The Ultimate Guide to Understanding Your Taxable Income

Are you the one who solely relies on tax calculators to file your returns? If calculating your taxable income and filing your returns is giving you goosebumps as the end of the year approaches, don’t worry.  We have carefully designed this article for taxpayers like you.

This article will clarify what taxable income is and how it is calculated. We’ll also discuss the available deductions and exemptions. Once you’ve grasped the fundamentals, we’ll review how to use tax calculators to save money.

Let’s get the ball rolling!

What is Taxable Income and How is it Calculated?

Taxable income is the amount of income that is subject to tax by the government. It is calculated by subtracting deductions and exemptions from gross income, the total income earned from all sources.

Understanding how taxable income works is critical for budgeting and filing your taxes, even if you use tax calculators.

Using a tax calculator is one way to estimate your accurate taxable income. This online tool can help you determine your tax liability based on income, deductions, and tax rates.

A tax calculator, for example, can help you determine how much money you can save contributing to your retirement, donating to charity, or claiming a tax rebate.

A tax calculator can help you determine and plan your tax income. However, a tax calculator does not replace professional tax advice.

As a result, you should always check the accuracy of your tax calculator results against your income documents and receipts.

Types of Income that are Taxable and Non-Taxable

Let us look at some of the common types of taxable income and non-taxable income under both regimes-

Taxable Income

– Salary income: Salary income is fully taxable under both regimes, except for some allowances that are exempt up to a certain limit, such as the HRA, LTA, conveyance allowance, and so on. Both regimes allow for a standard ₹50,000 deduction from salary income.

– Interest income: This is the income you earn from deposits, bonds, debentures, or other investments. Interest income is generally taxable under both regimes, except for interest from a savings bank account (up to ₹10,000), post office savings account (up to ₹3,500), PPF intt, etc.

– Capital gains: This is the income you earn from the sale of capital assets, such as property, shares, mutual funds, gold, etc. Capital gains are taxable under both regimes, depending on the nature and duration of the asset.

Short-term capital gains are taxed at the normal slab rates, while long-term capital gains are taxed at 10% or 20%, depending on the type of asset.

– Business or professional income: Business or professional income is taxable under both regimes, after deducting the expenses incurred for earning such income.

Non-Taxable Income

– Agricultural income is the income you earn from cultivating land, selling crops, or renting out agricultural land. Agricultural income up to Rs. 5 Lacs is fully exempt from tax under both regimes, subject to certain conditions.

– Gifts or inheritance: if you receive gifts from non-relatives exceeding ₹50,000 in a year, you have to pay tax on the excess amount as income from other sources.

– Life insurance proceeds: This is the income you receive from your life insurance policy, either as maturity or death benefits. Life insurance proceeds are fully exempt from tax under both regimes if the premium paid for the policy exceeds 10% of the sum assured.

Deductions and Exemptions that Reduce Taxable Income

Not all deductions and exemptions are available to everyone, and some depend on your chosen tax regime.

Some of the common deductions and exemptions that you can claim under the old tax regime are:

– Section 80C: This section allows you to invest up to Rs 1.5 lakh per year in various tax-saving instruments, such as Public Provident Fund, Employees’ Provident Fund, Sukanya Samriddhi Yojana, National Saving Certificate, 5-year bank fixed deposits, Equity-linked saving scheme, etc.

– Section 80D: This section allows you to claim a deduction for the premium paid for health insurance for yourself, your spouse, your dependent children, and your parents.

The maximum deduction you can claim is Rs 25,000 for yourself and your family and Rs 25,000 for your parents (Rs 50,000 if they are senior citizens). You can also claim an additional deduction of Rs 5,000 for preventive health check-ups.

– Section 80E: This section allows you to claim a deduction for the interest paid on education loans taken for higher studies for yourself, your spouse, or your children.

There is no limit on the deduction amount, but you can claim it only for a maximum of 8 years or until the interest is paid, whichever is earlier.

– Section 80G: This section allows you to claim a deduction for the donations made to notified relief funds and charitable institutions. The deduction can be 50% or 100% of the donation amount, depending on the entity you donate to. However, the deduction is subject to a limit of 10% of your adjusted gross income.

– Section 80TTA: This section allows you to claim a deduction for the interest income earned from a savings bank account, post office savings account, or cooperative society. The maximum deduction you can claim is Rs 10,000 per year.

– Section 80TTB: This section allows senior citizens to claim a deduction for the interest income earned from deposits in banks, post offices, or cooperative societies. The maximum deduction they can claim is Rs 50,000 per year.

– Standard deduction: This is a flat deduction of Rs 50,000 from your salary income, available to all salaried taxpayers. You must not submit any proof or documents to claim this deduction.

– House Rent Allowance: This employer’s allowance covers your rent expenses. The exemption amount is the least of the following: the actual HRA received, 50% of basic salary for metros and 40% for non-metros, or rent paid minus 10% of basic salary.

– Leave Travel Allowance: This is an employer’s allowance to cover your travel expenses during leaves. The exemption amount is the travel cost incurred or the amount specified by your employer, whichever is lower. You can claim this exemption only twice in a block of four years.

Therefore, referring to a tax calculator before claiming any deduction or exemption is advisable.

A tax calculator can help you understand your taxable income and plan for your taxes.

How to Use a Tax Calculator to Estimate Your Taxable Income?

A tax calculator is a handy tool to help you estimate your taxable income and tax liability for the year.

To use a tax calculator, you need to follow these steps:

1. Enter your details, including your name, age, gender, and residential status. This will help the tax calculator determine your tax slab, rates, and the applicable deductions and exemptions.

2. Enter your income details, such as your salary, interest, capital gains, business or professional income, and other sources of income.

3. Enter your deduction and exemption details

4. Choose the tax regime you want to opt for, either the old or the new tax regime. The tax calculator will show you the tax liability under both regimes, and you can choose the one that suits your income profile and tax planning objectives.

5. Review the tax calculator results and verify.

Illustration on Taxable Income: Both Under Old Tax and New Tax Regime

Suppose you are a salaried employee with a gross income of ₹15 lakh in FY 2023-24. Your investments include-

• Standard deduction of ₹50,000
• HRA exemption of ₹1,20,000
• LTA exemption of ₹20,000
• Deduction under section 80C of ₹1,50,000
• Deduction under section 80D of ₹25,000
• Deduction under section 80TTA of ₹10,000

Your taxable income and tax liability under the old and new tax regime would be as follows.

Income and Deductions	Old Tax Regime	New Tax Regime
Gross Income	Rs. 15,00,000	Rs. 15,00,000
Standard Deduction	Rs. 50,000	Rs. 50,000
HRA	Rs. 1,20,000	–
LTA	Rs. 20,000	–
Total Exemptions	Rs. 1,90,000
Net Salary	Rs. 13,10,000	–
Fewer Deductions
Sec 80 C	1,50,000
Sec 80 D	Rs. 25,000
Sec 80 TTA	Rs. 10,000
Total Deductions	Rs. 1,85,000
Taxable Income	Rs. 11,25,000	Rs. 14,50,000

Tax Liability

Under the Old Tax Regime

Tax Slab	Old Tax Rate	Tax Amt
Upto Rs. 2.5 Lacs	0%	Nil
Rs. 2.5- 5 Lacs	5%	Rs. 12,500
Rs. 5- 10  Lacs	20%	Rs. 1,00,000
Rs. 10 – Rs. 11.25  Lacs	30%	Rs 37,500
Total Tax		Rs. 1,56,000

New Tax Regime

Tax Slab	Tax Rate	Tax Amt
Upto Rs. 3 Lacs	0%	Nil
Rs. 3- 6 Lacs	5%	Rs. 15,000
Rs. 6- 9 Lacs	10%	Rs. 30,000
Rs. 9- 12 Lacs	15%	Rs 45000
Above Rs. 12 Lacs	20%	Rs 50,000
Total Tax		Rs. 1,40,000
Less: Tax Rebate	1,40,000
Total Tax Liability		Nil

Here, in the above case we saw how the new tax regime is more beneficial for you.

However, this may not be the case for everyone, as it depends on your income level, deductions, and exemptions.

Therefore, it is advisable to use a tax calculator to choose the tax regime that suits your income profile and plan tax accordingly.

Common Mistakes and Tips to Avoid Them When Filing Your Tax Returns

• Choosing the wrong tax regime: You should choose the tax regime carefully and use a tax calculator to see which one is more beneficial for you.

• Missing the deadline: If you miss the deadline, you may have to pay a late fee of up to ₹10,000, and you may also lose some benefits, such as carrying forward your losses, claiming interest on refunds, or revising your returns.

• Not verifying your Form 26AS: You should verify your Form 26AS with your income and tax details, and report discrepancies, if any. This will help you avoid any tax notices or demands from the income tax department.

Key Takeaways

In conclusion, understanding taxable income is essential for planning your finances and filing your tax returns. It’s the amount of income that is subject to tax by the government, and it is calculated by subtracting deductions and exemptions from the gross income.

You can use a tax calculator to accurately calculate your taxable income, and assess your tax liability based on your income, deductions, and tax rates. You can also compare different tax regimes, deductions, and exemptions, and see how they affect your taxes.

However, a tax calculator is not a substitute for professional tax advice, and you should always consult with a qualified CA or tax consultant before filing your taxes.

Knowing your taxable income and tax bracket precisely allows you to maximise your tax savings while avoiding common mistakes and penalties.

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