When a person’s income exceeds a certain limit, it comes under the purview of tax. Taxable income is calculated on the basis of the rules and regulations prescribed by the Income Tax Act 1961. Taxable income is that part of the total income of a person or institution on which he has to pay income tax.
If a person’s income in India exceeds a certain limit, then he has to pay tax on income. Taxable income is calculated on the basis of the rules and regulations prescribed by the Income Tax Act, 1961. Along with this, it is important to understand the liability that is created on a person or company / institution in a financial year, which he has to pay to the government.
In this article, so that you take the right decision regarding your tax liability, we are giving information about those parts of income which come under the purview of tax. Also, we will know which part of the income is outside the purview of tax.
What is taxable income?
- According to tax expert Manikandan S, taxable income is the portion of a person’s or entity’s total income on which he or she is required to pay income tax.
- It includes many different sources of income, including salary, pension, capital gains, rental income, business income, investment income and unearned income.
- However, deductions and exemptions are deducted from gross income as per the provisions of the Income Tax Act, 1961, while calculating taxable income.
- As per the rules, most sources of income are taxable, but there are some exceptions on which tax is not payable.
- For example, if a person is associated with a particular religious institution and has taken a vow of poverty and works for that institution, then any income earned from it is generally exempt from tax.
- Any amount received on the death of a loved one or the amount of life insurance payment is also exempted from tax, provided they meet specific conditions.
Who is required to pay Income Tax?
- The Income Tax Act defines the term ‘person’ broadly, which includes both natural and artificial entities.
- It includes individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Body of Individuals (BOIs), firms, Limited Liability Partnerships (LLPs), companies, local authorities and any Artificial Juridical Person (AJP) which is not included in any of the above categories.
- All these entities are required to pay income tax based on their taxable income.
How do we determine taxable income?
- There are several important steps involved in determining taxable income. First, the tax payer must calculate the income from all sources of income including employment, business, capital gains and other sources.
- The sum of all these incomes will be the Gross Total Income, which is the total income of any individual or entity. After this, eligible deductions and exemptions under the Income Tax Act, 1961 have to be included, which reduces the tax liability.
- After deducting exemptions and deductions from the gross total income, the remaining income is the amount on which one has to pay tax.
- If after this your total income exceeds the prescribed tax slab, then you have to pay tax. This tax contributes significantly to the development of the country.
- The taxpayer has to give details of his income in a certain format, which ensures transparency and accountability.
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