Computation of Tax for Individual
The income taxable in the hands of an individual and tax liability thereon shall be computed
according to his residential status. The income taxable under the Income-tax Act is computed
under the five heads of income, and tax thereon is computed as per the tax slab rates applicable
for that previous year.
Determination of residential status
Income-tax liability of an individual is calculated on the basis of his ‘Total Income’. His
residential status in India influences the income to be included in the taxable income. An
individual can be categorised into the following residential status during the previous year:
(a) Resident in India
(b) Resident but Not-ordinarily Resident
(c) Non-Resident in India
An individual, who is a resident in India, is liable to pay tax in India on his global income. On
the other hand, a non-resident person is liable to pay tax in India only on that income which
accrues or arises or is deemed to accrue or arise in India, and income received or deemed to be
received in India. However, if the income of an individual is taxable in India and outside India,
then he can claim a foreign tax credit in respect of such income.
Computation of income
Income tax is levied on the total income of an individual. Thus, the first step is to compute the
total income. The total income of an assessee is computed in the following steps:
Calculate income under 5 heads
In Income-tax Act, the income is computed in the following 5 heads of income:
(a) Salary
(b) House Property
(c) Profits and gains from business or profession
(d) Capital Gain
(e) Income from Other Sources.
Clubbing of income of any other person
An individual is generally taxed in respect of his own income, but in respect of certain income,
the Income-tax Act clubs the income of other persons in an individual’s income. Hence, an
individual has to add another person’s income to his own income if clubbing provisions apply in
his case.
Set off and carry forward of losses
Where an individual has incurred losses under any head of income, then he is allowed to make
the following adjustments subject to relevant provisions relating to set-off and carry forward of
losses:
(a) Intra-head adjustment to set-off of losses from one source of income against income from
another source taxable under the same head of income.
(b) Inter-head adjustment to set-off of losses from one head of income against income taxable
under another head of income.
If losses cannot be set off in the same year due to inadequacy of eligible profits, then certain
losses are carried forward to the next assessment year.
Allowability of deductions under Chapter VI-A
The aggregate of income so computed as per aforesaid steps is called ‘Gross Total Income
(GTI)’, out of which various deductions are allowed to a taxpayer on account of investments and
savings made by him.
Determining total income
The balance income after allowing the deductions is called ‘Total Income’. The total income is
bifurcated into 2 parts - Normal Income and Special Income. The normal income of a taxpayer is
charged to tax as per applicable tax rates, and special income is charged to tax at special rates.
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