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How Your Income Tax Is Calculated
February, 01st 2019

The government is due to present its Budget in Parliament on Friday. While the common man will look eagerly for any announcements in the income tax rules, analysts will watch the annual event closely for macroeconomic cues. Every year, the much awaited event - wherein the government details its revenue and expenditure as well as its approach to the fiscal policy for the time to come - triggers hopes of relief in terms of income tax sops. Before the February 1 Budget, here's a recap of existing income tax rules applicable to financial year 2018-19 (Assessment Year 2019-20). (Also read: What to expect from 2019-20 interim Budget)

Gross income vs taxable income

Taxable income is derived by adjusting all exemptions and deductions applicable under the income tax laws against the gross income. Other than deduction available under Section 80C (life insurance, ELSS, EPF, PPF contribution, Sukanya Samriddhi etc), considered one of the more popular deductions by tax experts, Section 80D (medical insurance), Section 80E (education loan) and Section 80TTA (savings account interest) provide for a range of deductions to the assessee. Also, a standard deduction of Rs. 40,000 is applicable to employees and pensioners.

The residual income after the assessee claims all suitable deductions is known as taxable income.

On this taxable income, tax is calculated as per the income tax slabs as per Finance Act 2018:

General (up to 60 years) Senior citizen (60-80 years) Super senior citizen (above 80 years) 
Income Tax Income Tax Income Tax
Up to Rs.2.5 lakh Nil Up to Rs. 3 lakh Nil Up to Rs. 5 lakh Nil
Rs.2,50,001-Rs.5 lakh 5% Rs. 3,00,001-Rs. 5 lakh 5% Rs. 5,00,001-Rs. 10 lakh 20%
Rs.500,001-Rs.10 lakh 20% Rs. 5,00,001-Rs. 10 lakh 20% Above Rs. 10 lakh 30%
Above Rs.10 lakh 30% Above Rs. 10 lakh 30%    
Surcharge of 10% for income between Rs. 50 lakh and Rs. 1 crore with marginal relief          
Surcharge of 15% for income above Rs. 1 crore with marginal relief          
# Rebate of up to Rs. 2,500 for taxable salary up to Rs. 3.5 lakh          
# Cess of 4%          

For example, in case of taxable income (or residual income after tax deductions) of Rs. 7 lakh for an assessee up to 60 years of age, an income tax of Rs. 54,600 (after cess of 4 per cent) is applicable.

That is: Rs. 12,500 + Rs. 40,000 + Rs. 2,100 (cess at 4 per cent)

As per current tax rules, a rebate of up to Rs. 2,500 for taxable salary up to Rs. 3.5 lakh is available.

The current tax laws also require the assessee to pay a surcharge in case the taxable income exceeds a specified limit.

COMMENT

The surcharge, applicable on the basic tax without inclusion of cess, of 10 per cent is applicable on those with taxable income between Rs. 50 lakh and Rs.1 crore. Income above Rs. 1 crore attracts a surcharge of 15 per cent. However, the provision of marginal relief is available, which aims to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above Rs. 50 lakh or Rs. 1 crore.

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