How to Compute Tax – A Broad Structure

For tax purposes, income is broadly divided into different heads, and separate computation mechanisms have been prescribed for each head. The heads are:

• Income from employment/salary
• Income from house property (rental income)
• Income from business and profession
• Income from capital gains
• Income from other sources (dividend, winnings from lotteries, gifts, family pensions, etc.)

After aggregating income under the various heads, the taxpayer can then reduce taxable income with certain allowable deductions. For example, an individual could claim deductions with respect to investments made in the Public Provident Fund or payment of life insurance premium, medical health policy premium, certain mutual funds, etc.

After these deductions, the resultant taxable income is required to be offered to tax at the rates prescribed by the law.