"COMPUTATION OF INCOME"

                 Let us take a quick survey of the steps involved fin the assessment (computation) of income under the Act.

1)   Determine Scope of Total Income :-      

                                          The "scope" of income means - What items are to be included in the income, and what items are to be excluded. The scope of income depends upon three factors - (a)  whether the  person earning the income is resident in India or not, (b)  whether the income arises during the previous 

     year and   (c) whether the income arises in India or outside. 

          

            (a)  Residence :  What items are to be included in the income depends upon whether a person is a  "resident"in India or not. A person is said to be "resident" in India, if, broadly speaking, he has stayed in India for the major part of the previous year (i.e. 6 moths or more); otherwise he is called a "non-resident".

            (b)  Year :  The income to be taxed must have arisen during the previous year only, i.e. neither before nor after the previous year.

             (c)  Place :  What items are to be included in the taxabbles income of a person, depends, next, upon whether the income is Incian of Foreign, i.e. arising within or outside India. Broadly speaking, a Resident has to pay Income-tax only on Indian as well as Foreign income, while a Non-Resident is liable to pay Income-tax only on the Indian income.

                 

2)   Classify Income Under Different Heads :-     

                                            After determining what is to be included, the next step is to classify the income under different "heads of income" prescribed under the Act. The major heads of income are - Salary,  Income from Property, Profits from Business, Capital Gains, and Income from Other Sources.

      

3)   Compute Income Under Each Head :- 

                                            The rules for computing income under each head are different. Such rules prescribe as to what is to be included under each head, what are the deductions allowed under each head and so on. This is the most important step in the computation of income. The Act grants exemption from tax, on certain items of income, such as agricultural income, or Leave Travel Allowance; or to certain persons such as Foreign Technicians, Foreign Teachers etc. Such exempted items are to be totally ignored and excluded while computing the taxable income.

4)   Determine Gross Total Income :-

                                           Though income is classified and computed under different heads, in the end, the income under all the heads is added together to arrive at the "Gross Total Income" of the assesses.

5)   Deduct Claims For Deductions :-

                                           The Income-tax Act allows certain deductions from the Gross Total Income.Such deductions are given to encourage savings in National Savings Certificates, PPF, etc. Deductions are also given on income earned by a handicapped person etc.           

6)   Compute Net Taxable Income :-

                                           Net Taxable Income is equal to Gross Total Income Less Deductions Allowed.This is the final step in the computation of income. Income-tax is charged on such bet taxable income.