A Complete Guide on Calculating Your Tax Liability
If you are paying taxes for the first time, you may not know much about calculating tax liability. The process of calculating tax liability is straightforward. It can take time to understand all the details.
This article breaks down the calculation process into steps. The content highlights everything you need to know about calculating tax liability. Calculate tax liabilityusing the tax liability formula. Before getting into the details, let us understand tax liability.
What is tax liability?
The Indian Government taxes your income every year. However, you only have to pay the tax at the end of the financial year. Tax liability is the amount of money you owe the Indian Government at the end of the year.
Tax liability is a term usually used by businesses. This is the amount your business is expected to pay at the end of the financial year.
Various factors are involved in calculating tax liability using the tax liability formula. Businesses can also reduce their tax liability. Claiming exemptions or tax credits under the respective clauses are some ways you can reduce your tax liability.
When calculating your business’s tax liability, you need to consider all sources of income. This makes it confusing for many people to calculate tax liabilities. The tax liability formula is simple.
How to calculate tax liability?
1. Determine your income.
To calculate your salary income, you need all your salary slips. You will also need form 16S. Calculate all your allowances, bonuses and compensations. Most full-time employees are provided medical. But you may also receive others such as house rent allowance, travel expenses, etc.
Deduct the exemptions that apply to you. You are also allowed a standard deduction of 50,000/- on your annual salary. Deferred tax liability does not apply here.
2. Calculate your income from other sources.
Calculate the income you receive from other sources. For example, if you have rented out your properties, the rent is considered income. You can also add other similar incomes. If you rent one or more rooms on your existing property, you should include that in the income. For example, some businesses may rent out one or more floors in their office building.
3. Calculate your capital gains.
Capital gains are the income you earn from selling shares, mutual funds, or bonds. Capital gains can be either short-term or long-term. Short-term capital gain is the profit you make by selling shares, mutual funds or bonds less than one year after purchasing. You can claim any deductions under Section 54 and its sub-sections that you are applicable for. The remaining amount is the capital gains income.
4. Calculate your business income.
If you run a profitable business, calculate the net profit. Deduct the expenses and allowances from the net total. Refer to the applicable allowances under the clauses of the IT Act.
Deferred tax liability is the net difference between the company’s income and earnings before tax. Subtract your earnings before tax from your company’s net income and multiply it by the expected tax rate.
5. Determine if you are missing any sources of income.
After calculating all income sources, determine if you have missed any sources. For example, declare if you have received any additional money. If you have won a lottery, you should provide the exact figure. Similarly, you also need to include if you have received money as a gift. Providing the correct amounts will help you simplify the process of income tax filing.
6. Calculate your total income.
Calculate your total income by adding all the values you have calculated in Steps 1 to 5. If you earn income from only one source (for example, you are a salaried person), then you need not calculate all these.
All money you earn in the financial year should be declared when you file your taxes.
7. Deductions you can claim under chapter VI A.
These are the deductions related to investments under Sections 80C to 80U of the Income Tax Act. It includes:
- Public Provident Fund (PPF)
- Equity Linked Savings Scheme (ELSS)
- National Pension System Fund (NPS)
- Unit Linked Insurance Plan (ULIP)
- National Savings Certificate (NSC)
- Voluntary Provident Fund (VPF)
- Life insurance policies
- Health insurance policies.
You can deduct this amount if you invest in any of these schemes. Before deducting, calculate how much money you invest in these schemes per year. For example, you may have life insurance policies and health insurance policies but not ELSS funds. You can also invest in these funds to get deductions.
The total exempt amount allowed is INR 1.5 lakh.
8. Calculate your net taxable income.
Your net taxable income is the gross income (step 6) minus deductions (Step 7). The final amount is the final taxable income. The income tax rate on this amount will be according to the amount. You have to check the income tax slabs.
9. Determine your income slab.
You have to determine your income tax slabs. Using this slab, you can calculate the tax liability. Before using the income tax formula, understand your slabs.
What are the income tax slabs?
In the table below, find your category. For example, if you are a senior citizen whose net income of INR 4,00,000, the income tax rate is 5%. Use your net income (amount calculated in step 8) to determine your income tax rate.
Note:
1. The rates of Surcharge under the tax regimes are as under:
Tax slabs help you determine which income tax rate applies to you. Once you have added the rate, this is the tax payable to you. For example, in the above case, you have to pay 5% of INR 4,00,000. That is, your total tax is INR 20,000.
Conclusion
Calculating tax liability is not very difficult. However, you have to remember to include all deductions and income sources. If you are filing taxes without the help of an expert, go through all calculations and amounts several times before submitting.
Using the tax liability formula may seem like a complex task for a first-time taxpayer. Consult a financial advisor to understand whether you have included the correct amounts.
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