Monday, February 1, 2010

Income Tax Exemptions.....!!!

Income Tax Exemptions.....!!!
Income tax calculation is one of the easiest as well as toughest job a person needs to do. Easy in the sense all you need to do here is calculate your taxable income and find out the tax liability according to tax slabs and tough in a way that there are every chances that a person will commit mistakes while calculating his tax liability though he knows what is his income, investments and tax slab under which he falls. Then how to calculate the tax effectively and be error free and what are the things that an assessee needs to consider while calculating tax liability?

The income tax that a person needs to pay is calculated from the Net income or Taxable income. You can get this taxable income once you deduct all the deductions which come under section 80 from gross total income. Hence the first step in calculating the income tax would be to calculate gross total income.

Gross total income (GTI) Gross total income is calculated by taking into consideration five heads of income they are

• Income from Salary
• Income from house property
• Income from business / Profession
• Income from Capital Gains
• Income from Other sources

Add up incomes from each head to get gross total income. For most of assessees they will be having income from all the heads of income except third one or income from business or profession.

Once you get the gross total income all you need to do is deduct all the exemptions so as to get the taxable income.

Example 1: Mr. X has an annual income of Rs 5,00,000. He has a house from which he has obtained income of 80,000 rupees. He also has earned about 70,000 rupees from other sources. His gross total income would be

GTI= income from salary + income from house property + income from other sources

Example 2: Mr. Y is a government worker with annual income of rupees 3,45,000. He also has a house property which earns him an annual income of rupees 38,000. He also has got capital losses to the tune of 20,000 rupees. Income from other sources amounts to 20,000 rupees. His gross total income is

GTI= income from salary + income from house property + income from other sources

In this case you may think that I forgot to deduct the capital loss but the fact is that the capital losses cannot be deducted under any heads of income but carried forward. Capital loss is deducted from capital gains during next assessment year.

Calculation of Net income
To get net income an assessee needs to deduct the exemptions under section 80 from gross total income.

In example 1 if Mr. X has paid an medical insurance premium of 12000 rupees, has purchased National Saving Certificates worth 10,000 rupees, LIC premium of 8,000 then his net income would be;
Variables Amount
Gross total income 6,50,000
(-) Deductions 30,000
Net income 6,20,000

In second example if Mr. Y has contributed 50,000 towards Provident fund, 10000 towards medical insurance, has donated 5000 rupees to a charitable trust which is fully exempted, his total income would be;

Variables Amount
Gross total income 4,03,000
(-) Deductions
Provident fund -50,000
Medical insurance -10,000
Charitable trust -5,000
Net income 3,38,000

Tax slabs as per income tax act 2009

For Male Tax Payers
Upto Rs. 1,60,000 NIL
From Rs. 1,60,001 to Rs. 3,00,000 10%
From Rs. 3,00,001 to Rs. 5,00,000 20%
Above Rs 5,00,001 30%

For Female Tax Payers
Upto Rs. 1,90,000 NIL
From Rs. 1,90,001 to Rs. 3,00,000 10%
From Rs. 3,00,001 to Rs. 5,00,000 20%
Above Rs 5,00,001 30%

For Senior citizens Tax Payers
Upto Rs 2,40,000 NIL
From Rs 2,40,001 to Rs. 3,00,000 10%
From Rs. 3,00,001 to Rs. 5,00,000 20%
Above Rs 5,00,001 30%

Note: education cess of 3% will be applicable to all the tax payers and surcharge of 10% was applicable to all those tax payers whose income is above 10 lakh rupees but for calculation of Income tax for the assessment year 2010-11 the surcharge has been removed.

Let us calculate income tax keeping in mind some of the situations

Example 3: Nirmala is a salaried employee, her annual income is Rs. 3,40,000. She has made no tax savings investments during the year.

Let us calculate her income tax liability.
Variables Amount
Gross total income 3,40,000
Deductions Nil
Taxable Income 3,40,000

Income tax calculation
Description Tax (%) Tax (Amount)
Income upto 1,90,000 Nil 0
Income from 1,90,001 to 3,00,000 10% 11,000
Income from 3,00,001 to 5,00,000 20% 8,000
Tax liability 19,000
Education cess at 3% 570
Total tax liability (rupees) 19,570

Example 4: Prashant is a salaried employee. His annual income is Rs. 3,50,000. His home loan interest payment is Rs 1,20,000 and his home loan principal repayment is Rs. 80,000.He has made an investment of Rs. 30,000 in NSC.

Let us calculate Prashant's Tax liability.
Description Tax (Amount)
Income from salary 3,50,000
Income from house property (deduction) 1,20,000
Gross total Income 2,30,000
Deductions US 80C (Maximum Rs. 100000)
Home loan repayment 80,000
Investment in NSC 30,000
Total -1,10,000
Taxable income 1,30000
Tax liability Nil

In this case although Prashant has invested more than 1,00,000 in home loan repayment and NSC certificates maximum deduction given under 80C is 1,00,000 only. Hence the tax liability in the above case is Zero because income up to 1,60,000 is exempt from tax.

Example 5:Ramesh is a salaried employee who earned Rs.12,00,000. He has bought a health insurance policy for himself worth Rs 9,000. Ram has also bought ELSS funds for Rs. 85,000 and has also paid a LIC premium of Rs. 20,000.He has also donated Rs. 15,000 to the Prime Minister's Relief Fund. We will try to find what will be the tax liability if Ramesh is a senior citizen and if he is an individual.

Let us calculate Ramesh's tax liability if he is an individual below the age of 65
Description Amt Tax (Amount)
Gross total Income 12,00,000
Deduction US 80C
LIC Premium 20,000
ELSS 85,000
Total -1,05,000

Deduction US 80D Health Insurance Premium 9,000
Deduction US 80G Donation to PM fund 15,000
Total Deductions -1,24,000
Total Taxable Income 10,76,000

* Maximum deduction under Sec 80c is Rs. 1,00,000

Tax liability would be
Description Tax (%) Tax (Amount)
Upto 1,60,000 Nil Nil
From 1,60,001 to 3,00,000 10% 14,000
From 3,00,001 to 5,00,000 20% 40,000
Above 5,00,000 30% 1,72,800
Total 2,26,800
Education cess @ 3% 6,804
Total tax liability (rupees) 2,33,604

By investing in tax exempted avenues Ramesh could save Rs. 37200

If Ramesh is a senior citizen then there will be no change till calculation of Total taxable income.

Total Taxable Income 10,76,000

Tax liability would be
Description Tax (%) Tax (Amount)
Upto 2,40,000 Nil Nil
From 2,40,001 to 3,00,000 10% 6,000
From 3,00,001 to 5,00,000 20% 40,000
Above 5,00,000 30% 1,72,800
Total 2,18,800
Education Cess @ 3% 6,564
Total tax liability (rupees) 2,25,364


  1. Hi Sumeet,
    Nice article.
    I liked the way you explained the structure.
    The illustrations were very helpful and easy to understand.
    Keep writing.

  2. Thanks for detailed description on the vital topic. I do believe to avail Tax deduction from total income as allowable in Income Tax Act, investment u/s 80c is a pivot investment avenues &/or contributions.