Taxable Income

How do you calculate taxable income?

Taxable income is the amount on which you pay income tax. The Income Tax department calculates basic taxable income based on the following:

Employees can take their gross income (the sum of Basic salary + HRA + Special Allowance + Transport Allowance + any other allowances) and deduct the investments made under section 80C. And calculate taxes based on the tax or slab rate you fall.

TDS is deducted at the source, and taxes are calculated after adding the TDS to your income.

What is the taxable limit?

The taxable limit is the maximum income you can earn without paying taxes. You have to pay taxes on your income more than the taxable limit. Your taxable limit also varies based on your filing status and the country you belong to it. Your taxable limit is higher if you are a senior citizen or a super senior citizen.

As per section 10A of the Income Tax Act, 1961, the maximum amount of income taxable in a particular financial year is Rs.2,50,000/- for a person who belongs to the general category (not more than 60 years of age) while Rs.3,00,000/- for a senior citizen (more than 60 years and not more than 80 years). As per section 87B of the IT Act, this amount is applicable for senior citizens who are getting their income from other sources apart from pension-like interest earned on bank deposits, interest/dividend earned by holding shares in companies, etc.

What is the minimum salary one has to make to pay income tax?

In the case of existing tax slabs and rates, if your total taxable income is between Rs 2.5 Lakhs to Rs 5 Lakhs, you will have to pay a flat income tax of Rs 12,500. While in the case of the new tax regime, if your taxable income is between Rs 2.5 Lakhs and Rs 5 Lakhs, you will have to pay an income tax of 10% on the amount exceeding Rs 2.5 Lakhs.

What kind of income is not taxable?

There are many kinds of income that are not taxable. They include agricultural income, scholarships, interest earned on PPF and EPF, long-term capital gains, and certain portions of HRA, LTA, and leave encashments.

Tax-free bonds and certificates are also considered as nontaxable income.

Nontaxable income is different from exempt income. Exempt income is the amount you don’t have to pay tax. But nontaxable income is the portion of taxable income which is not taxed for your convenience.

I'm looking to reduce my taxable income. What steps can I take?

Here are some steps you can decrease your taxable income:
1. Contribute to your retirement plan. It will take your contributions from your gross income before deducting for taxes.
2. Invest in medical insurance, childcare, and other qualified benefits/savings accounts that are tax-deductible.
3. Buy tax-exempt bonds like US Treasury Bonds, which will not be taxed on the interest earned.
4. Avoid paying capital gains in short-term investments by holding them for more than a year.
5. Be aware of the tax deductions available while still in school: deduct tuition fees and textbooks, but save receipts as proof of purchase, and don’t forget scholarships!