What is Total income and how to calculate?

When it comes to filing your income tax returns, understanding the term “total income” is crucial. Defined under the Income Tax Act, 1961, total income forms the basis for calculating your tax liability. This blog breaks down the concept, components, and relevance of total income, helping individuals and businesses comply with tax rules.

What is Total Income?

Total income refers to the amount remaining after deducting permissible deductions under chapter VIA from an individual’s or entity’s gross total income. It is the figure on which your tax liability is calculated.

In simpler terms, total income is your taxable income after accounting for all allowances, exemptions, and deductions as prescribed by the Income Tax Act.

How to Calculate Total Income as per the Income Tax Act

Calculating total income involves a systematic process of aggregating income from various sources, subtracting exemptions, and applying permissible deductions. Here’s a step-by-step guide to compute total income:

Step 1: Identify Income Sources

Income is categorized into five heads under the Income Tax Act:

1. Income from Salary

   • Includes: Basic pay, allowances (HRA, special allowance, etc.), bonuses, and perquisites.
   • Deduct: Exemptions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), etc.

2. Income from House Property

   • For let-out property: Net Annual Value (NAV) = Annual Rent – Municipal Taxes. Deduct 30% as a standard deduction and interest on home loans.
   • For self-occupied property: Deduct interest on home loans (up to ₹2 lakh).

3. Profits and Gains from Business or Profession

   • Includes income from freelancing, business, or professional services.
   • Deduct: Expenses incurred for earning the income, like rent, salaries, and depreciation.

4. Capital Gains

   • Includes profit from the sale of property, shares, or other capital assets.
   • Types: Short-term (taxed at slab rates) and long-term (taxed at lower rates).
   • Deduct: Indexed cost of acquisition/improvement, exemptions under Section 54.

5. Income from Other Sources

   • Includes interest on savings accounts, fixed deposits, dividends, and winnings from lotteries.
   • Deduct: Deductions like Section 57 for specific expenses.

Step 2: Compute Gross Total Income

Sum up the income from all heads calculated in Step 1 to arrive at the Gross Total Income (GTI).

Step 3: Claim Deductions under Chapter VI-A

Deductions under Chapter VI-A reduce your taxable income. Common sections include:

• Section 80C: Up to ₹1.5 lakh for investments in PPF, EPF, LIC, ELSS, etc.
• Section 80D: Medical insurance premiums (₹25,000 for self and family, ₹50,000 for senior citizens).
• Section 80E: Interest on education loans.
• Section 80G: Donations to specified charities.
• Section 80TTA/80TTB: Interest on savings accounts (₹10,000/₹50,000 for senior citizens).

Subtract the total eligible deductions from the gross total income.

Step 4: Calculate Total Income

The resulting figure after deducting exemptions and deductions from the gross total income is your Total Income. This is the taxable amount on which income tax is computed.

Example of Total Income Calculation

Case 1: Salaried Individual

• Gross Salary: ₹12,00,000

• HRA Exemption: ₹2,00,000

Gross Total Income: ₹10,00,000

Deductions Claimed:

• Section 80C: ₹1,50,000 (Investments in PPF, ELSS)

• Section 80D: ₹25,000 (Health Insurance Premium)

• Total Deductions: ₹1,75,000

Total Income (Taxable): ₹10,00,000 – ₹1,75,000 = ₹8,25,000

Difference between Gross total income and Total income

Conclusion

Understanding and accurately calculating total income as per the Income Tax Act is essential for seamless ITR filing. By knowing the components, deductions, and calculation method, you can optimize your tax savings while adhering to legal requirements. For expert guidance, consult a qualified Chartered Accountant

Stay informed, calculate wisely, and file on time!