How to Calculate Taxable Income: All You Need to Know?

Anurag, a 29-year-old software engineer in Bengaluru who works for a multinational corporation, receives ₹18,000,000 in CTC annually. He devoted a whole weekend to calculating all his tax-paying income because he wanted to be ahead of the line. 

Anurag carefully checked over exclusions and deductions while paying a monthly rent of ₹30,000 and receiving a salary breakup that included ₹7,20,000 basic pay, ₹3,60,000 HRA, and ₹5,40,000 special allowance. 

His taxable income was ₹10,57,000 after deducting ₹2,88,000 from his HRA exemption, ₹150,000 from Section 80C, ₹25,000 for mediclaim premiums, ₹50,000 from NPS, and the required deduction of ₹50,000. He was comfortable with the explanation, and more assured of having a well-timed plan in place for paying his taxes.

How to Calculate Your Gross Total Income?

Tips for Accurate GTI Calculation

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• Maintain Proofs: Keep salary slips, rent receipts, bank interest certificates, and capital gain statements ready.
  
  
• Report All Sources: Even small income, like savings interest or freelance income, should be reported.
  
  
• Use Form 26AS & AIS: Cross-check your reported income with Form 26AS and Annual Information Statement from the income tax portal.
  
  
• Separate Capital Gains: Be sure to distinguish between short-term and long-term capital gains; they are taxed differently.
  
  
• Avoid Double Counting: For example, if the employer’s contribution to PF is not part of your taxable salary, don’t add it again.
  
  
• Use Online Calculators: Use trusted tax calculators for a quick review before filing your return.

Deduct Allowable Exemptions (Like HRA, LTA, etc.)

It is crucial to take note of the several exemptions that can lower your total tax obligation when determining your taxable income. Salaried people are eligible for certain exemptions, which are granted under various provisions of the Income Tax Act. Here is a thorough overview of some important exemptions:

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1. House Rent Allowance (HRA) – Section 10(13A)

HRA is an allowance provided by employers to employees to meet the cost of renting a house. The exemption on HRA is available under Section 10(13A) and is subject to certain conditions. The exempt amount is the least of the following:

• Actual HRA received.
  
  
• Rent paid minus 10% of salary.
  
  
• 50% of the salary for employees residing in metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% of the salary for those residing in non-metro cities.

Example:

• Basic Salary + DA: ₹6,00,000
  
  
• HRA Received: ₹1,50,000
  
  
• Rent Paid: ₹1,20,000
  
  
• Rent Paid minus 10% of Salary: ₹1,20,000 - ₹60,000 = ₹60,000
  
  
• 50% of Salary: ₹6,00,000 × 50% = ₹3,00,000

Exempt HRA = ₹60,000 (least of the above)

Taxable HRA = ₹1,50,000 - ₹60,000 = ₹90,000

Note: If no rent is paid, the entire HRA is taxable.

2. Leave Travel Allowance (LTA) – Section 10(5)

LTA is provided by employers to employees to cover travel expenses incurred during leave. The exemption is available for travel within India and is subject to the following conditions:

• Frequency: Can be claimed for two journeys in a block of four years.
  
  
• Eligible Expenses: Only travel fare (air/train/bus) is exempt; expenses on accommodation, food, etc., are not.
  
  
• Documentation: Submission of travel tickets and bills is required.

Example:

• LTA Received: ₹30,000
• Actual Travel Fare: ₹25,000

Exempt LTA = ₹25,000 (actual travel fare)

Taxable LTA = ₹30,000 - ₹25,000 = ₹5,000

Note: If the actual travel fare is less than the LTA received, the excess amount is taxable.

3. Children's Education Allowance – Section 10(14)

This allowance is provided to employees for the education of their children. The exemption is available up to ₹100 per month per child for a maximum of two children.

Example:

• Allowance Received: ₹200 per month
• Exempt Amount: ₹100 × 2 children = ₹200 per month

Annual Exempt Amount = ₹200 × 12 = ₹2,400

Note: Any amount received beyond the exempt limit is taxable.

4. Hostel Expenditure Allowance – Section 10(14)

This allowance is provided to employees for the hostel expenses of their children. The exemption is available up to ₹300 per month per child for a maximum of two children.

Example:

• Allowance Received: ₹600 per month
• Exempt Amount: ₹300 × 2 children = ₹600 per month

Annual Exempt Amount = ₹600 × 12 = ₹7,200

Note: Any amount received beyond the exempt limit is taxable.

5. Transport Allowance – Section 10(14)

Transport allowance is provided to employees to meet the expenditure for commuting between the place of residence and the place of duty. The exemption is available up to ₹1,600 per month.

Example:

• Allowance Received: ₹1,600 per month

Annual Exempt Amount = ₹1,600 × 12 = ₹19,200

Note: This exemption is available only to employees who are not in receipt of a daily allowance.

Important Considerations:

• Documentation: Always maintain proper records and receipts to substantiate your claims for exemptions.
  
  
• Form 12BB: Submit Form 12BB to your employer to claim these exemptions, especially for HRA and LTA.
  
  
• Tax Regime: Under the new tax regime, these exemptions are not available. However, you can opt for the old tax regime to avail of these benefits.

By understanding and utilising these exemptions, you can effectively reduce your taxable income and optimise your tax liability.

How to Claim Eligible Deductions Under Sections 80C to 80U?

Your taxable income can be greatly decreased by claiming deductions under Sections 80C to 80U of the Income Tax Act, 1961, which will lessen your tax obligation. Both individuals and Hindu Undivided Families (HUFs) are eligible for these deductions, which cover a range of costs and investments. Here is the guide to follow:

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Section 80C – Deduction for Investments in Specified Instruments:

Maximum Deduction Limit: ₹1,50,000 per annum.

Eligible Investments:

• Life Insurance Premiums
  
  
• Employee Provident Fund (EPF)
  
  
• Public Provident Fund (PPF)
  
  
• National Savings Certificates (NSC)
  
  
• Tax-saving Fixed Deposits (FDs) with a 5-year lock-in
  
  
• Senior Citizens Savings Scheme (SCSS)
  
  
• National Pension System (NPS)
  
  
• Equity Linked Savings Scheme (ELSS)
  
  
• Sukanya Samriddhi Yojana (SSY)
  
  
• Principal repayment on home loans
  
  
• Tuition fees for up to two children
  
  
• Stamp duty and registration charges for the purchase of a residential property

For example:

In this example, the total deduction under Section 80C is ₹1,50,000, which is the maximum limit.

Section 80CCC – Deduction for Contributions to Pension Funds

Maximum Deduction Limit: ₹1,50,000 per annum (combined with Section 80C)

Eligible Contributions:

• Payments made to pension funds of Life Insurance Corporation of India (LIC) or any other insurer.

For example:

In this case, the individual can claim a deduction of ₹50,000 under Section 80CCC.

Section 80CCD – Deduction for Contributions to the National Pension System (NPS):

Maximum Deduction Limits:

• Section 80CCD(1): 10% of salary (Basic + DA) or 20% of Gross Total Income (GTI) for self-employed individuals.
  
  
• Section 80CCD(1B): An additional ₹50,000 (over and above the ₹1,50,000 limit under Section 80C, 80CCC, and 80CCD(1)).
  
  
• Section 80CCD(2): Employer's contribution to NPS is deductible up to 10% of salary (Basic + DA).

For example:

The individual can claim a total deduction of ₹2,10,000 under Sections 80CCD(1), 80CCD(1B), and 80CCD(2).

Section 80D – Deduction for Premiums Paid on Health Insurance

Maximum Deduction Limits:

• For self, spouse, and children:
  • Up to ₹25,000 per annum.
    
    
• For parents:
  • Up to ₹25,000 per annum (if parents are below 60 years).
  • Up to ₹50,000 per annum (if parents are senior citizens, i.e., above 60 years).

For example:

In this case, the individual can claim a total deduction of ₹65,000 under Section 80D.

Conclusion

You can reduce your taxable income and develop appropriate savings, investing, and financial wellness by taking deductions under Sections 80C to 80U. You can maximise the advantages offered by the Income Tax Act by being conscious of the eligibility and cap for each part.

FAQs

1. What is the maximum deduction allowed under Section 80C?

You can claim up to ₹1,50,000 per financial year under Section 80C.

2. Can I claim both 80C and 80CCD(1B) deductions together?

Yes, you can claim both, with an additional ₹50,000 deduction under 80CCD(1B).

3. Is the health insurance premium for parents eligible for the deduction?

Yes, premiums paid for parents are deductible under Section 80D, up to ₹50,000 if they are senior citizens.

4. Do I need to submit proof to claim these deductions?

Yes, valid investment proofs or receipts are required to claim deductions when filing your return or submitting it to your employer.

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