Not everything that you earn, goes home with you, right? In a country like India, with a huge population and an ever-growing economy, taxes play a vital role for the growth in GDP and the country as a whole.

Taxes constitute a major part of the revenue receipts of the government. These taxes are used by the government for the infrastructural, medical and recreational development of the nation.  Government expenditure is mainly financed by tax collection. If the taxes collected are not enough, the government resorts to borrowing from the public or the commercial banks, which further leads to inflation. Thus, one could easily forecast the negative effects of not paying taxes.

Well, it is the duty of each and every citizen of the country to contribute his or her share of taxes to the government on regular basis and with full sincerity.

For an individual to understand the importance of paying taxes, it is very important for him or her to know how much tax he or she needs to pay and to whom.  Not everyone has to pay the same amount of tax. It varies as per the income of the person.

Many other aspects are considered before deciding the amount of tax an individual needs to pay. Whether the tax structure adopted in the country is Progressive, Regressive or Proportionate? Whether the tax needs to be paid on value-added basis or on the final product? Who is the concerned authority to which all the tax payments are to be handed? These are certain questions that an individual should know beforehand.

What is Taxable Income?

Taxable Income, also known as Gross Income or Adjusted Gross Income, is the amount of income that helps to calculate the total amount of tax paid by a company or an individual to the government in one financial year.  The earned as well as the unearned income, both are taken into account. Taxable Income takes into account bonuses and tips, wages and salaries.

It serves as the base upon which an institution levies the income tax.  All the revenues are added to the taxable income and all the expenses incurred are deducted from the same. It is not mandatory to have the same income and expenses. The process of adding-subtracting varies from system to system and from country to country.  Also, the entire process of tax collection may change from on financial year to another. But in practice, this is not the case, as it will lead to a lot of instability in the economy.

Some systems treat a particular form of income as exempted from tax. For example, in the United States, the taxable income takes into account all kinds of income earned from whatever type of source, but the tax exempted items such as municipal bond interest are excluded.

It would be more apt to classify the taxable income into two broad categories: Earned Income and Unearned Income.

Salaries, wages, commissions, bonuses etc. are included in the earned income whereas royalties, rent from property, dividends, interest earned etc. form a part of the latter one. The income that you receive without doing any work or without rendering any service is called unearned income.

It is important to note that the wages that you earn is just a part of your income and not the total income. Consider for example a situation where you have to pay INR 50,000 as the last installment for the purchase of a plant for your factory.  The debt was issued in your name, but eventually the creditor decides to forgive the debt or reduce it to INR 20,000. In both the cases the profit of INR 50,000 or INR 30,000 will be treated as a part of your income and thus, as a part of your taxable income.

Taxes are charged depending on the source of income. Below mentioned are five major heads from which taxes are deducted.

  • Income earned from wages and salaries

The taxable income received by all the employees by their respective employers comes under this head. According to Section 192 of the Income Tax Act, the employer will deny any taxes if the concerned employer does not fall in the tax brackets.  Form 16 provides all information regarding tax deductions and net income paid. This form is handed over by the employer to the employee so that the latter gets to know each and every minute detail of the tax structure of which he or she is a part of.

  • Income generated on Property

If you rent your house, the rented income is liable to be taxed as per the government rules.  The property used for commercial purposes does not fall under this head.

  • Income from Capital Gains

Capital gains refer to the profits earned from the sale of property or on the investment made.

The taxation rule under this head is applied to the revenue earned by the sale of assets which are held by the tax assessee.

The financial instruments such as bonds, equities, debentures etc. fall under the category of capital assets.

  • Income received from Business

This income head is also referred as the “Profits and Gains of Business or Profession”.  Any profit earned by providing professional service or from business, is taxable according to the applicable rates; as per Section 30 to 43D of the Income Tax Act.

  • Income from other sources

Any other income that does not fall in the above mentioned four heads, come under this category. The windfall gains such as lottery winning, gifts and grants received are taxable. Retirement pension, property income other than house generated and interest earned on the government bonds and securities also come under the same head.

Make sure you are clear as to under which category your income falls, so that taxes can be levied suitably.

How to calculate Taxable Income?

Well, calculating your taxable income may seem to be a very tedious task, right? In reality, the story is entirely opposite. Determining your taxable income is a simple and hassle free job. You just need to be honest to yourself and to the government. Engaging in fraud methods of calculating your taxable income will not only land you in trouble, but will require too much of extra efforts and stress. Therefore, it is advisable to be just and fair.

Below mentioned are some simple steps that you can follow to determine your income in the most apt and confusion free manner.

  • Spot your earned income

As mentioned earlier, identify your wages, salaries, side income (if any), tips etc. and report all the income to the IRS. Make sure your earned income is reported on your 1099-MISC or W-2 forms. If need arises, you can take help from any of your family member who is well informed about all your receipts and expenditures.

  • Compute the unearned income

Around the tax collection time, you will receive 1099 forms. You have to mention your unearned income on these forms.

  • Select your filing status

Make note of the following.

  • Single: Choose your filing status as single if you are single on the end day of the calendar year. You can also choose this status if you have children but you is not the primary caregiver to them. All you need to do is just report your income.
  • Married filing jointly: You can choose this only if you are married on 31st December of the tax year. Along with your own income you need to mention the income of your spouse as well.
  • Married filing separately: If you are married and want to just enter your income, you can choose Married filing separately as your status.

Although, married filing jointly is considered to be a better option than this.

  • Head of Household: For choosing this status, you need to be unmarried on the 31st of December and also be paying more than half of the expenses to maintain your home. Also, if you have anyone who is dependent upon you, such as a child or dependant parents, Head of Household status can be filed.

It is very important that you file the correct status as it will decide how much of your total income you require to maintain for the tax purposes.

  • If possible, reduce your income.

Line 23-35 of Form 1040 will help you reduce your income for several different reasons. For example, consider the IRA Deduction. If you are contributing towards traditional IRA you can ask for deductions.

The amount that you pay for the student loan interest can also be asked for deductions.

Health Savings Account (HSA) contribution deduction can be taken for one own self.

After reaching this stage, subtract all the adjustments from your total income and compute the adjusted gross income.

  • Avail Tax Help

If you are stuck at some point and want help you can do so in an easy manner. The Volunteer Income Tax Assistance (VITA) provides you with free tax help.  All your tax related queries will be answered. You can find the nearest VITA either by contacting the toll free number or by visiting their website.

For the people above 60 years of age, Tax Counseling for the Elderly Program (TCE) has been set up.

Another alternative is to consult an accountant. If you are facing issues in contacting the VITA you can directly get in touch with the accountant, but make sure, he is well-educated and honest. He will guide you with and each every detail and will clear all your confusion.

Taxable Income Slab Rates

In a country like India, to make the tax system more transparent, taxes are levied according to the slab system wherein the tax rates increase with the increase in income. With the announcement of the budget every year, the tax slabs change accordingly.

Three categories of the individual taxpayers are listed below for the year 2018-19.

  • Individuals aged below 60 years; includes both residents and non-residents.
  • Senior citizens falling in the age group of 60 years to 80 years.
  • Super senior citizens; above 80 years of age.

Below mentioned are the Taxable Income Slab Rates for the financial year 2018-19.

 Tax Slabs for taxpayers who are less than 60 years

  • For income up to INR 250000, tax rate is zero percent.
  • For income between INR 250000-500000, tax rate is 5 percent.
  • For income ranging between INR 500000-1000000, tax rate is 20 percent.
  • For income higher than INR 1000000, tax rate is 30 percent.

Tax Slabs for taxpayers who fall in the age group of 60 years -80 years

  • For income up to INR 300000, tax rate is zero percent.
  • For income between INR 300000-500000 tax rate is 5 percent.
  • For income ranging between INR 500000-1000000, tax rate is 20 percent.
  • For income higher than INR 1000000, tax rate is 30 percent.

Tax Slabs for taxpayers who are aged above 80 years

  • For income up to INR 500000, tax rate is zero percent.
  • For income ranging between INR 500000-1000000, tax rate is 20 percent.
  • For income higher than INR 1000000, tax rate is 30 percent.

Understanding the concept of taxable income is very important these days. For a country’s Gross Domestic Product to grow at a faster rate, it is very important that minimal cascading of taxes take place in the country.

If each and every citizen of the country honestly pay his or her taxes, the GDP is likely to get a boost. But this is possible only if the citizens have complete information regarding their income sources and the total income that they earn. They should be aware of the prevailing tax rates in the economy and should know in which category they fall.

Any misleading information will not only create doubt, but also hamper the development of the country.

Thus, make sure you pay your taxes on time and follow no red tapism!


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