Income Tax Computation with Class 12 Maths Principles

Ramraj SainiUpdated on 21 Apr 2023, 09:10 AM IST

An income tax is a tax that the government collects from people based on the income they earn. Income tax is an essential part of the Indian financial system, and understanding it is crucial for responsible citizenship and making informed financial decisions. For Class 12 students, having a good grasp of income tax concepts and computation is necessary as it is an important topic from the exam point of view, and pursuing careers in finance and accounting. Additionally, understanding income tax concepts can be beneficial throughout their professional life.

Income Tax

This article aims to provide an overview of income tax, and basic concepts of income tax, including the different types of income, exemptions, deductions, and tax rates. The article will also explain how to calculate income tax using the slab system.

Income Tax

Income tax is a direct tax levied on an individual's income by the government.

There are two types of income - taxable income and exempt income. Taxable income includes income from salary, business or profession, house property, capital gains, and other sources. Exempt income, on the other hand, includes income from agricultural sources, dividend income, long-term capital gains from listed securities, and more. It is important to note that while exempt income is not taxed, it still needs to be reported in the income tax return.

Exemptions, Deductions, And Tax Rates

Exemptions are the amounts that are not considered part of the taxable income. For example, exemptions are available for HRA (House Rent Allowance), LTA (Leave Travel Allowance), and more.

Deductions, on the other hand, are amounts that are subtracted from the taxable income to arrive at the net taxable income. Deductions are available for investments made under various schemes like Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Pension System (NPS), and more.

The income tax rates in India are determined by the Finance Act of the respective financial year. The tax rates are different for different income levels and tax slabs.

Income Tax Computation

Calculating income tax can be done using various methods, including the slab system and the formula method. Let's explore both methods in more detail.

The Slab System

The slab system is the most common method used to calculate income tax in India. The income tax department determines different tax slabs based on income levels, and tax is calculated accordingly. These are the current tax slabs:

New Tax Regime

Under these new tax slabs, individuals with an income of up to Rs. 7 lakhs will not be required to pay any taxes, which will be the standard regime going forward. However, the new tax regime does not allow exemptions or rebates.

If the income is more than Rs. 7 lakhs then the following slab will be applicable in the new tax regime:

Income	Tax Rate (%)
0 - 2.5 Lakh	NIL
2.5 - 5 Lakh	5%
5 - 7.5 Lakh	10%
7.5 - 10 Lakh	15%
10 - 12.5 Lakh	20%
12.5 - 15 Lakh	25%
Above 15 Lakh	30%

In an effort to simplify the income tax structure and make it more user-friendly, the Government of India introduced optional new tax slabs during the 2020-21 financial year. The new system offers lower tax rates but without the numerous exemptions and deductions available under the previous system. The government hoped this would encourage taxpayers to switch to the new system and reduce the compliance burden. However, many taxpayers have continued to prefer the old tax system due to the various deductions and exemptions available.

As a result, in the recent 2022-23 budget, the government proposed a new regime with even more attractive tax brackets which are effective from April 1, 2023.

Income	Tax Rate (%)
0 - 3 Lakh	NIL
3 - 6 Lakh	5%
6 - 9 Lakh	10%
9 - 12 Lakh	15%
12 - 15 Lakh	20%
Above 15 Lakh	30%

The new tax regime is voluntary, meaning individuals can opt for either the old or new tax slabs.

Old Tax Regime

Under the Old tax system, there was no tax levied on income up to Rs. 5 lakhs. However, if the income exceeded Rs. 5 lakhs, the following tax slabs would be applicable:

Income	Tax Rate (%)
0 - 2.5 Lakh	NIL
2.5 - 5 Lakh	5%
5 - 10 Lakh	20%
Above 10 Lakh	30%

In this old tax regime, individuals could claim exemptions related to savings under various schemes like PPF, NPS, etc. up to a certain limit. Persons are free to choose either the old or new tax regime for tax payment.

For Example,

Mr. XYZ has a basic salary of Rs. 1,00,000 per month

House Rent Allowance (HRA) of Rs. 45,000 per month

Special allowance of Rs. 20,000 per month

Leave Travel Allowance (LTA) of Rs. 20,000 per Annum

His taxable income would be calculated as follows:

Components	Amounts(Rs. )
Basic Salary	1,00,000 x 12	= 12,00,000
HRA	45,000 x 12	= 5,40,000
Special Allowance	20,000 x 12	= 2,40,000
LTA	20,000	= 20,000
Total Income		20,00,000

Since his taxable income is Rs. 20,00,000, he is categorised in the tax bracket for incomes above Rs. 15 lahks.

Now, we will compute his overall taxable income using both the Old Tax Regime and the New Tax Regime.

Components	Old Tax Regime	New Tax Regime
Total Annual Salary	Rs. 20,00,000	Rs. 20,00,000
Gross Total Income	Rs. 20,00,000	Rs. 20,00,000
(now less all the applicable deductions, allowances, and exemptions)
Standard Deduction	– Rs. 50,000	– Rs. 50,000
Deductions under Section 80C	– Rs. 1,50,000	–
Deductions under Section 80D	– Rs. 50,000	–
House Rent Allowance (Out of 5,40,000 deductions)	– Rs. 3,00,000	–
Leave Travel Allowance (Out of 20,000 deductions)	– Rs. 10,000 (bills must be submitted)	–
Total Taxable Income	Rs. 14,40,000	Rs. 19,50,000
Total Tax Liability (Payable) (tax liability + cess 4%)	= Rs. 2,54,280	= Rs. 2,96,400

Tax Calculation for old tax regime:

2.5 lakh x 5% + 5 Lakh x 20% + 4.4 Lakh x 30%

12,500 + 1,00,000 + 1,32,000 = Rs. 2,44, 000

4% health and education cess is applied on this tax = 2,44,500 x 4% = Rs. 9780

Total tax liability = 2,44,000+9,780 = Rs. 2,54,280

Tax Calculation for New tax regime:

3 lakh x 5% + 3 lakh x 10% + 3 lakh x 15% + 3 lakh x 20% + 4.5 lakh x 30%

= 15,000 + 30,000 + 45,000 + 60,000 + 1,35,000

= Rs. 2,85,000

4% health and education cess is applied on this tax = 2,85,000 x 4% = 11,400

= Rs. 2,96,400

Hopefully, now you will have a better understanding of income tax calculation, and be equipped with the knowledge of income tax concepts to solve problems both your exams and professional life.