How to Calculate Your Income Tax Liability in 2024

Are you confused about how to calculate your income tax liability? With multiple income sources, deductions, and tax regimes to consider, the process can feel overwhelming. But don’t worry, understanding how taxes work isn’t as complicated as it seems. In fact, you can break it down into simple, manageable steps and take control of your finances with confidence. Whether you’re trying to decide between the old and new tax regimes, or figuring out how to maximize deductions, knowing the right approach can make a significant difference to your savings. Here is the guide with the step-by-step process of calculating your tax liability in an easy, practical way, ensuring you’re fully prepared for the next tax season. Keep reading to discover how much you really owe—and more importantly, how you can reduce it!

How to Calculate Your Income Tax Liability?

Step 1: Identify Your Income Sources

The first step in calculating your income tax liability is identifying all sources of income. In India, income is classified into five major heads:

– Salary Income: This includes your basic salary, allowances, bonuses, and perquisites.

– Income from House Property: Any rental income or property-related earnings.

– Capital Gains: Profits from selling shares, mutual funds, real estate, etc.

– Business or Profession Income: For self-employed individuals or professionals.

– Other Sources: Interest from savings accounts, fixed deposits, dividends, and more.

It’s crucial to account for every source of income because missing one could lead to penalties later on.

Step 2: Choose the Right Tax Regime

In India, taxpayers can choose between two tax regimes: the old regime and the new regime. Each has its benefits, and selecting the right one can significantly affect your tax liability.

– Old Tax Regime: This regime offers multiple deductions and exemptions like HRA, LTA, and Section 80C, which can help reduce your taxable income. However, the tax rates are slightly higher.

– New Tax Regime: Introduced in FY 2024-25, this regime offers lower tax rates but eliminates most deductions and exemptions. It is beneficial for taxpayers who don’t have many investments or deductions.

– Pro Tip: If you have numerous tax-saving investments and expenses, the old regime might save you more money. On the other hand, if your income structure is simpler, the new regime’s lower tax rates may work better.

Step 3: Calculate Gross Total Income (GTI)

Once you’ve chosen your tax regime, you’ll need to calculate your Gross Total Income (GTI). This is simply the sum of all your income sources mentioned earlier. Here’s a quick breakdown:

– Income from Salary: Take your gross salary and subtract exemptions such as HRA, LTA (under the old regime), and standard deduction (₹50,000).

– Income from House Property: Net off the 30% standard deduction and any home loan interest deduction under Section 24.

– Capital Gains: Calculate both short-term and long-term capital gains separately.

– Business/Profession Income: Total your business profits after deducting expenses.

– Other Sources: Add up interest income, dividends, etc.

Step 4: Claim Deductions and Exemptions

Deductions can help you lower your taxable income and, ultimately, reduce your tax liability. Under the old regime, you can claim various deductions under different sections of the Income Tax Act. Some of the most popular deductions include:

– Section 80C: Investments like PPF, ELSS, life insurance premiums, home loan principal repayments, and more. Maximum deduction: ₹1.5 lakh.

– Section 80D: Health insurance premiums for self, spouse, children, and parents. Maximum deduction: ₹25,000 (₹50,000 if covering senior citizen parents).

– Section 24(b): Deduction for interest paid on a home loan (up to ₹2 lakh per annum).

– Section 80G: Donations to approved charitable organizations.

Step 5: Compute Taxable Income

Once you’ve claimed all eligible deductions, you can now calculate your Taxable Income. The formula is straightforward:

Gross Total Income (GTI) – Deductions = Taxable Income

For example, if your Gross Total Income is ₹10 lakh and you claim ₹2 lakh in deductions, your Taxable Income would be ₹8 lakh.

Step 6: Apply the Income Tax Slabs

Now that you know your taxable income, apply the relevant tax slabs based on your chosen tax regime.

Old Tax Regime (For FY 2023-24):

New Tax Regime:

Step 7: Factor in Rebate Under Section 87A

If your taxable income is below ₹5 lakh, you’re eligible for a rebate under Section 87A. The rebate is up to ₹12,500, effectively reducing your tax liability to zero. This is applicable under both tax regimes.

Step 8: Include Surcharge and Cess

Depending on your income level, you may need to pay a surcharge on your tax liability:

– Income above ₹50 lakh: 10% surcharge

– Income above ₹1 crore: 15% surcharge

– Income above ₹2 crore: 25% surcharge

– Income above ₹5 crore: 37% surcharge

Additionally, every taxpayer has to pay a Health and Education Cess of 4% on their total tax liability (including surcharge).

Step 9: Adjust for Advance Tax or TDS

By now, you’ve calculated your tax liability. But remember, many taxpayers would have already paid a portion of their taxes through TDS (Tax Deducted at Source) or Advance Tax payments.

– TDS: Your employer, bank, or other institutions deduct TDS before making payments

– Advance Tax: If your tax liability exceeds ₹10,000, you must pay taxes in advance

Subtract the amount of TDS or Advance Tax from your total tax liability to find out how much tax you still owe (or the refund you’re entitled to).

Step 10: File Your Income Tax Return

Once you have a clear idea of your total tax liability, it’s time to file your Income Tax Return (ITR). Filing the return accurately ensures that you comply with the law and avoid penalties. You can file your ITR online via the Income Tax e-filing portal.

Make sure to verify all the details, claim any eligible deductions, and disclose all income sources to avoid complications later.

Final Thoughts

Calculating your income tax liability can seem like a daunting task, but breaking it down into manageable steps simplifies the process. Whether you opt for the old tax regime or the new one, having a clear understanding of your income, deductions, and tax slabs ensures you remain compliant and avoid unnecessary payments. Plus, when you calculate your taxes effectively, you might even find ways to save more!

These tips are brought to you by HappyWise Financial Services.

If you need any assistance with organizing your finances or want to discuss your investment options, feel free to connect through Email or Whatsapp.

Disclaimer: Some part/s may be generated/modified using GenerativeAI