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Understand the difference between gross income and taxable income, how each is calculated, and why deductions, exemptions, and adjustments affect taxable income.
Understanding the difference between gross income and taxable income is essential for managing personal finances and preparing for tax filing. Gross income is the total earnings before any deductions, while taxable income is the amount on which tax is calculated after considering deductions, exemptions, and other adjustments. Knowing the distinction helps in clearer financial understanding and accurate tax filings.
Gross income is the total income earned by an individual before any deductions such as taxes, retirement contributions, or other withholdings. It includes all sources of income that a person earns during a specific period, such as:
Salary or wages
Bonuses
Investment income (interest, dividends, etc.)
Rental income
Business income
Alimony
Social Security benefits
Pension and retirement benefits
Gross income serves as the basis for determining the overall financial position, as it includes all the money received from various sources.
Gross income is derived from multiple sources, each contributing to an individual’s total earnings:
Employment income: This includes salaries, wages, bonuses, allowances, and other compensation received from an employer.
Investment income: Earnings generated from financial investments such as interest on savings accounts, bonds, dividends from shares, and other investment instruments.
Business income: Income earned from owning, operating, or participating in a business or professional activity, after accounting for allowable expenses.
Rental income: Money received from leasing or renting out residential or commercial property, including any applicable rent-related receipts.
Other sources: Income that does not fall under the main categories, such as alimony, pension payments, and other similar receipts.
Taxable income is the portion of an individual’s income that is subject to tax after accounting for applicable exemptions and deductions as prescribed under the Income Tax Act, 1961. While gross income represents total earnings from all sources, taxable income is the amount on which income tax is calculated by the Income Tax Department of India. It is determined by adjusting gross total income for exempt income and subtracting eligible deductions, such as those available under Chapter VI-A (including sections like 80C, 80D, and 80G), in accordance with the provisions of the Act.
Several factors can reduce the taxable income:
Standard deduction: A fixed amount that reduces the taxable income, available to most taxpayers.
Specific deductions: Including expenses like mortgage interest, medical expenses, and charitable contributions.
Tax exemptions: For dependents or certain types of income.
Tax credits: Direct reductions in the amount of tax owed.
Consider the following table:
| Aspect | Gross Income | Taxable Income |
|---|---|---|
Definition |
Total income earned before deductions |
Income subject to tax after deductions |
Purpose |
Represents overall income |
Determines the amount of tax liability |
Includes |
All sources of income |
Income after deductions, exemptions, etc. |
Taxability |
Not subject to tax directly |
Subject to tax calculation |
The transformation from gross income to taxable income involves applying various adjustments like:
Applying standard deductions: A fixed amount is deducted from gross income.
Itemising deductions: Taxpayers may opt to list deductions like mortgage interest or charitable contributions instead of the standard deduction.
Applying exemptions: Some income, such as certain types of pension, may be exempt from tax.
Here is how gross income is adjusted step by step to arrive at taxable income under income tax rules.
Determine gross income
Start by calculating the total gross income from all sources. This may include salary, business or professional income, rental income, interest, dividends, and any other taxable receipts earned during the financial year.
Identify income under each head
Classify the gross income under the applicable heads of income, such as salary, house property, business or profession, capital gains, and income from other sources. This helps in applying the correct deductions and rules.
Adjust for exempt income
Exclude incomes that are fully exempt under the Income Tax Act, such as certain allowances or specified interest incomes, as these are not included in taxable income.
Apply deductions allowed within each head
Reduce permissible deductions specific to each head of income. For example, standard deduction from salary or deductions for municipal taxes and interest on home loans under house property income.
Calculate gross total income
Add the income remaining under all heads after adjustments and deductions. This total is referred to as Gross Total Income (GTI).
Claim deductions under Chapter VI-A
Subtract eligible deductions such as those under Sections 80C, 80D, 80G, and other applicable sections, subject to limits and conditions.
Arrive at taxable income
The amount remaining after all eligible deductions is the taxable income. This figure is used to calculate income tax as per the applicable slab rates.
Understanding the difference between these two concepts is essential for accurate tax planning. For a shareholder, gross income gives an idea of overall financial earnings, but only taxable income determines how much tax an individual owes. Allowable deductions and exemptions affect the level of taxable income and, in turn, the tax payable.
Here are a few misunderstandings when it comes to Gross and Taxable Income:
Gross income is taxable: While gross income represents total earnings, not all of it is taxable. The market value of certain assets can influence taxable calculations. Deductions, exemptions, and other factors can reduce the amount that is taxable.
Taxable income is always higher than gross income: This is not true. After deductions, the taxable income may be lower than the gross income.
Gross income and taxable income serve different purposes in the tax framework. While gross income reflects total earnings from all sources, taxable income is the adjusted amount used to calculate tax after deductions and exemptions. Understanding this distinction helps ensure accurate tax computation and clearer financial assessment.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Gross income refers to total earnings from all sources before deductions. Total income, also referred to as taxable income under the Income Tax Act, 1961, is the amount arrived at after subtracting eligible exemptions and deductions, and it is this figure on which income tax is computed.
Taxable income is calculated after reducing gross income by eligible exemptions and deductions, so taxable income does not include exempt amounts; it represents only the portion of income on which tax is actually charged.
Gross income is always computed before income tax and other statutory deductions are applied, representing the full amount earned from all sources during a period, without considering any exemptions, deductions, or tax payments.
Taxable income can be zero when exemptions, deductions, and eligible losses fully offset gross income, resulting in no remaining income on which tax is payable. In certain cases, losses may also be carried forward as per applicable provisions.
Gross income indirectly affects the applicable tax slab, as total taxable income is derived starting from gross income after adjustments and deductions, and tax slabs are applied based on this total taxable income.
Salary slips typically show gross salary, allowances, exemptions, deductions, and net pay, but they do not usually display final taxable income, which is computed for the full financial year while filing the income tax return.
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Posted on 19 Dec
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