ITR (Income Tax Return) Computation: A Step-by-Step Guide
ITR Computation refers to the process of calculating the total income of an individual or entity and the tax payable based on applicable tax rates, exemptions, and deductions. It is a crucial step for filing the income tax return (ITR) with the Income Tax Department.
Here’s how to compute income tax:
Step-by-Step Process of ITR Computation
1. Calculate Gross Total Income (GTI)
The first step is to calculate Gross Total Income (GTI), which includes income from various sources such as:
Income from Salary:
- Salary received from employer.
- Allowances and perquisites.
- Bonus and commission.
- Retirement benefits (gratuity, pension, etc.).
Income from House Property:
- Rental income (after deductions such as municipal taxes paid and 30% standard deduction for repairs).
Income from Business/Profession:
- Profits or gains earned from business or professional activities.
- Deduct business-related expenses (rent, salaries, etc.).
Capital Gains:
- Profit from the sale of assets like property, stocks, or bonds.
- Long-term or short-term capital gains, subject to exemptions and deductions.
Income from Other Sources:
- Interest on savings accounts, fixed deposits, or dividends.
- Winnings from lotteries, bets, or gambling.
2. Apply Exemptions and Deductions
Exemptions and deductions reduce the total taxable income.
Exemptions:
- HRA (House Rent Allowance): For employees living in rented accommodations.
- Agricultural Income: In some cases, agricultural income is exempt from tax.
- Capital Gains Exemptions: For example, exemption on long-term capital gains from the sale of a house under Section 54.
Deductions under Section 80C to 80U:
Common deductions include:- 80C: Investments in PPF, life insurance premiums, ELSS, and more (up to ₹1.5 lakh).
- 80D: Premiums paid for health insurance policies.
- 80E: Interest paid on education loans.
- 80G: Donations to charitable organizations.
- 80TTA/80TTB: Deduction for interest on savings accounts.
3. Compute Total Taxable Income
Once you have accounted for all the exemptions and deductions, subtract them from the Gross Total Income to arrive at the Net Taxable Income.
- Formula: Net Taxable Income=Gross Total Income−Exemptions−Deductions\text{Net Taxable Income} = \text{Gross Total Income} – \text{Exemptions} – \text{Deductions}Net Taxable Income=Gross Total Income−Exemptions−Deductions
4. Calculate Tax Payable
Based on the Net Taxable Income, apply the applicable income tax slabs to compute the tax payable.
For Individuals Below 60 Years (FY 2023-24)
Income Range (₹) | Tax Rate |
---|---|
0 – ₹2,50,000 | Nil |
₹2,50,001 – ₹5,00,000 | 5% |
₹5,00,001 – ₹10,00,000 | 20% |
Above ₹10,00,000 | 30% |
For Senior Citizens (60+ Years)
Income Range (₹) | Tax Rate |
---|---|
0 – ₹3,00,000 | Nil |
₹3,00,001 – ₹5,00,000 | 5% |
₹5,00,001 – ₹10,00,000 | 20% |
Above ₹10,00,000 | 30% |
For Super Senior Citizens (80+ Years)
Income Range (₹) | Tax Rate |
---|---|
0 – ₹5,00,000 | Nil |
₹5,00,001 – ₹10,00,000 | 20% |
Above ₹10,00,000 | 30% |
5. Apply Rebates and Credits
Rebate under Section 87A:
- If the taxable income is up to ₹5,00,000, a rebate of ₹12,500 is available.
- This reduces the tax liability for eligible taxpayers.
Tax Credits:
- If you have any tax credits like foreign tax credit, apply them to reduce your overall tax liability.
6. Calculate Additional Taxes (if applicable)
- Surcharge and Cess:
- Surcharge applies to high-income earners (income above ₹50 lakh).
- Health and Education Cess (4%) on the total tax calculated.
7. Final Tax Payable
After calculating the total tax payable, adjust for any advance tax or TDS (Tax Deducted at Source) already paid.
- Formula: Final Tax Payable=Tax Payable+Surcharge and Cess−Advance Tax / TDS Paid\text{Final Tax Payable} = \text{Tax Payable} + \text{Surcharge and Cess} – \text{Advance Tax / TDS Paid}Final Tax Payable=Tax Payable+Surcharge and Cess−Advance Tax / TDS Paid
Example of ITR Computation
Scenario:
- Gross Total Income: ₹8,00,000 (Salary)
- Deductions under 80C (PPF, LIC): ₹1,50,000
- HRA Exemption: ₹50,000
Steps:
- Gross Total Income (GTI): ₹8,00,000
- Deductions (80C): ₹1,50,000
- Taxable Income = ₹8,00,000 – ₹1,50,000 = ₹6,50,000
- Tax Calculation (using tax slabs):
- ₹2,50,000 (No Tax)
- ₹3,00,000 taxed at 5% = ₹15,000
- ₹1,00,000 taxed at 20% = ₹20,000
- Total Tax = ₹15,000 + ₹20,000 = ₹35,000
- Apply Rebate under Section 87A (if applicable):
- Rebate of ₹12,500 (since taxable income is ≤ ₹5,00,000 after deductions).
- Final Tax Payable = ₹35,000 – ₹12,500 = ₹22,500
Conclusion:
The ITR computation involves calculating various components of income, applying exemptions and deductions, and arriving at the final tax payable. It’s important to ensure accuracy while computing taxable income to avoid penalties.
If you need help with ITR computation or filing, feel free to contact AK Mehta & Associates 😊