8

Computation of Total Income and Tax

Payable

Learning Objectives
After studying this chapter, you would be able to
Comprehend as to what is meant by total income
Identify the income earned in different capacities by an individual which are to be
considered while computing his total income
Understand the steps involved in computation of total income and tax liability of an
individual.

1. Meaning of Total Income

The Total income of an individual is arrived at after making deductions under Chapter VI-A
from the Gross Total Income. As we have learnt earlier, Gross Total Income is the aggregate
of the net income computed under the 5 heads of income, after giving effect to the provisions
for clubbing of income and set-off and carry forward and set-off of losses.

2. Income to be Considered while Computing Total Income of

Individuals
Capacity in which income is Treatment of income earned in each capacity
earned by an individual
(1) In his personal capacity Income from salaries, Income from house property,
(under the 5 heads of income) Profits and gains of business or profession, Capital
gains and Income from other sources.
(2) As a partner of a firm (i) Salary, bonus etc. received by a partner is
taxable as his business income.
(ii) Interest on capital and loans to the firm is
taxable as business income of the partner.

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 8.2 Income-tax

The income mentioned in (i) and (ii) above are

taxable to the extent they are allowed as deduction
to the firm.
(iii) Share of profit in the firm is exempt in the
hands of the partner.
(3) As a member of HUF (i) Share of income of HUF is exempt in the
hands of the member
(ii) Income from an impartible estate of HUF is
taxable in the hands of the holder of the estate who
is the eldest member of the HUF
(iii) Income from self-acquired property converted
into joint family property.
(4) Income of other persons (i) Transferees income, where there is a transfer
included in the income of the of income without transfer of assets
individual (ii) Income arising to transferee from a revocable
transfer of an asset.
In cases (i) and (ii), income is includible in the
hands of the transferor.
(iii) Income of spouse as mentioned in section
64(1)
(iv) Income from assets transferred to sons wife
or to any person for the benefit of sons wife.
(v) Income of minor child as mentioned in section
64(1A)

3. Special Provision for Spouses Governed By Portuguese Civil Code

[Section 5A]
This section relates to the computation of total income of husband and wife governed by the
system of community of property as in force in the State of Goa and in the Union Territories
of Dadra and Nagar Haveli and Daman and Diu. Such income shall not be assessed as that of
the community of property. The income under each head of income (other than under the head
Salaries) should be apportioned equally between the husband and wife and should be
included separately in their respective total income. However, in the case of salary income, it
will be assessed in the hands of the spouse who has actually earned it.

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 Computation of total income and tax payable 8.3

4. Computation of Total Income and Tax Liability of Individuals

Income-tax is levied on an assessees total income. Such total income has to be computed as
per the provisions contained in the Income-tax Act, 1961. The procedure of computation of
total income for the purpose of levy of income-tax is detailed hereunder
Step 1 Determination of residential status: The residential status of a person has to be
determined to ascertain which income is to be included in computing the total income. In the
case of an individual, the duration for which he is present in India determines his residential
status. Based on the time spent by him, he may be (a) resident and ordinarily resident, (b)
resident but not ordinarily resident, or (c) non-resident. The residential status of an individual
determines the taxability of income earned by him. For e.g., income earned outside India will
not be taxable in the hands of a non-resident but will be taxable in case of a resident and
ordinarily resident.
Step 2 Classification of income under different heads: The Act prescribes five heads of
income. These heads of income exhaust all possible types of income that can accrue to or be
received by an individual. An individual has to classify the income earned by him under the
relevant head of income.
Step 3 Exclusion of income not chargeable to tax: There are certain income which are wholly
exempt from income-tax e.g. agricultural income. These income have to be excluded and will not
form part of Gross Total Income. Also, some incomes are partially exempt from income-tax e.g.
House Rent Allowance, Education Allowance. These incomes are excluded only to the extent of
the limits specified in the Act. The balance income over and above the prescribed limits would
enter computation of total income and have to be classified under the relevant head of income.
Step 4 Computation of income under each head: Income is to be computed in
accordance with the provisions governing a particular head of income. Under each head of
income, there is a charging section which defines the scope of income chargeable under that
head. There are deductions and allowances prescribed under each head of income. These
deductions and allowances have to be considered before arriving at the net income
chargeable under each head
Step 5 Clubbing of income of spouse, minor child etc. : In case of individuals, income-
tax is levied on a slab system on the total income. The tax system is progressive i.e. as the
income increases, the applicable rate of tax increases. Some taxpayers in the higher income
bracket have a tendency to divert some portion of their income to their spouse, minor child etc.
to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have
been incorporated in the Income-tax Act, 1961, under which income arising to certain persons
(like spouse, minor child etc.) have to be included in the income of the person who has
diverted his income to such persons for the purpose of computing tax liability. Effect has to be
given to these clubbing provisions.

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 8.4 Income-tax

Step 6 Set-off or carry forward and set-off of losses: An individual may have different
sources of income under the same head of income. He might have profit from one source and
loss from the other. For instance, an individual may have profit from his let-out house property
and loss from his self-occupied property. This loss can be set-off against the profits of the let-
out property to arrive at the net income chargeable under the head Income from house
property.
Similarly, an assessee can have loss under one head of income, say, Income from house
property and profits under another head of income, say, Profits and gains of business or
profession. There are provisions in the Income-tax Act, 1961 for allowing inter-head
adjustment in certain cases. Further, losses which cannot be set-off in the current year due to
inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per
the provisions contained in the Income-tax Act, 1961.
Effect has to be given to these provisions for set-off/carry forward and set-off of losses.
Step 7 Computation of Gross Total Income : The final figures of income or loss under
each head of income, after allowing the deductions, allowances and other adjustments, are
then aggregated, after giving effect to the provisions for clubbing of income and set-off and
carry forward of losses, to arrive at the gross total income.
Step 8 Deductions from Gross Total Income : There are deductions prescribed from
gross total income. The allowable deductions in case of an individual are deductions under
sections 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA,
80-IAB, 80-IB, 80-IC, 80-ID, 80-IE, 80JJA, 80QQB, 80RRB, 80TTA and 80U. These
deductions are allowable subject to satisfaction of the conditions prescribed in the relevant
sections.
Step 9 Total income: The total income of an individual is arrived at, after claiming the
above deductions from the gross total income
Step 10 Application of the rates of tax on the total income: For individuals, there is a
slab rate and basic exemption limit. At present, the basic exemption limit is ` 2,00,000. This
means that no tax is payable by individuals with total income of up to ` 2,00,000. The rates of
tax and level of total income are as under -
Level of total income Rate of tax
(i) where the total income does not Nil;
exceed ` 2,00,000
(ii) where the total income exceeds 10% of the amount by which the total
` 2,00,000 but does not exceed income exceeds ` 2,00,000
` 5,00,000

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 Computation of total income and tax payable 8.5

(iii) where the total income exceeds ` 30,000 plus 20% of the amount
` 5,00,000 but does not exceed by which the total income exceeds
` 10,00,000 ` 5,00,000;
(iv) where the total income exceeds ` 1,30,000 plus 30% of the amount by
` 10,00,000 which the total income exceeds
` 10,00,000.
It is to be noted that for a senior citizen (being a resident individual who is of the age of 60
years or more at any time during the previous year), the basic exemption limit is ` 2,50,000
and for a very senior citizen (being a resident individual who is of the age of 80 years or more
at any time during the previous year), the basic exemption limit is ` 5,00,000. Therefore, the
tax slabs for these assessees would be as follows
For senior citizens (being resident individuals of the age of 60 years or more but less than
80 years)
(i) where the total income does not Nil;
exceed ` 2,50,000
(ii) where the total income exceeds 10% of the amount by which the
` 2,50,000 but does not exceed total income exceeds ` 2,50,000;
` 5,00,000
(iii) where the total income exceeds ` 25,000 plus 20% of the amount
` 5,00,000 but does not exceed by which the total income exceeds
` 10,00,000 ` 5,00,000;
(iv) where the total income exceeds ` 1,25,000 plus 30% of the amount by
which ` 10,00,000 the total income exceeds ` 10,00,000.
For resident individuals of the age of 80 years or more at any time during the previous
year
(i) where the total income does not Nil;
exceed ` 5,00,000
(ii) where the total income exceeds ` 5,00,000 20% of the amount by which the total
but does not exceed ` 10,00,000 income exceeds ` 5,00,000;
(iii) where the total income exceeds ` 1,00,000 plus 30% of the amount by
which ` 10,00,000 the total income exceeds ` 10,00,000.
Further, the rates of tax for long-term capital gains, certain short-term capital gains and winnings
from lotteries, crossword puzzles, races etc. are prescribed in sections 112, 111A and 115BB
respectively. The rates of tax are 20% (10%, without indexation benefit or currency fluctuation, in
case of long-term capital gains on transfer of unlisted securities by non-residents or foreign
companies), 15% and 30%, respectively, in the above cases.
These tax rates have to be applied on the total income to arrive at the income-tax liability.

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 8.6 Income-tax

Step 11 Rebate under section 87A (where total income ` 5,00,000) / Surcharge
(where total income 1,00,00,000)
Rebate under section 87A: In order to provide tax relief to the individual tax payers who
are in the 10% tax slab, section 87A has been inserted to provide a rebate from the tax
payable by an assessee, being an individual resident in India, whose total income does
not exceed ` 5,00,000. The rebate shall be equal to the amount of income-tax payable
on the total income for any assessment year or an amount of ` 2,000, whichever is less.
Surcharge: Surcharge is an additional tax payable over and above the income-tax.
Surcharge is levied as a percentage of income-tax. In case where the total income of an
individual exceeds ` 1 crore, surcharge is payable at the rate of 10% of income-tax.
Level of Total Income Surcharge Rebate under section 87A
` 5,00,000 Not applicable Income-tax on total income or
` 2,000, whichever is less
` 5,00,000 ` 1,00,00,000 Not applicable Not applicable
` 1,00,00,000 10% of income-tax Not applicable

Step 12 Education cess and Secondary and higher education cess : The income-tax
is to be increased by education cess@2% and secondary and higher education cess@1% on
income-tax. This is payable by all individuals who are liable to pay income-tax irrespective of
their level of total income.
Step 13 Credit for advance tax and TDS: From the total tax due, deduct the TDS and
advance tax paid for the relevant assessment year. The balance is the net tax payable by an
individual which must be paid as self-assessment tax before submitting the return of income.
An illustration is given for better understanding of the procedure of computation of total
income and tax liability of individuals.
Illustration

Compute the total income and tax liability of Harish, aged 52 years, for the A.Y.2014-15 from
the following particulars:
Particulars `
(i) Income from house property (computed) 3,15,000
(ii) Income from textile business before adjusting the following 1,20,000
(a) Business loss brought forward 80,000
(b) Current depreciation 40,000
(c) Unabsorbed depreciation brought forward 1,20,000
(iii) Short-term capital gains on sale of land 1,25,000
(iv) Long-term capital loss on sale of shares sold through a recognised 25,000

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 Computation of total income and tax payable 8.7

stock exchange (securities transaction tax paid)

(v) Long-term capital gain on sale of debentures 50,000
(vi) Dividend on shares held as stock-in-trade 5,000
(vii) Dividend from a company carrying on agricultural operation 7,000
(viii) Income from growing and manufacturing coffee (cured and roasted) 80,000

During the previous year 2013-14, Harish has donated ` 50,000 to an approved Local Authority for
promotion of family planning and repaid ` 90,000 towards principal portion of housing loan.

Solution
Computation of total income of Mr. Harish for A.Y.2014-15
Particulars ` ` `
Income from house property 3,15,000
Profits and gains of business or profession
Income from textile business 1,20,000
Income from coffee business (40% of ` 80,000) 32,000 1,52,000

Less: (i) Current year depreciation 40,000

(ii) Brought forward business loss 80,000 1,20,000 32,000
Capital gains
Short-term capital gain land 1,25,000
Long-term capital gain debentures 50,000 1,75,000
Income from other sources
Dividend on shares held as stock-in-trade [Exempt u/s Nil
10(34)]
Dividend from agricultural company [Exempt u/s 10(34)] Nil Nil
5,22,000
Less: Unabsorbed depreciation 1,20,000
Gross total income 4,02,000
Less:
Deduction u/s 80C Repayment of housing loan 90,000
Deduction u/s 80G @ 100% of ` 50,000 subject to
[10% of (4,02,000 90,000 (80C) - 50,000(LTCG)] 26,200 1,16,200
Total income 2,85,800

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 8.8 Income-tax

Computation of tax liability

Particulars ` `
Tax on agricultural income plus non-agricultural income i.e., tax
on ` 48,000(i.e. 60% of ` 80,000) + ` 2,85,800 = `
3,33,800
Tax on LTCG of ` 50,000 @ 20% 10,000
Tax on balance income ` 2,83,800 8,380 18,380
Less: Tax on agricultural income plus basic exemption limit i.e. ` 4,800
48,000 + ` 2,00,000 = ` 2,48,000
Tax payable 13,580
Less: Rebate under section 87A __2,000
11,580
Add: Education cess @ 2% 232
Add: Secondary and higher education cess @ 1% 116
Total tax payable 11,928
Total tax payable (rounded off) 11,930

Note Loss from an exempt source cannot be set-off against income from a taxable source.
Therefore, long-term capital loss on sale of shares cannot be set-off against long-term capital
gains on sale of debentures.

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