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The Difference Between Gross Income & Total Income in Calculating Income Tax

Save Tax Now
  • 29th Mar 2021
  • 1,347
The Difference Between Gross Income & Total Income in Calculating Income Tax

Income tax calculation appears baffling to many taxpayers due to the various jargons involved. But if your annual earnings fall under the taxable income slabs, you need to pay the correct tax amount to avoid penalty charges.

However, the first step to compute your payable tax is to know your gross income and your total taxable income. It also helps in tax-planning with tax-savings instruments, and claiming deductions and exemptions to reduce your tax burden.

If the two terms confuse you, read on to understand how the two differ.

What is gross income?

It is the total amount you earn in a financial year. As per the Income Tax Act (ITA), 1961, you can earn income from different sources, termed as income heads. Your gross income is the aggregate of your earnings under all those heads, including:

  • Salary
  • Property
  • Business or profession
  • Capital gains
  • Other sources

As per Section 80B(5) of the ITA, gross income includes adjustments for set-off and carry-forward profits or losses from preceding years..

How to calculate gross income?

1. Identify your residential status: Your residential status decides the earnings you are to include in your taxable income.

2. Classify your income: Categorize your earnings under the five income overheads:

  • Salary – the wages your employer pays to 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, the sale of immovable property like land or house, movable assets such as shares, jewellery, etc.
  • Other sources – Any source not included in the previous four categories (Examples: royalty, lottery winnings, interest income, and the like)

3. Calculate the amount earned from each head: For this, you need to be aware of the tax-exempt income types, like agricultural income. You
do not have to include those earnings into your gross income.

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.

4. Set-off and/or 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.

5. Compute your total gross income: The final figure obtained from the previous steps’ calculations gives your gross income.

What is total income?

Total income or net income is the amount left from your gross income after taking out all deductions allowed under the ITA.
It is the taxable part of your income; your tax liability depends on this amount.

How to calculate total income?

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

  • For Indian residents: Any income received, interest accrued, and also expected to receive (deemed income)
  • For not ordinarily resident Indians: Incomes 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:

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1. Deduct the following from your gross income:

  • Tax rebates, if any
  • Advance tax already paid
  • TDS deducted
  • Leave Travel Allowance
  • House Rent Allowance
  • Exempt reimbursements from your employer, such as mobile bills, food coupons, etc.
  • Interest paid on your home loan (under Section 24)
  • Incomes including
  • ○ cooperative society revenues

    ○ royalty for specific books

    ○ royalty on patents

    ○ profits from infrastructure developing enterprises

    ○ gains from enterprises concerned with the development of defined economic zones

  • Deductions permitted under Section 80C through 80U.

2. Round it off:

After you find out your total income by claiming relevant deductions from your gross income, you have to 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 paisa. If your total income amount comes to ₹5,76,897.50, you have to take it as ₹5,76,897 only.

After that, if the last digit in the figure is five or more, increase the amount to the closest higher sum that 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 have to consider it as ₹5,76,890.

3. Apply surcharges and Cess:

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

Gross Income vs Total Income: Key Differences

Parameter Gross Income Total/ Net Income
Meaning An assessee’s overall income calculated under all five income source heads as per the ITA, after applying clubbing rules and set off of losses The income amount 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 Gross income – deductions under Section 80 (80C to 80U) = Total income
Tax treatment Tax is not levied on it. Income tax is payable on this sum.

What are the deductions available under Section 80 of Chapter VI of the ITA?

80C: Expenses and investments up to ₹1.5 lakhs,including:

  • Public Provident Fund
  • Employee’s Provident Fund
  • National Savings Certificate
  • Sukanya Samriddhi Yojana
  • Atal Pension Scheme
  • Equity Linked Savings Schemes
  • National Pension System from the Central Government
  • Tax-saving five-year term deposits from banks and post offices
  • Specific bonds
  • Senior Citizen Savings Schemes
  • Repayments made towards home loan principal amount
  • Stamp duty and registration charges of property
  • Children’s tuition fees
  • Pension plans from life insurance companies
  • Life insurance policies

80CCD: Contribution in National Pension System up to ₹50,000 over and above 80C deductions

80D: Expenses towards health insurance premiums, up to Rs. 25,000 if you are under 60 years of age, and up to ₹50,000 for senior citizens

80TTA: Interest earned on your savings account, up to ₹10,000

80E: Interest paid on education loan

80EE: Interest on a home loan, over and above Section 24 deductions, if applicable

80GG: Exemption on house rent if your salary component does not include HRA

80DDB: Medical expenses up to ₹40,000 (or ₹1,00,000 for senior citizen patients) towards specific ailments

80G: Charitable donations

80U: Deductions for taxpayers suffering from a physical disability

How to reduce your total taxable income without affecting your gross income and save on tax?

The government permits several deductions and exemptions on your gross income to reduce your taxable income. Among the deductions you can claim, the largest, up to ₹1.5 lakhs, is available under Section 80C. You can invest in various lucrative savings and investment schemes to avail of the 80C deductions and save on tax.

However, you should not select your investment tools based on tax-saving goals only. The investment avenues should also help fund your life goals. Moreover, you should also plan to safeguard your financially dependent family from a shortage of funds resulting from life’s uncertainties.

Among the 80C tax-saving instruments, life insurance plans offer the unique advantage of combining life cover with savings and investment. The different product categories include:

  • Unit-Linked Insurance Plans (ULIPs): Offer life cover with the opportunity to earn inflation-beating returns from investments in the capital market
  • Endowment plans: Provide capital protection with guaranteed returns and capital appreciation with dividends of profits or guaranteed additions to your invested sum, or both
  • Pension plans: Secure your financial freedom in retirement with guaranteed income, helping you maintain your preferred lifestyle after your regular earnings stop
  • Term Plan Replacing your income and protecting your loved ones against financial challenges in case of an unfortunate event

Kotak Life offers a wide range of life insurance plans to meet all such investment and protection goals. You can get instant quotes on the premium payable, calculate the tax benefit you can avail with the plan, and buy online.

Conclusion

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

- A Consumer Education Initiative series by Kotak Life

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