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

Income-Tax Liability- The Difference Between Gross Income & Total Income in Calculating Income Tax
  • 16th Jun 2022 |
  • 7,632

Income tax calculation appears baffling to many taxpayers due to the jargon 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 and total taxable income. It also helps in tax planning with tax-saving instruments and claiming deductions and exemptions to reduce your tax burden. If the two terms confuse you, read on to learn about Gross total income vs total 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 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

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 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 in your gross income.

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.

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.

6.Compute your total gross income

The final figure 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: 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:

1.Deduct the following from your gross income:

Tax rebates, if any advance tax already paid 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) Income 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 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 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 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. 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 need to deposit with the tax department.

Gross Total Income vs Total Income

Let’s understand the key differences between gross total income and total income

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. Then, 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) = Total income
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 referred to as 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.

What deductions are 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 to 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 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 do you reduce your total taxable income and save on tax without affecting your gross income?>/b>

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. In addition, 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, it would help if you also planned 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)

Offers life cover with the opportunity to earn inflation-beating returns from investments in the capital market endowment plans: Providing 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. Moreover, you can get instant quotes on the premium payable, calculate the tax benefit you can avail of with the plan, and buy online.

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 investments in tax-savings schemes, you can reduce your total income and lower your income tax outgo.

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