5 easy steps to calculate your tax

When calculating income tax liability each year, the first and foremost aspect which comes across one's mind is the tax slabs. In this year's annual budget, the government has brought about relief for the common man by widening this tax slab from the previous years.

Here is a look into the slabs for the current financial year to help you prepare your investments and income, and to be able to file your tax returns accurately in the following assessment year.

Basic tax jargons

Financial Year, Assessment Year and Previous Year: Do these commonly used income tax jargons often confuse you? This is what they mean.

Financial Year (FY)

Duration of one year between April 1 to March 31 of the following year, in which all financial information are reported. The current financial year is April 1, 2010 to March 31, 2011.

Assessment Year (AY)

The income of a particular financial year is assessed in the following financial year, which is known as the assessment year. For the current financial year, income will be assessed in the assessment year 2011-2012.

Previous Year (PY)

The financial year preceding the assessment year, the income of which is assessed in the following assessment year. Assessment year 2011-2012 will assess income for previous year 2010-2011.

Income tax slabs

With the upward revision of the tax slabs, there would now be more savings for the taxpayers.

Basic tax exemptions limits have been retained; however, the brackets have been broadened. Below are the income tax slabs and rates applicable for the current financial year 2010-11 and assessment year 2011-12.

Tax Slabs for Male Assesses(less than 65 years)

Income: up to 1.6 lakh -- No Tax

Income: Rs 1.6 lakh to 5 lakh -- 10 per cent

Income: RS 5 lakh to 8 lakh -- 20 per cent

Income: above Rs 8 lakh -- 30 per cent       

Tax slabs for women assesses (less than 65 years)

Income: up to Rs 1.9 lakh -- No tax

Income: Rs 1.9 lakh to Rs 5 lakh -- 10 per cent

Income: Rs 5 lakh to Rs 8 lakh -- 20 per cent

Income: above Rs 8 lakh -- 30 per cent

Tax slab for senior citizen (above 65 years)

Income: up to Rs 2.4 lakh -- No tax

Income: Rs 2.4 lakh to Rs 5 lakh -- 10 per cent

Income: Rs 5 lakh to Rs 8 lakh -- 20 per cent

Income: above Rs 8 lakh -- 30 per cent

As a result of the widening of the tax brackets, for an individual in the bracket between Rs 3 lakh to Rs 5 lakh, there could now be a saving of up to Rs 20,000.

Earlier, this bracket of 10 per cent tax rate was applicable only up to an income of Rs 3 lakh. Similarly, for the tax slab of Rs 8 lakh and above, there could now be a saving of more than Rs 50, 000.

Additionally, the government has also introduced section 80CCF where investments in infrastructure funds could fetch an extra deduction of Rs 20,000.

5 easy steps to calculate your tax

Calculating income tax is not any rocket science. The following 5 steps give you an idea of the process.

Calculate your gross total income. This includes gross income from Form 16; and the taxable income from other sources.

Calculate your net deductions, which may include, donations, investments and savings such as provident fund subscriptions, life insurance premiums etc.

Your net taxable income is gross total income minus net deductions.

Apply the appropriate income tax slab to calculate your tax payable on aggregate income.

Education Cess of 3 per cent is applied on the tax payable to arrive at the total tax payable. Relief under various sections would be applied on this total tax.

For example: Let us consider a net taxable income of Ravi as Rs 8, 00,000.

As a male assessee, here's how his tax will be calculated.

Calculation

Tax up to Rs 1,60,000 -- Nil

Tax on Rs 1,60,000 to Rs 5,00,000 @ 10per cent = Rs 34,000

Tax on Rs 5,00,000 to Rs 8,00,000 @ 20per cent =Rs 60,000

Total = Rs 94,000

Educational Cess @ 3 per cent of total tax = Rs 2,820

Net tax payable = Rs 96,820