Deductions, Computation of
Tax:
Determination of Tax liability, Tax Deducted at Source, Advance Tax.
Content
Determination of Tax Liability : Key Concepts: Taxable Income, Gross Income.
Tax Deducted at Source (TDS):Definition and Purpose of TDS
Types of Income Subject to TDS (Salary, Interest, Rent, etc.)
Advance Tax : Definition and Importance of Advance Tax
Who Needs to Pay Advance Tax?
Determination of Tax Liability
Gross Income Definition: Gross income includes all income received in a year that isn’t
specifically exempt from tax. It encompasses wages, dividends, capital gains, business
income, and other earnings.
Components:
Earned Income: Salaries, wages, tips, and other compensation .Unearned Income: Interest,
dividends, and otherr form of passive income
Business Income: Revenue from a business or profession.
Capital Gains: Profit from the sale of assets . Purpose: Gross income is the starting point for
calculating taxable Liability income and determining tax liability.
Determination of Tax Liability
Taxable Income Definition: Taxable income is the portion of gross income that remains
after deductions and exemptions have been subtracted. It's the amount on which taxes
are actually calculated.
Process:
Subtract Adjustments: Certain expenses like retirement contributions and student loan interest
may reduce gross income.
Apply Deductions: Itemized or standard deductions further lower income.
Consider Exemptions: Personal and dependent exemptions, if applicable . Calculation of Tax
Liability: Once taxable income is determined, it is applied to tax brackets to calculate the
amount owed, minus any credits.
Tax Deducted at Source (TDS)
Definition and Purpose of TDS
Definition: Tax Deducted at Source (TDS) is a method of collecting income tax in which a portion of
income is deducted by the payer (e.g., an employer or bank) before the income is credited to the
payee. This amount is then remitted to the government as a prepaid tax.
Purpose:
Ensures Consistent Tax Collection: TDS is deducted throughout the year, providing the government
with a steady flow of revenue.
Prevents Tax Evasion: By deducting tax directly at the source of income, the risk of tax evasion is
reduced.
Simplifies Tax Filing: At the end of the fiscal year, individuals and businesses already have some
taxes paid, which can simplify their tax liability calculations and reduce their final tax payment.
Tax Deducted at Source (TDS)
Types of Income Subject to TDS
Several types of income are subject to TDS, including:
Salaries: Employers deduct TDS on salaries as per applicable income tax rates, adjusted for
deductions and exemptions that employees may propertie.
Rent Payments: TDS is deducted on rental income received, particularly for commercial and
high-value residential properties.
Interest on Bank Deposits: Banks deduct TDS on interest income earned on fixed deposits if
the interest exceeds a certain threshold.
Advance Tax
Definition and Importance of Advance Tax
Definition: Advance tax, also known as the "pay-as-you-earn" tax, is income tax paid in advance
rather than as a lump sum at the end of the fiscal year. It applies to income earned throughout the
year and is paid in installments, based on estimated earnings.
Importance:
Helps Avoid a Large Year-End Payment: By paying tax in installments, taxpayers avoid the burden
of a large one-time payment at the end of the year.
Improves Government Cash Flow: Advance tax provides the government with regular revenue,
which helps in managing funds for public services.
Reduces Penalties: Paying advance tax on time can help taxpayers avoid interest and penalties
on unpaid taxes.
Advance Tax
Who Needs to Pay Advance Tax ?
Advance tax must be paid by individuals and entities if they meet certain criteria:
Self-Employed Individuals and Freelancers: If their total tax liability in a financial year is more than a
specified limit (e.g., over INR 10,000 in India), they need to pay advance tax in installments.
Businesses: Business owners, including sole proprietors, partnerships, LLPs, and corporations, are
required to pay advance tax if their estimated annual tax liability crosses the threshold.
Individuals with Additional Sources of Income: Salaried individuals who have other income sources,
such as rental income, interest on investments, or capital gains, might need to pay advance tax if
their total tax due exceeds the specified limit.
Advance tax is generally payable in four installments over the fiscal year, which allows taxpayers
to manage their obligations in stages.
Conclusion
In conclusion, understanding and complying with these aspects ensures effective financial
management, reduces the risk of penalties, and promotes systematic tax payment,
fostering a balanced tax system beneficial to both the taxpayer and the government.
