This is the season to get worried, la,la,la!!!
Yes fellow Gruhinis’ its tax season! You know the time we desperately wish we had asked Santa for Harry Potter’s wand, so that we could get over and done with those horrid tax return forms. But fret not! For although the Great Gruhini certainly does not possess Harry’s magic wand, she certainly can help you understand that magical figure of “income tax” and how to arrive at it.
We pay taxes (a percentage of our income) as per standard income tax brackets as decided by our government in its budget every year.
The current income tax brackets are:
For Income upto Rs 200,000: No tax, , On the income of Rs 2,00,001 – but less than Rs 500,000: 10%, On the income of Rs 500,001-Rs 10,00,000: 20%, On the income of Rs 10,00,001: 30%.
On the tax so calculated, a 3% of that amount is charged as an education cess.
Get the “Net taxable income” First
To know how and which bracket you fit in, you first need to know your “net taxable income” from all the sources (salary, rental income, shares etc). You will find this figure either in your salary slip or in the Form 16 provided by your employer.
Your employer calculates your income under various heads (depending on what you have disclosed or shared), applies relevant deductions to each income source to arrive at gross total income. It further deducts an amount not exceeding Rs 1,00,000 (or the actual amount of investment proofs declared by you) as required under Section 80C. The figure so arrived is your net taxable income.
Let’s assume your net taxable income is Rs 10,20,300 for the financial year ending March 31 2014.
Calculate your tax liability from Net Taxable Income
Based on above tax rates, you might quickly calculate your tax as Rs 3,15,272 (30% of Rs 10,20,300+3% education cess) . 30% of your hard earned money just going towards taxes. Feels miserable isn’t it?
It’s time to stop feeling miserable. Let’s improve our maths. The income tax is calculated in a graded manner.
On the first Rs 200,000 of your net taxable income, you don’t pay any tax
Out of the balance Rs 8,20,300 net taxable income, you pay 10% on the Rs 300,000: Rs 30,000
Out of the remaining Rs 5,20,300 of the taxable income, you pay 20% on Rs 500,000: Rs 1,00,000
On the balance Rs 20,300 of your net taxable income, you pay 30%: 6090
Your total tax outgo is Rs 1,36,090. With a 3% education cess, the total tax is Rs 1,40,172.
So your total tax outgo, after making necessary investments will be Rs 1,40,172 and not Rs 3,15,272.
Get Discount for Earning Less
Are you earning upto Rs 500,000 or less? Make sure you get a rebate of Rs 2,000 in your total tax liability. Let’s say your income is Rs 4,20,000. So your tax liability based on above method is Rs 22,660 and after rebate, the actual liability will be Rs 20,660.
Your Income Tax Rate Depends on
Age: Like our railway system, the taxation system also rewards you for getting old! If you are above 60 years but below 80 years, you start paying tax on income above Rs 2,50,000. If you are above 80 years, then you start paying tax on income of more than Rs 500,000. Read here to know more about the senior citizen tax slabs
Work Status: If you work for a salary, you will be charged on the basis of rates mentioned above. But if you have your own firm where your hire people to do work or you are a freelancer, the basis of income tax charge will be different.
Residential Status: The tax officials also look at the fact that for how many days were you in India in the financial year.