Steps to Compute Income Tax under the Income Tax Act, 2025
Understanding the systematic process of income tax computation is crucial for every taxpayer. The Income Tax Act, 2025, outlines a clear sequence of steps to arrive at the final tax liability. This infographic details these essential stages:
1
Determine Residential Status
The first step is to ascertain the residential status of the assessee (individual, HUF, company, etc.) as per the provisions of the Income Tax Act, 2025. This status dictates the scope of total income liable to tax in India.
2
Classify Income under Different Heads
Income must be classified under the five prescribed heads: Salaries, House Property, Profits and Gains of Business or Profession (PGBP), Capital Gains, and Income from Other Sources (IFOS).
3
Compute Income under Each Head
Calculate income under each of the five heads, adhering to the specific provisions, deductions, and allowances applicable to that head as per the Income Tax Act, 2025.
4
Apply Clubbing Provisions
Examine if any income of other persons (like spouse, minor child, son’s wife) needs to be included in the assessee’s income as per the clubbing provisions of the Act to prevent tax evasion.
5
Set-off and Carry Forward of Losses
Adjust current year losses against current year incomes, and then carry forward unabsorbed losses to subsequent years for set-off, as per the provisions of the Act.
6
Calculate Gross Total Income (GTI)
Aggregate the income computed under all heads after applying clubbing provisions and set-off of losses to arrive at the Gross Total Income (GTI).
7
Deductions from Gross Total Income
Claim eligible deductions under the relevant chapters for deductions from the GTI. These deductions reduce the taxable income.
8
Compute Total Income
Subtract the Chapter VI-A deductions from the GTI to arrive at the Total Income (also known as Net Taxable Income), which is rounded off to the nearest multiple of ten.
9
Apply Tax Rates
Apply the applicable income tax rates (slab rates for individuals, specific rates for companies, etc.) to the Total Income. Consider the default tax regime or the old regime.
10
Surcharge and Rebate
Add surcharge if applicable (based on income thresholds) and then deduct rebate for resident individuals with total income up to a specified limit.
11
Health and Education Cess (HEC)
Add Health and Education Cess at 4% on the income tax (including surcharge, if any) to arrive at the total tax liability.
12
Credit for Advance Tax, TDS, TCS
Deduct any advance tax paid, Tax Deducted at Source (TDS), or Tax Collected at Source (TCS) from the total tax liability.
13
Final Tax Payable/Refundable
The final amount is either the tax payable by the assessee or the amount refundable by the Income Tax Department.
Visualizing the Income Tax Computation Process
Here’s a video explaining the steps involved in computing income tax, providing further clarity on each stage:
Format for Computation of Taxable Income
The calculation of taxable income follows a specific structure, aggregating income from various sources and applying eligible deductions.
| Particulars | Amount (₹) |
|---|---|
| Income from Salaries | XXXXX |
| Income from House Property | XXXXX |
| Profits and Gains of Business or Profession (PGBP) | XXXXX |
| Capital Gains | XXXXX |
| Income from Other Sources (IFOS) | XXXXX |
| Gross Total Income (GTI) | XXXXX |
| Less: Eligible Deductions (as per the Act) | (XXXXX) |
| Total Income (Taxable Income) | XXXXX |
Format for Computation of Tax Liability
Once the total income is determined, the tax liability is calculated by applying the relevant tax rates and adjusting for surcharge, cess, and credits.
| Particulars | Amount (₹) |
|---|---|
| Tax on Total Income (as per applicable slab rates/provisions) | XXXXX |
| Add: Surcharge (if applicable, based on income thresholds) | XXXXX |
| Less: Rebate (if applicable) | (XXXXX) |
| Income Tax (after Surcharge & Rebate) | XXXXX |
| Add: Health and Education Cess @ 4% | XXXXX |
| Gross Tax Liability | XXXXX |
| Less: Advance Tax Paid | (XXXXX) |
| Less: TDS (Tax Deducted at Source) | (XXXXX) |
| Less: TCS (Tax Collected at Source) | (XXXXX) |
| Net Tax Payable / (Refundable) | XXXXX |
Clubbing of Income Provisions (Income Tax Act, 2025)
The Income Tax Act, 2025, includes specific provisions to prevent tax evasion by individuals who attempt to divert their income to other persons who are either not taxable or fall into a lower tax bracket. These are known as ‘clubbing provisions’.
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Purpose of Clubbing
To prevent tax evasion by diverting income to individuals in lower tax brackets or non-taxable entities.
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Common Scenarios
Income transferred to spouse, minor child, son’s wife, or assets transferred without adequate consideration.
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Minor Child’s Income
Income of a minor child (except for special skills/talent or disability) is clubbed with the parent whose total income is higher.
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Exemptions
Income from manual work or special skills/talent of a minor child is not clubbed. A maximum exemption of ₹1,500 per minor child is allowed as per the Act.
Practical Assignment: Identify three scenarios where clubbing provisions would apply, and for each, specify the relevant provision of the Income Tax Act, 2025, that governs it and the person whose income it would be clubbed with.