit of ₹25,000/50,000 includes ₹5,000 on preventive health check-up.  

Make a note of any expenses incurred for a disabled dependent relative. Under Section 80DD  – any expenses incurred for a disabled dependent – depending on the extent of their disability is allowed to be claimed as a deduction from taxable income. The expenditure incurred for their treatment as well as maintenance can be claimed under sections 80DD and 80DDB respectively. 

Under Section 80DDB - If persons who underwent medical treatment are: Up to 60 years – a deduction of ₹40,000/- is allowed. Over 60 years – the deduction allowed is ₹1,00,000/-. 

Under Section 80DD – For normal disability, a deduction of ₹75,000 is allowed. For disability of 80% or more – which is classified as a severe disability – a deduction of ₹1,25,000/- is allowed. 

Interest paid on loan taken for higher education: In case of loans taken for higher education of self or spouse or children from approved financial institutions, the interest paid thereon is allowed as deduction (under old regime). 

Interest paid on loans taken for purchasing a single residential property is also deductible from tax under Section 80EE, subject to certain conditions (like loan to be sanctioned in FY16-17, total loan sanctioned do not exceed Rs 35lakhs etc) 

Donations made to a recognized institution under 80G: If you donate an amount every year – finding a recognized institution that you can donate to makes your donation amount deductible from Taxable income. The deduction is available depending on the charity chosen. The deduction allowed can be 50% or 100% of the amount donated depending on the charity donated to and the qualifying amounts. The qualifying limit is 10% of the gross total income of the person. For example, donation to the Prime Minister’s relief fund is eligible for 100% deduction without any qualifying limit whereas donation to associations to promote family planning or sports allows 100% deduction subject to a maximum limit. In some examples donations to certain charities gives you 50% of the amount donated as deduction. For example, donation to PM’s drought relief fund gives 50% deduction without any qualifying limits and the donation to some other approved charity gives 50% deduction with qualifying limit. 

Interest received on savings bank account held by an individual: Section 80TTA allows interest income from saving bank account/s to be taken as a deduction subject to a maximum amount of ₹10,000/-. This is only for Individuals and HUF’s. 

Specific Deductions: There are many sections that allow specific deductions for example for an author on royalty income or to a patent holder or some other such. It is a good idea to consult a tax practitioner with full details of the sources of income so they might guide you on all possible tax saving³ measures that can be taken. 

Section 24 allows deduction of interest paid on loan taken for acquisition/ construction of house property: in case of house property bought the interest expense paid on the purchase of it can be claimed as a deduction up to ₹2,00,000 under Section 24. 

 

Step 3: Appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.

Once the list of sources of income is ready and the deductions have been claimed, each person’s tax liability will be calculated on the basis of the slab rate applicable to them. However, income from long term capital gain and Income from gambling would be taxed at different rates of tax and the remaining income is taxed as per the slab rates given. 

 

Step 4: Deduction of the Income Tax Rebates allowable under the Income Tax Act.

Tax rebate is a deduction allowed from the tax calculated as payable to government. This rebate is given under Section 87A of the Indian Income Tax Act, 1961. Under Section 87A, a tax rebate is allowable to those Individuals whose total annual income falls below ₹5,00,000, under the old regime. This rebate is limited to a maximum of ₹12,500/-.  

This in effect causes that - no tax is payable for income under ₹5,00,000/- of Income but it is important to note that it is still essential to file a return of income. Individuals with income exceeding ₹5,00,000/- do not get the benefit of any rebate under section 87A. 

Under the new regime, where total income does not exceed Rs 12,00,000/-, entire tax amount is allowed as rebate subject to maximum of Rs 60,000/-.  This is applicable from FY25-26. However such rebate will not be available on income subject to tax at special rates (like capital gains etc). 

 

Step 5: Deduct the Taxes already paid:

By way of TDS, TCS and advance taxes has to be deducted from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable. All certificates of Tax deducted at source, tax collected at source and challans of advance tax paid have to be maintained securely. Once the tax liability is determined the prepaid sums of tax has to be deducted from the payable amount and the balance amount is either the amount left to be paid or they may be a refund due to you, which will be claimed at the time of filing of the Tax Return.