WHAT IS TAXABLE INCOME? A COMPREHENSIVE GUIDE
Let’s first understand a little about Taxable Income.
Earned and unearned income are both considered taxable income. Cancelled debts, government benefits (such as unemployment and disability insurance), strike benefits, and lottery winnings are examples of unearned income that is taxed. Earnings from dividends and interest income, as well as from the sale of appreciated assets during the year, are also considered taxable income.
WHAT IS TAXABLE INCOME?
The amount of your gross income that is used to determine how much tax you owe in a certain tax year is known as taxable income. In general, it is defined as adjusted gross income (AGI) less any standard or permitted itemised deductions. Wages, salaries, bonuses, tips, investment income, and other forms of unearned income are all considered forms of taxable income.
Individual taxpayers might choose to claim an itemised deduction list or the standard deduction when it comes to deductions from the IRS.
Interest paid on mortgages, medical costs above a certain amount (7.5% of AGI), and many other expenses are all included in the itemised deductions.
Businesses do not immediately disclose their revenue as taxable income when they file their taxes. Instead, to determine their business income, they deduct their business expenses from their revenue. From there, they deduct expenses to determine their taxable revenue.
TAXABLE INCOME IN INDIA
In India, all persons, including Hindu Undivided Families (HUFs), corporations, firms, associations of individuals, local government bodies, and any other artificial judicial person, are subject to taxable income. Each person pays a different amount of tax based on their income. The Indian Income Tax Act of 1961 governs the tax that is imposed. The primary source of funding for the nation’s public services is the income tax that taxpayers pay.
WHAT ARE THE SOURCES OF TAXABLE INCOME?
Any money you make during the tax year is taxable. The most typical is the salary for employees. However, income from other sources is also subject to taxes.
1.Employee compensation:
This is the most typical kind of taxable income, as was already mentioned. This takes the shape of pay that your employer gives you, such as salary and wages, gratuities, bonuses, and fees. The income is shown on your W-2, which you receive via mail from the firm.
Any appropriate deductions from your taxable income, including income tax, Social Security, Medicare, and 401(k) contributions, are also included on this form.
Whether they do it in their own homes or somewhere else, people who provide child care are required by the IRS to report the money they get as taxable income. This regulation also holds true for any cash you get for watching others.
You also need to indicate the value of any fringe benefits you receive from your company, as a director, or as a partner.
On its website, the IRS provides a comprehensive list of what is taxable and what is not.
2.Revenue from Ventures and Enterprises:
Any revenue you receive from certain business and investing activities must be reported by you. This covers any rental money you get from your owned properties. It makes no difference if you obtain rental activity for profit or as the outcome of a business.
Remember that you might be able to claim the costs associated with the rental, which could deduct the money you get.
3.Revenue from Joint Ventures:
Partnership entities are not subject to IRS taxation; however, any profits, losses, and deductions resulting from these businesses are distributed to the individual partners. The partnership doesn’t pay taxes as a result. Any pass-throughs must be disclosed on your yearly tax return if you are a partner. Even if the pass-through does not directly affect you, this still needs to happen.
HOW TO CALCULATE TAXABLE INCOME?
It is quite simple and hassle-free to calculate taxable income. The client must total all income received and deduct all applicable deductions and exemptions from the tax liability in order to determine the amount of income tax that must be paid.
Public access to the income tax calculator is provided via Income Tax India’s official website. By entering a few facts, the user of the tax calculator can determine their income.
A few details that must be entered in order to calculate the tax are listed below:
- Assessment year
- Taxpayer
- Residential status
- Income from salary
- Income from house property
- Capital gains
- Income from other sources
- Profits and gains
- Agricultural income
- Deductions
SOME EXAMPLES OF TAXABLE INCOMES
- Payroll
- Bonus
- Annuity
- Alimony
- Discounts
- Dividends
- Wages
- Employee honours
- Interest Charge
TAXABLE INCOME SLAB RATES
The income tax slab rates for 2023–2024 are shown below. For every group, there are different taxable income slab rates.
For male individuals and those in the HUF under 60 years of age:
| Taxable Income Slab | Taxable Income Rates |
|---|---|
| For total income below Rs. 2,50,000 | NIL |
| For total income between Rs.2,50,000 and Rs.5,00,000 | 5% |
| For total income between Rs.5,00,000 and Rs.10,00,000 | 20% |
| For income that exceeds Rs.10,00,000 | 30% |
For individuals between the ages of 60 and 80
| Taxable Income Slab | Taxable Income Rates |
|---|---|
| For total income Rs. 0 - Rs. 3.00 lakh | NIL |
| For total income between Rs 3.00 lakh- Rs 5.00 Lakh | 5% |
| For total income between Rs 5.00 lakh - Rs 10 Lakh | 20% |
| For income that exceeds Rs.10 Lakh | 30% |
HOW TO LOWER TAXABLE INCOME?
Everyone wants to increase their savings and build a stable financial future that can support them in the event that they don’t have a steady source of income. Savings are, quite rightly, essential to any financial plan’s success. Paying income taxes on your entire taxable income, however, may lower your savings and leave you with less cash for future planning.
What if you could lower your taxable income and still build more money to protect your future? These are a few strategies for lowering taxable income.
Under the Income Tax Act of 1961, you have access to a variety of tax-saving options that allow you to invest to increase your wealth and lower your taxable income. But before you can choose where and how much to invest, you need to understand the tax slabs. The current tax slabs are listed below:
| Net Income Range (Annually) | Rate of Income Tax |
|---|---|
| Up to Rs 2,50,000 | NIL 0% |
| Rs 2,50,000 to Rs 5,00,000 | 5% |
| Rs 5,00,000- Rs 7,50,000 | 10% |
| Rs 7,50,000- Rs 10,00,000 | 15% |
| Rs 10,00,000- Rs 12,50,000 | 20% |
| Rs 12,50,000- Rs 15,00,000 | 25% |
| More than 15,00,000 | 30% |