2 min
31 January 2025
Income tax liability is the total tax an individual or business must pay to the government based on their earnings. Understanding how this liability is calculated is essential for effective financial planning. By knowing the factors influencing taxable income and available deductions, taxpayers can optimise their finances and reduce tax burdens.
This article will explain the key components of income tax liability in India, how taxable income is determined, the impact of deductions and exemptions, and how tax slabs influence tax payments.
Taxable Income = Total gross income - Deductions
Gross income includes salary, business income, capital gains, rental income, and interest from savings. Deductions, such as contributions to provident funds, medical insurance, and home loan interest, help reduce taxable income.
New tax regime
Old tax regime
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This article will explain the key components of income tax liability in India, how taxable income is determined, the impact of deductions and exemptions, and how tax slabs influence tax payments.
Components of income tax liability
Income tax liability comprises multiple factors that contribute to the final tax amount payable. These include:- Income sources: Income from salary, business, capital gains, house property, and other sources determines the tax payable.
- Deductions and exemptions: Section 80C deductions, house rent allowance (HRA), and other exemptions reduce taxable income.
- Applicable tax rates: Progressive tax slabs determine the final tax rate applicable to an individual.
- Surcharges and cess: High-income earners must pay additional surcharges, along with health and education cess.
Taxable income: What it is and how it is calculated
Taxable income is the portion of earnings subject to tax after deductions. The formula to calculate taxable income is:Taxable Income = Total gross income - Deductions
Gross income includes salary, business income, capital gains, rental income, and interest from savings. Deductions, such as contributions to provident funds, medical insurance, and home loan interest, help reduce taxable income.
Tax deductions and exemptions: Reducing your taxable income
Tax deductions and exemptions lower tax liability. Key deductions under the Income Tax Act include:- Section 80C: Up to Rs. 1.5 lakh for investments in PPF, EPF, and life insurance.
- Section 80D: Health insurance premiums deductible up to Rs. 25,000 (Rs. 50,000 for senior citizens).
- Section 24(b): Home loan interest deduction up to Rs. 2 lakh annually.
Tax credits: Direct reduction of tax liability
Unlike deductions, tax credits directly reduce tax liability. For example:- Foreign tax credit: Offsets tax paid abroad against Indian tax liability.
- Rebate under Section 87A: Individuals earning up to Rs. 5 lakh receive a rebate up to Rs. 12,500, reducing their tax to zero.
Tax slabs and rates
In India, individuals are taxed based on income slabs, which vary between the old and new tax regimes.New tax regime
| Income slabs | Tax rate |
| Up to Rs. 3,00,000 | Nil |
| Rs. 3,00,001 to Rs. 7,00,000 | 5% |
| Rs. 7,00,001 to Rs. 10,00,000 | 10% |
| Rs. 10,00,001 to Rs. 12,00,000 | 15% |
| Rs. 12,00,001 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% |
Old tax regime
| Total income | Individuals below 60 years | Individuals aged below 60 years to 80 years | Individuals above 80 years |
| Up to Rs. 2,50,000 | Nil | Nil | Nil |
| Rs. 2,50,001 to Rs. 3,00,000 | 5% | Nil | Nil |
| Rs. 3,00,001 to Rs. 5,00,000 | 5% | 5% | Nil |
| Rs. 5,00,001 to Rs. 10,00,000 | 20% | 20% | 20% |
| Above Rs. 10,00,000 | 30% | 30% | 30% |
How to calculate your income tax liability
To compute income tax liability, follow these steps:- Determine total gross income: Add income from salary, business, property, and investments.
- Apply deductions: Subtract eligible deductions such as 80C, 80D, and 24(b).
- Determine taxable income: The resulting amount after deductions is taxable income.
- Apply tax slabs: Calculate tax based on the applicable slab rates.
- Add surcharges and cess: Include applicable surcharges and 4% health and education cess.
- Subtract tax credits: Apply eligible rebates or credits.
Explore Bajaj Housing Finance Home Loan
Tax planning goes beyond just saving money; it's about making smart financial decisions for a secure future. By leveraging options like a home loan, you can maximize tax savings while working towards your goals.When it comes to finding a trusted partner for your dream home, Bajaj Housing Finance is the right choice. Here’s why:
1. High loan amount: Secure funding up to Rs. 15 crore* to turn your dream home into reality.
2. Low interest rates: Enjoy interest rates starting 8.25%* p.a, and EMIs as low as Rs. 741/lakh*.
3. Quick approval: Get approved within 48 Hours* of applying – sometimes even sooner.
4. Flexible repayment tenure: Choose a repayment term of up to 32 years for comfortable EMIs.
5. Simple application: Take advantage of doorstep document collection for a smooth process.
6. Balance transfer facility: Move your existing home loan and get a top-up loan with better terms.
Explore Bajaj Housing Finance Home Loan today and take advantage of tax savings and flexible repayment plans.
