According to income tax laws, total taxable income is divided into five parts:
a) Income from salary
b) Income from house property
c) Income from capital gains
d) Income from business and profession
e) Income from other sources
Once the sources of income are determined, the individual must ensure to file ITR using correct the income tax return form for FY 2021-22 (AY 2022-23).
- Income under the head ‘Salary’
The total taxable income under the head ‘Salary’ can be easily computed via one’s Form 16. It is a TDS certificate containing details of the tax deducted from salary income in each quarter, total salary paid, income tax regime chosen, tax exemptions and deductions claimed (if opted for old income tax regime).
Form 16 has to be mandatorily issued by the employer if tax has been deducted during the financial year
What to check in Form 16 for ITR filing
Do note that there are certain tax exemptions and deductions that can be claimed from salary income only. Further, these tax exemptions and deductions can be claimed only if the individual opts for old income tax regime. Submission of documentary proof is mandatory to claim tax exemptions and deductions.
Some of the examples of tax exemption and deductions are – Tax exemption on house rent allowance, leave travel concession and standard deduction of Rs 50,000.
However, what happens if you haven’t received Form 16 from your employer? In such a scenario, your salary slips will help you to compute your taxable salary income.
If you are a pensioner, then pension received from employer will be taxable under the head, ‘Income from salary’.
- Income from house property
To know income under this head, one must first understand three concepts:
a) Self-occupied property
b) Rental property
c) Deemed to be let out
Self-occupied property is the property that is occupied by the individual himself/herself. For income tax purpose, an individual can choose any house as self-occupied house, irrespective whether he/she is residing in it or not. Income from self-occupied property will be nil.
An individual can claim any two houses as self-occupied property if he/she has more than two houses. An amendment was announced effective from FY 2019-20. From April 1, 2019, if an individual has two or more houses, then any of the two houses can be treated as self-occupied property and no tax will have to be paid. Till FY 2018-19, if an individual had a second house, then in such a case tax would have been paid on deemed rent basis such second house.
Do note that if the self-occupied property has an ongoing home loan, then deductions of up to Rs 2 lakh on interest payment and Rs 1.5 lakh on principal repayment of home loan can be claimed.
Property which has been given on rent during the financial year is called rental property. A property which is empty and does not qualify as ‘Self-occupied property’, then such property will be called ‘Deemed to be let out’.
Abhishek Soni, CEO, Tax2Win.in – an ITR filing website, explains how to calculate income from house property:
Step 1: Compute the Fair Rent (i.e., expected rent from the similar property) and Municipal Value (valuation as per municipal authorities). Take the higher value of the two. This higher value is termed as expected rent.
Step 2: Compare the actual rent received/receivable for the year with the expected rent computed in Step 1. The higher value will be the Gross Annual Value (GAV) of the house. Remember, if a property is covered under the Rent Control Act, then expected rent cannot exceed the standard rent.
Step 3: Calculate the Net Annual Value (NAV) by deducting municipal taxes paid during the year from GAV. Remember, GAV will be nil for self-occupied property. No deduction of municipal taxes is allowed for self-occupied property.
Step 4: Deduct 30 per cent standard deduction from NAV. This standard deduction is offered to cover the expenses made for the maintenance of the house. It is a straight deduction that does not require any documentary proof. This standard deduction is different from one offered under ‘Income from salary’. This deduction is not available for self-occupied property.
Step 5: Deduct the total amount of interest paid on the home loan taken, if any, to purchase the said house. This deduction is available for all the properties. The final figure arrived at this step will give you an income from house property. This may be a positive or negative value.
In the case of self-occupied property, the GAV would be taken as nil and maximum deduction of interest paid would be limited to Rs 2 lakh. In the case of rental property, there is no limit on maximum deduction on the amount of interest paid. Do keep in mind that the set-off of losses under the head of house property from the other heads of income will be restricted to Rs 2 lakh.
- Income from capital gains
Capital gains arise from the sale of assets such as house, mutual fund units, equity shares etc. There are two types of capital gains – short-term capital gains (STCG) and long-term capital gains (LTCG). The type of capital gains occurred depends on how long the asset has been held by the individual. The holding period for each asset class varies. There are different income tax rates for capital gains.
Income tax rate of capital gains for different asset class
|Asset class||Income tax rate for short term capital gains||Income tax rate for long term capital gains|
|Equity shares on which STT paid||15% if shares are sold before completion of one year||10% (Without indexation) if shares are sold after one year*|
|Equity mutual funds||15% if mutual fund is sold before completion of one year||10% (Without indexation) if mutual fund is sold after one year*|
|Debt mutual funds||As per the income tax slab rates applicable, if funds are redeemed before completion of three years||20% (with indexation), if funds are redeemed after completion of three years|
|Property||As per the income tax slab rates applicable, if property is sold before completion of two years||20% (with indexation), if property is sold after completion of two years|
|Gold||As per the income tax slab rates applicable, if gold is sold before completion of three years||20% (with indexation), if gold is sold after completion of three years|
|Foreign company shares||As per the income tax slab rates applicable, if funds are redeemed before completion of three years||20% (with indexation), if shares are sold after three years|
|International equity funds||As per the income tax slab rates applicable, if funds are redeemed before completion of three years||20% (with indexation), if funds are redeemed after completion of three years|
*LTCG up to Rs 1 lakh in a financial year is exempted from tax.
(The above tax rates are exclusive of cess and surcharge.)
- Income from business and profession
Individuals having their income from business or profession such as lawyers, CAs, freelance writers etc. are required to report their income under the head ‘Income from business and profession’. Any profits/gains or losses made from running a business are required to be reported.
Soni adds, “Individuals having income from business and profession can claim several expenses to run a business that are not allowed to a salaried individual. Some of the examples are travelling expenses, stationary expenses, overhead expenses etc.”
- Income from other sources
Any income which does not fall under the income heads mentioned above, is required to be reported under the final head, ‘Income from other sources’. Incomes usually reported under this head are interest income from bank accounts, post office savings scheme, bank fixed deposits, family pension, pension received from insurance company etc. Dividends received from shares and mutual funds are also required to be reported under this head.
Final tax liability amount
Once income from all the sources mentioned above have been added, you will arrive at your ‘Gross taxable income’ for the FY.
From the gross taxable income, an individual will be required to claim deductions under section 80C, 80D etc., provided if he/she continues with the existing, old income tax regime. However, if an individual opts for the new, concessional income tax regime, then he/she will have to forego approximately 70 tax exemptions and deductions.
After claiming deductions, the individual arrives at net taxable income. The tax liability will be calculated on the net taxable income.