Grossing up income to show right results for tax payments
August, 19th 2015
There is often a tax deduction at source done on several payments or income that is received by an individual. A common example of this is bank fixed deposits or even some other income where the amount that is received in the bank account or through a cheque is actually the net figure after the deduction of tax. In this case many individuals make a mistake while considering the figures in the return filing process. They often just take the amount that they have received but this is not the right one and it actually needs some work to ensure that the details here are correctly shown. Here is a closer look at what needs to be done in such a situation and how one can handle this.
The way in which the entire process works is that there is a certain amount of income that is earned by the individual. Once this figure crosses the threshold mark for the deduction of tax the person or the entity that is making the payment would simply deduct the tax on the amount that is paid and then remit the net amount. The tax that is deducted would then be deposited with the government with the PAN number of the person for whom this is deducted. Now the receiver of the amount often considers the amount received as the income that they should include in their tax return but this does not reflect the correct picture and there are a few specific steps that they need to take.
The first thing that the individual has to do is to take a look at the amount that has been received as income because this is where the entire calculation process starts. The amount that has come into the bank account is not the actual amount that has been earned as income because there has been a deduction from the actual amount earned. This will require an effort of grossing up the income which is nothing but the process of adding the tax deducted to the income received to arrive at the income that has actually been earned. For example consider the situation where an individual has received Rs 18,000 as bank interest on the fixed deposits that have been kept with the bank. Now this figure is not the income because this is the amount after the deduction of tax of Rs 2,000. To arrive at the income earned the Rs 18,000 and the Rs 2,000 have to be added so Rs 20000 is the income earned that has to be shown in the tax return.
Credit for tax
Since there has been a tax deducted from the income of the individual and deposited with the government there should also be a credit taken for this entire process. Under this working if for example there has been a total tax deduction of say Rs 48,000 from various sources and the workings for the tax calculations show that the total tax to be paid is Rs 64,000 then the individual can take the credit for the tax deducted and he now has to pay jut the remaining Rs 16,000 that remains outstanding. This ensures that the benefit of the tax that has been paid on behalf of the individual is available and this will be visible in the AS 26 statement of the person because the tax is deducted against the PAN of the individual and then deposited with the government. One thus needs to check that the respective figures are appearing in the statement and once this is visible the necessary tax credit can be taken.