Difference Between Gross Total Income & Total Income

To understand the gross total income and total income difference, comparing their unique characteristics is helpful. Each plays a distinct role in calculating an individual’s tax obligations under the . The following table provides a clear breakdown of the parameters that differentiate between gross total income and total income. This comparison clarifies how these terms influence and assessments.

What is Gross Total Income?

Gross total income refers to an individual’s total income from all sources before applying any deductions or exemptions. It serves as the starting point for calculating total income and is essential for understanding one’s financial standing. According to the Income Tax Act, gross total income is the sum of incomes categorized under five heads: salary, house property, business or profession, capital gains, and income from other sources.

This comprehensive income calculation includes salary, business profits, rental income, interest, and capital gains from asset sales. Importantly, gross total income does not factor in tax-saving deductions or exemptions that may be claimed later. Once an individual has calculated their gross total income, they can apply eligible deductions to arrive at their total income, subject to taxation.

Understanding gross total income is vital for effective tax planning. It lays the groundwork for identifying opportunities for tax savings and ensuring compliance with tax regulations.

How to Calculate Gross Income?

For employees, calculating gross income is relatively straightforward. It typically involves adding up all forms of compensation received during a specific period, such as a year, from the employer(s) and other sources of income.

Here’s a step-by-step guide on how to calculate gross income for employees:

Step 1: Identify Your Residential Status

Your residential status decides the earnings you will include in your taxable income.

Step 2: Classify Your Income

Categorize your earnings under the five income overheads:

• Salary – the wages your employer pays you, including all perquisites and reimbursements (This category also covers pension income.)
• House property – rental income
• Business or profession - Profit from your business or earnings from your self-employment, determined by subtracting your business or professional expenses from your total receipts
• Capital gains – Gains from the stock market, such as the sale of immovable property like land or house, movable assets such as shares, jewelry, etc.
• Other sources – Any source not included in the previous four categories (Examples: royalty, lottery winnings, interest income).

Step 3: Calculate the Amount Earned From Each Head

You must know the tax-exempt income types, like agricultural income. You do not have to include those earnings in your gross income.

Step 4: Club Your Income

You must include in your gross income some types of income your spouse or minor child earns, as per the tax laws.

Step 5: Set Off and Carry Forward Losses

Some income heads can include various income sources. You might receive profits from one source while incurring losses from another under the same head. You can set off losses from one source against the gains from another. The tax rules also allow inter-head adjustment of such losses and profits. Moreover, you can apply previous years’ losses to the current year’s income to reduce your tax liability.

Step 6: Compute Your Total Gross Income

The final figure from the calculations for the previous steps gives your gross income.

Gross Total Income Example

Gross total income refers to the total income earned by an individual during a financial year before claiming any deductions, exemptions, or allowances. It includes income from all sources, such as salary, business or profession, capital gains, house property, and other sources, without deductions. GTI serves as the starting point for calculating taxable income.

For example, let’s consider Mr. Smith, who works as a software engineer and earns a salary of ₹60,000 per year. He also has a small business that generates an additional income of ₹10,000. Furthermore, he earns ₹2,000 from interest on his savings account and ₹3,000 from renting out a property. In this case, Mr. Smith’s GTI would be the sum of all these incomes: ₹60,000 + ₹10,000 + ₹2,000 + ₹3,000 = ₹75,000.

What is Total Income?

Total income is your net income after considering all deductions and exemptions permissible under the Income Tax Act of 1961. It is the figure that the tax authorities use to determine an individual’s tax liability. Total income is derived from gross total income by subtracting deductions under Chapter VI-A of the Income Tax Act, which includes deductions for investments, health insurance premiums, and other eligible expenses.

Understanding what is total income can seem very easy because of its name. But if you want to grab its concept, you will need to run some calculations. To calculate total income, you must begin with the gross total income, which encompasses all earnings from various sources such as salary, business income, capital gains, and rental income. After identifying the gross total income, you can apply relevant deductions, like those specified under Sections 80C to 80U, to arrive at the total income. This process allows taxpayers to benefit from tax-saving strategies and reduces the income subject to taxation.

Simply speaking, total income is the taxable income calculated after accounting for deductions and is crucial to determine the amount of tax an individual must pay to the government.

How to Calculate Total Income?

Section 2(45) of the ITA defines total income, and Section 5 defines the scope.

• For Indian residents: Any income received, interest accrued, and also expected to receive (deemed income)
• For Resident but Not Ordinarily Residents (RNOR) Indian: Income generated in foreign countries through businesses operated or controlled from India.
• For Non-Resident Indians (NRI): Only those earnings arising or accruing in India

The steps to calculate your total income are as follows:

Step 1: Deduct the Following from Your Gross Income

• Tax rebates (if any)
• Advance tax already paid
• Deductible allowances like Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc
• Exempt reimbursements from your employer, such as mobile bills, food coupons, etc.
• Interest paid on your home loan (under Section 24)
• Income, including cooperative society revenues, royalty, profits from infrastructure-developing enterprises, and gains from enterprises concerned with the development of defined economic zones
• Deductions permitted under through 80U

Step 2: Round it Off

After you find your total income by claiming relevant deductions from your gross income, you must round it off to the nearest multiple of 10.

According to Section 288A, you have to take the following factors into account:

• First, ignore any amount in paisa. If your total income amount comes to ₹5,76,897.50, you only have to take it as ₹5,76,897.
• After that, if the last digit in the figure is five or more, increase the amount to the closest higher sum, which is a multiple of ten. In this case, your income became ₹5,76,897. Hence, you have to take it as ₹5,76,900.
• But, if the last digit in the figure is less than 5, you have to reduce the amount to the nearest lower amount, a multiple of ten. Therefore, if your income after ignoring paisa is ₹5,76,892, you must consider it ₹5,76,890.

Step 3: Apply Surcharges and Cess

Your total income is the basis for determining the tax amount you need to pay. Next, you can calculate the tax per the rate applicable to your income slab. Then, take away rebates, if any. Finally, add the applicable surcharges and Cess to get the amount you must deposit with the tax department.

Total Income Example

On the other hand, total income is calculated after claiming eligible deductions, exemptions, and allowances from the GTI. It is also referred to as “taxable income,” the income on which an individual’s tax liability is calculated.

For example, let’s continue with the example of Mr. Smith. Assuming he claims a deduction of ₹5,000 for investments made in a tax-saving scheme and ₹2,000 for health insurance premiums, his total income would be calculated as follows:

GTI: ₹75,000

Deductions: ₹5,000 + ₹2,000 = ₹7,000

Total Income: GTI - Deductions = ₹75,000 - ₹7,000 = ₹68,000

In this case, Mr Smith’s total income would be ₹68,000, the amount his tax liability would be calculated.

Is Classification of Income into Different Heads of Income Necessary?

Income classification is an important aspect of tax systems in many countries. It refers to categorizing income individuals or entities earn into different heads or categories for tax purposes. The purpose of income classification is to determine the appropriate tax treatment for different types of income, ensuring that taxpayers pay their fair share of taxes and comply with tax laws.

Tax Compliance

Classification of income into different heads of income is necessary to ensure tax compliance. Different types of income are subject to different tax rates, exemptions, and deductions. By categorizing income into different heads, tax authorities can enforce compliance by ensuring taxpayers accurately report their income and pay appropriate taxes. This helps prevent tax evasion and ensures taxpayers fulfill their tax obligations.

Fairness and Equity

Income classification promotes fairness and equity in the tax system. Different types of income have different economic characteristics and may warrant different tax treatments. For example, income from salary and wages is usually subject to tax at source, while income from investments or capital gains may be subject to different tax rates or exemptions. Income classification helps create a progressive tax system where higher-income taxpayers pay proportionately higher taxes. In comparison, taxpayers with lower incomes pay a lower amount of taxes. This ensures that the burden of taxation is distributed equitably based on taxpayers’ ability to pay.

Simplification and Clarity

Classifying income into different heads of income provides simplicity and clarity in the tax system. Tax codes can be complex, and different types of income may have different rules and regulations associated with them. By categorizing income into different heads, taxpayers can easily identify the relevant tax treatment for their income and comply with tax laws. It also makes tax administration more efficient as tax authorities can streamline their processes based on the different income categories.

Encourages Economic Activities

Income classification can incentivize certain economic activities. Tax policies may be designed to promote specific economic activities, such as investments in certain industries or regions, research and development, or charitable donations. By categorizing income into different heads, tax authorities can provide preferential tax treatment for specific types of income, which can encourage taxpayers to engage in those activities. For example, tax incentives for investments in renewable energy may encourage taxpayers to invest in clean energy projects, leading to positive environmental and economic impacts.

International Taxation

Income classification is particularly relevant in the context of international taxation. Income earned by taxpayers in different countries may be subject to different tax laws and rates. Income classification helps determine the appropriate tax treatment for income earned by taxpayers in different jurisdictions and avoids double taxation or tax disputes. For example, income earned by a multinational corporation in different countries may be classified as foreign-source income, and specific tax rules may apply to such income, such as foreign tax credits or tax treaties.

Conclusion

Although total income and gross total income sound similar, the two are not interchangeable. Income tax applies only to the latter. With careful tax planning and investment in tax savings schemes, you can reduce your total income and lower your income tax.