What is gross income?
When it comes to income tax in India, understanding the difference between gross income and total income is crucial. Though sometimes used interchangeably, these terms have distinct and separate meanings that impact your obligations. Let us explore how gross income differs from taxable income to help you grasp this idea and its relevance to your income tax calculations.
First, let us understand what total gross income is. Total gross income means your entire income from all sources before any reductions or exemptions. It refers to the total amount you earn from different places, including things like:
- Your salary or wages from your job
- Pension income
- Income from selling assets for a gain (capital gains)
- Rent payments from tenants
- Income from your own business
- Dividend or investment income
- Inheritance or gifts
In other words, gross income represents all the money you earn from different places before any adjustments are made. Your gross income is your total amount before any taxes are applied. To distinguish between gross total income and total income, we must first understand the meaning of taxable income.
Understanding taxable income
Total income means the income which is subject to income tax. It shows how much tax an individual, business or company must pay the government for a particular tax year.
A taxable income is a person's total gross or income after accounting for any permitted deductions or exemptions for that year. To determine your taxable income, you must first know your gross total income from all sources. Then, subtract any deductions or exemptions for which you qualify.
The Income Tax Act provides various deductions and exemptions that can vary depending on your investments, expenses and other specific tax provisions.
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Calculation of taxable income using applicable tax rates
To calculate your taxable income in India, consider all sources of income, such as salary, pension, profit from selling assets, rent, business or self-employment income, investment returns, and unearned income. The process differs between the old and new tax regimes.
Under the old regime, you can claim exemptions and deductions to reduce your taxable income. The tax rates range from 0% for income up to Rs 2.5 lakh to 30% for income above Rs 10 lakh.
Under the new regime, you do not get exemptions or deductions but pay lower tax rates. The tax rates vary from 0% to 30%, and up to Rs 3 lakh of income is tax-free.
Understanding the difference between gross total income and taxable income and applying the correct tax rates ensures you accurately calculate your taxable income and follow Indian tax laws.
Key differences between gross income & taxable income
- Gross income represents the total income one earns from all sources. In contrast, taxable income is the portion of one's income subject to income tax after deducting applicable allowances and exemptions.
- To determine taxable income, subtract various deductions and exemptions from gross income. These reductions include deductions allowed under the Income Tax Act 1961, like exemptions on allowances and home loan interest. Some allowances like house rent allowance (HRA) and leave travel concession (LTC) are tax-exempt up to certain limits.
- Gross income can include non-taxable items, such as gifts, inheritance, life insurance proceeds, return of capital, and tax-free dividends. These amounts are not considered a part of taxable income as they are free from income tax.
- There are several reasons gross income and taxable income can vary greatly. Business expenses, capital gains or losses, retirement contributions and charitable deductions can all impact taxable income without affecting gross income.
Understanding gross income and taxable income: importance and implications
Understanding the difference between gross income and total income is essential for planning your taxes. Reporting your income accurately can help you avoid penalties and audits. Knowing your gross and taxable income helps you make informed choices about tax-saving investments and deductions. For example, if you know your taxable income, you can assess the impact of various deductions. Under Sections 80C to 80U of the Income Tax Act, you can identify ways to minimise your tax liability.
Misinterpreting gross income versus taxable income can lead to incorrect tax filings, triggering scrutiny from the income tax department. Penalties for underreporting income can be significant, ranging from financial penalties to legal consequences.
Therefore, accurately calculating and reporting your taxable income based on tax laws is crucial to comply with tax regulations and avoid unnecessary complications. Correctly interpreting and using gross and taxable income concepts helps ensure you pay the correct taxes owed.
Tips for maximising deductions and minimising taxable income
Incorporate these strategies into your financial planning to keep more money in your pocket.
- Keep up with allowable deductions and exemptions under the Income Tax Act.
- Optimise exemptions such as HRA and LTC to reduce taxable income.
- Utilise Section 80C for deductions on investments like child tuition fees, Mutual Funds and Public Provident Funds.
- Explore other sections (80D, 80U, 80E) for deductions on medical insurance, disability, and housing loans.
- Keep records of eligible expenses like rent receipts, medical bills, and travel expenses.
- Stay updated with changes in tax laws to take advantage of new deductions or exemptions.
- Seek professional advice from a tax professional or chartered accountant.
- Remember to comply with tax laws (Income Tax Act, 1961) while minimising taxable income.
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Resources and tools for calculating gross income and taxable income
Here are some resources and tools for calculating gross income and taxable income:
Income Tax Calculators - India's income tax department's official calculator is useful for estimating your tax liability based on your gross income and deductions.
Income Tax Calculator Apps - Several apps function as income tax calculators, helping you input information regarding your salary, investments, and expenses to determine your taxable income and potential refund.
Accountant or Tax Professional - Consulting an accountant or tax professional can help ensure your gross and taxable income is properly determined and reported on your tax return.
Conclusion
Understanding the difference between gross total income and total income helps individuals and businesses accurately determine how much tax they owe and fulfil their responsibilities towards the government.
By properly understanding income gross total income definitions, taxpayers like you can correctly determine their tax liabilities and follow Indian income tax laws. Accurate tax payments mean individuals save more of their hard-earned money.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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