Procedure for Computation of Total Income

Understanding the computation of total income is essential for anyone navigating the world of taxation, especially aspiring Chartered Accountants. Total income is the base on which income tax is levied, and its accurate computation ensures compliance with the Income-tax Act, of 1961.

This article will guide you through the process step-by-step, breaking down the complexities into manageable insights for CA exams . With these steps, you’ll have a solid foundation to compute total income effectively, ensuring clarity and precision.

What is Total Income?

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Steps for Computation of Total Income

Step 1: Determination of Residential Status

1. Resident and Ordinarily Resident (ROR): Global income is taxable.
2. Resident but Not Ordinarily Resident (RNOR): Income earned or accrued in India is taxable.
3. Non-Resident (NR): Only income earned or accrued in India is taxable.

Step 2: Classification of Income Under Different Heads

• Salaries: Includes basic salary, allowances, and bonuses.
• Income from House Property: Rental income, minus deductions such as municipal taxes.
• Profits and Gains of Business or Profession: Net earnings from business activities.
• Capital Gains: Profits from the sale of capital assets like property or stocks.
• Income from Other Sources: Residual income such as dividends or lottery winnings.

Step 3: Exclusion of Income Not Chargeable to Tax

• Agricultural income.
• Share of profit from a partnership firm.

Step 4: Computation of Income Under Each Head

• Salaries: Deduct exemptions like HRA or standard deductions.
• House Property: Deduct municipal taxes and home loan interest.
• Business or Profession: Subtract business expenses, depreciation, and other eligible deductions.
• Capital Gains: Deduct the indexed cost of acquisition from sale proceeds.

Step 5: Clubbing of Income

• Income earned by a spouse from assets transferred by the taxpayer.
• Income of minor children, except in specific cases.

Also Check: Accounting for Reconstruction of Companies

Step 6: Set-Off and Carry Forward of Losses

1. Set-off within the same head
2. Inter-head set-off
3. Carried forward

Step 7: Computation of Gross Total Income

Step 8: Deductions from Gross Total Income

• Section 80C: Investments in PPF, ELSS, etc.
• Section 80D: Medical insurance premiums.
• Section 80G: Donations to eligible institutions.

Step 9: Total Income

Step 10: Application of Tax Rates and Additional Charges

• Income up to Rs. 2,50,000: No tax.
• Income from Rs. 2,50,001 to Rs. 5,00,000: Taxed at 5%.

• Surcharge: Applicable for high-income earners.
• Education Cess: Levied at 4% of income tax and surcharge.