Computations of Total income of an individual

Computation of total income of an individual is an important aspect of income tax assessment. It involves various deductions, exemptions, and other provisions under the Income Tax Act that help in arriving at the taxable income of an individual. The process of computation of total income is complex and requires a thorough understanding of the Income Tax Act. In this article, we will explain the computation of total income of an individual in detail.

Income from Salaries:

Salary is the most common source of income for salaried individuals. The Income Tax Act defines salary as the amount received by an individual from his employer in cash or kind, including any bonus, commission, or any other monetary payment. To compute income from salaries, the following deductions are allowed:

1. Standard deduction: A standard deduction of Rs. 50,000 is allowed from the gross salary income.
2. Professional tax: Professional tax paid during the year is allowed as a deduction from gross salary income.
3. Deductions under section 80C to 80U: Deductions under these sections are allowed from gross salary income, subject to certain conditions.

Income from House Property:

Income from house property is the income earned by an individual from a property he owns. To compute income from house property, the following deductions are allowed:

1. Municipal taxes: Municipal taxes paid during the year are allowed as a deduction from the net annual value of the property.
2. Standard deduction: A standard deduction of 30% of the net annual value is allowed from the net annual value of the property.
3. Interest on home loan: Interest paid on home loan taken for the purpose of purchase, construction, or renovation of a property is allowed as a deduction from the net annual value of the property.

Income from Business or Profession:

Income from business or profession is the income earned by an individual from any trade or profession he is engaged in. To compute income from business or profession, the following deductions are allowed:

1. Expenses: All expenses incurred in relation to the business or profession are allowed as a deduction from the gross receipts.
2. Depreciation: Depreciation on assets used in the business or profession is allowed as a deduction from the gross receipts.
3. Deductions under section 80C to 80U: Deductions under these sections are allowed from the gross receipts, subject to certain conditions.

Income from Capital Gains:

Income from capital gains is the income earned by an individual from the sale of a capital asset. To compute income from capital gains, the following deductions are allowed:

1. Cost of acquisition: The cost of acquisition of the asset is allowed as a deduction from the sale price of the asset.
2. Cost of improvement: The cost of improvement of the asset is allowed as a deduction from the sale price of the asset.
3. Indexation: In case of long-term capital gains, the cost of acquisition and cost of improvement are indexed to adjust for inflation.

Income from Other Sources:

Income from other sources is the income earned by an individual from sources other than the above sources. To compute income from other sources, the following deductions are allowed:

1. Expenses: All expenses incurred in relation to the income from other sources are allowed as a deduction from the gross income.
2. Deductions under section 80C to 80U: Deductions under these sections are allowed from the gross income, subject to certain conditions.

Once the income from all the above sources is computed, the following deductions are allowed to arrive at the total income of the individual:

1. Deductions under section 80C to 80U: Deductions under these sections are allowed from the gross total income, subject to certain conditions.
2. Losses: Losses from one source

Question:

Mr. X is a salaried employee earning a basic salary of Rs. 50,000 per month. He also receives a special allowance of Rs. 20,000 per month and has made an investment of Rs. 1.5 lakhs in tax-saving mutual funds. Calculate his total income for the financial year 2022-23, assuming he has no other sources of income.

Solution:

As Mr. X is a salaried employee, his income falls under the head “Income from Salaries.” The computation of his total income will be as follows:

Particulars Amount (Rs.)

Basic Salary 50,000 x 12 = 6,00,000

Special Allowance 20,000 x 12 = 2,40,000

Gross Salary 8,40,000

Less: Standard Deduction 50,000

Income chargeable under the head “Salaries” 7,90,000

Add: Income from Other Sources (if any) Nil

Gross Total Income 7,90,000

Less: Deductions under Chapter VI-A

Tax-saving mutual fund investment 1,50,000

Total income 6,40,000

Therefore, Mr. X’s total income for the financial year 2022-23, after considering his salary income and the tax-saving investment made, is Rs. 6,40,000.