Taxable Income vs Gross Income
In India, all income is taxable unless otherwise mentioned as an exception. Most of your income is taxable, and it should be mentioned in the Income Tax return forms. For some taxpayers, a part of the income is taxable, or the whole of the income gets excluded from the payment of taxes. Therefore, the correct determination of taxable income and actual income is significant for tax computation.
Determination of your total income is the primary step in the process of tax computation. A particular taxpayer may get income from various sources in a specific assessment year. It could be income from salary, agriculture, income from the sale of stocks and shares, or any other form of income. Once the total income is determined, it can be used to calculate the taxable income for tax filing.
What is Gross Income?
The gross income of an individual is the total income that he receives in a year before the application of taxes or deductions. This income covers not only income received by way of salary, but also income from various other sources like income from property, or agricultural income, or income from the sale of assets. Similarly, Gross Total income is also calculated for business units.
The types of Gross Total Income are:
Individual Gross Total Income
This is the total gross income for an individual which consists of income from salary, including pensions, and income from any interests, dividends, or rental income.
Business Gross Income
This is the total income for a business in a year before any deductions or taxes are paid. It is also known as the gross profit or gross margin of a business unit.
* Business Gross Income = Gross revenue of the firm - the cost of goods sold
Overall, first, the total gross income is calculated. After the application of the required tax deductions and exemptions, this total gross income becomes adjusted gross income, which is followed by taxable income.
A regular taxpayer can have income from various sources. Income tax laws have mentioned five heads under the broad sources of income. These sources of income for a taxpayer are classified under the following heads:
- Income from salary
- Income from House Property
- Income from Capital Gains
- Income from Business/Profession
- Income from Other sources
Let us explore these heads of income one by one for tax purposes for a clear understanding of the taxable income vs gross income.
Income from Salary (A)
This is the simplest form of income for an individual. The salary is made of various components:
- Pension or annuity
- Any applicable Commission, fees, or benefits other than salary
- Advance salary
- Leave compensation
- Any PPF which is taxable
- Contribution to any pension scheme under Sec 80CCD
- Any bonus received
- All these sub-heads of income are added together to give the Gross salary.
- Now, the deductions need to be calculated.
- The exempted portion of HRA
- DA or Dearness Allowance
- Transport Allowance
- Medical reimbursements to a maximum of Rs 15,000 where actual bills have been furnished
- The standard deduction is allowed from your gross salary.
The sum of these deductions will be taken and deducted from the gross salary. The resultant figure will be taxable income.
Thus, Taxable Income from salary = Gross total income –Total Deductions.
Income from House Property (B)
As the name suggests, this income from house property is the rental income that a particular assessee receives from the house that he has put on rent. In case, the assessee does not have a rental income, or has only one, self-occupied house by him, his income from house property will be NIL or a negative.
Here we need to consider specific points:
- The expected rent is the higher value out of the FMV or the Fair Market Value, and the property valuation as per the municipal authorities.
- Whatever is the total actual rent received annually, and the expected rent, the higher value gives the GAV or the real value of the property owned.
- The expected rent cannot be higher than the standard rent if the Rent Control Act covers the property.
Income from Capital Gains(C)
If the sale of a capital asset results in the generation of any profit or gain, then that is termed as a Capital gain. This gain is treated as an income, and the assessee is required to pay tax for that amount in the year in which the sale of the capital asset takes place.
These capital gains can be long term capital gains or LTCGs, as well as short term capital gains. An LTCG is a capital gain from the sale of an asset that has been held by the assessee for more than a year (at the time of sale). Ex: Real estate, property, stocks, bonds, etc.
An STCG is capital gain from the sale of an asset that has been held by the assessee for less than or equal to a year (at the time of sale). Ex: shares and securities. This gain is taxed similarly to regular income. Deductions under Sections 54, 54G, etc. need to be claimed for this income from capital gains.
Income from Business or Profession (D)
The taxpayer himself can assess this income from business or profession if the company is not set up on a large scale. Big companies require assistance from professional experts to compute professional income after several allowances and expenditures.
Income from Other Sources (E)
After classifying income from the sources mentioned above, there is still some income from other sources that cannot be classified under the income heads mentioned above. This income is the income from other sources. This includes income from sources like Interest Income, interest from recurring FDs, income from FDs and savings accounts, gifts, Dividend income, etc.
The Gross Income is the total of income from all the heads mentioned above, after claiming the relevant deductions and allowances.
What is Taxable Income?
The total gross income can be calculated as above by adding up the income from all sources of income.
Gross Total income =Income from A+B+C+D+E
Thereafter, taxable income is calculated after deducting all the necessary allowances.
Total Taxable Income= Gross Total Income minus Income deductions
Finally, this figure can be used to compute the total payable tax after adjustment of various rebates and deductions, permissible under the Indian IT act.
The Income Tax Act prescribes a list of these deductions. Some of these are as follows:
- Investment in PPF
- Tuition fee
- Medical Insurance
- Life insurance
- Donations are given to certain approved institutions as mentioned in the IT Act
- Royalty income
- There are several deductions available under Sections 80C to 80U of the IT Act that the taxpayer can claim. The total of these deductions cannot be more than Rs 1.5 lakhs. Also, the amount of deduction is not to exceed the Gross total income.
Total Tax Payable = Tax on Total Income- Rebates
Thus, if you look into the taxable income vs gross income computation, the total gross income is first required to be calculated. After that, the total taxable income is determined.
Why is the calculation of Gross Total Income necessary?
In a study of taxable income vs gross income, the determination of the Gross Total Income is necessary to calculate your taxable income in a particular assessment year. As a taxpayer, filing your taxes every year becomes your prime financial responsibility. However, even before you file your ITR, you need to first gather the relevant figures required for its calculation.
The final tax that you need to pay as an assessee can only be determined correctly if the resulting taxable income has been correctly computed. Thereafter, the final income tax can be calculated by applying applicable tax rates of the land. The same goes for calculation of refundable tax or Advance tax or for computing TDS.
Taxable Income vs Gross Income: An Example
Below we present an example that shows the calculation of gross income and taxable income for computation of taxes for a salaried employee.
Suppose X is a salaried employee in an IT firm with a salary of Rs 50,000 per month. Here are the various components of his salary:
Basis Salary: Rs.50, 000 per month
HRA or House Rent Allowance: Rs.20, 000 per month
SA or Special allowance: Rs.10, 000 per month
LTA or Leave Travel Allowance: Rs.9, 000 per year
Rent paid by X: Rs.15,000 per month
Total annual salary for X= 50,000 X 12= 600,000
Total SA in a year: 10,000 X 12=120,000
Total LTA in a year=9,000
Total annual HRA= 20,000 X 12=240,000
Total yearly rent paid by X=15,000 X 12=180,000
The following table will make things more clear:
|Salary Heads||Amount per year||Deductions||Taxable income (under new IT scheme)||Taxable income (under old IT scheme)|
|LTA||9,000||9,000(with bills submission)||9,000||9,000|
Calculation of Taxable Income
Now that we have calculated the gross income, the taxable income is to be calculated. For that, let us first consider the various investments X has made in the financial year.
- PPF: Rs.20,000
- EPF Contribution a year: Maximum Rs.1, 15,200
- ELSS: Rs.8,000
- LIC Premium: Rs.6,000
- Medical Insurance: Rs.10,000
Calculation of Total Deductions
So, the amount that is eligible for tax deduction is as follows:
Amount under Section 80C- PPF+ EPF +ELSS +LIC i.e. 20,000+115,200+8,000+6,000=149,200
Amount under Section 80D-Medical Insurance=10,000
|Type of Tax Deduction||Maximum deduction Limit||Amount Eligible||Claimed Amount|
|Sec 80D||25,000(for self) 50,000(for parents)||10,000||10,000|
Now, the Gross Taxable Income will be:
Gross taxable income = Salary+ income from other sources-Total deductions
= 919,000+0-159,200= 759,800
It is on this Gross Taxable Income that the payable income tax will be calculated further.
Thus, a comparative study of Taxable income vs Gross Income, both gross income and taxable income is necessary.
Comparison Between Taxable income and Gross Income
- Gross income is the total of all incomes earned or received by an assessee in a financial year without any tax deductions or exemptions. Taxable income is the actual income that is subjected to Income tax calculation after the claimed eligible deductions.
- Gross income includes income from various sources of income like salary, house rent, capital gains, interests, etc. In contrast, taxable income is the gross income minus multiple deductions under the various sections of the IT Act, like 80C, 80D, 80G, 80TT.
- Thus, a comparison of Taxable income vs Gross Income shows that the Gross Income will always be higher than the taxable income. This study will make it easy for you to understand the basics of gross income and taxable income and how to calculate them.
Ans: The Indian Income Tax Act mentions five heads of income under which the income of a taxpayer is classified. These are:
- Income from house property,
- business income,
- capital gain income, and
- income from other sources, like interest from FDs, RDs, or savings accounts.
Ans: No, a taxpayer can only claim deductions for those expenses that are mentioned under Section 80 of the Indian Income Tax Act. These deductions cannot be claimed for other household expenses of the taxpayer.
Ans: No, both incomes are different types of income. The Gross total income is the summation of income from all sources, whereas the taxable income is gross income less than the income tax deductions and exemptions. Calculation of the correct gross income is essential to further compute the taxable income for tax purposes.