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ARN. No. KLI/23-24/E-BB/1201
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Ref. No. KLI/22-23/E-BB/999
When calculating income tax, understanding gross total income and total income is essential, as they significantly impact tax liability. Gross total income refers to earnings before deductions, while total income is calculated after applying deductions and exemptions. If you're looking to explore these terms further, you’re in the right place.
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.
Parameter |
Gross Income |
Total/ Net Income |
Meaning |
An assessee’s overall income is calculated under all five income source heads as per the ITA after applying clubbing rules and setting off losses |
The income amount is used to calculate an assessee’s payable tax amount |
Equals to |
The entire income earned in a financial year before claiming deductions under Chapter VI-A |
Deductions under Section 80 (80C to 80U) |
Tax Treatment |
Tax is not levied on it |
Income tax is payable on this sum |
Deductions made under Chapter VI-A of the 1961 Income Tax Act |
The income before deductions under Chapter VIA of the I-T Act of 1961 is gross total income |
After deductions under Chapter VIA of the I-T Act of 1961, income is defined as total income |
Income Tax Obligation |
Gross total income is not used to determine income tax obligations |
The total income is used to determine and/or assess the income tax obligation |
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.
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:
Your residential status decides the earnings you will include in your taxable income.
Categorize your earnings under the five income overheads:
You must know the tax-exempt income types, like agricultural income. You do not have to include those earnings in your gross income.
You must include in your gross income some types of income your spouse or minor child earns, as per the tax laws.
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.
The final figure from the calculations for the previous steps gives your gross income.
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.
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.
Section 2(45) of the ITA defines total income, and Section 5 defines the scope.
The steps to calculate your total income are as follows:
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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