Computation of Total Income and Tax Liability

The overall computation of a taxpayer's income tax liability broadly follows these steps:

1. Compute income separately under each of the five heads of income (Section 14).
2. Aggregate them, after allowing for permitted set-off and carry-forward of losses, to arrive at the Gross Total Income (GTI).
3. Subtract permissible deductions (e.g. under sections in Chapter VI-A of the Act, such as deductions for specified savings/investments, medical insurance premium, and donations to specified funds) from the Gross Total Income to arrive at the Total Income (also called taxable income).
4. Apply the applicable income-tax slab rates for that assessment year to the Total Income to compute the gross tax liability.
5. Add applicable surcharge and cess (e.g. Health and Education Cess), and subtract any tax already paid (through TDS — tax deducted at source, or advance tax) to arrive at the final tax payable or refundable.

Illustrative slab structure for practice (NOTE: actual rates are revised almost every year by the Union Budget/Finance Act — always verify the current year's actual slab rates from the applicable Finance Act before relying on any specific figure; the numbers below are used purely to practise the METHOD of computation): a basic exemption slab taxed at nil, the next slab taxed at a lower rate (illustratively 5%), the next slab at a middle rate (illustratively 20%), and income above the highest slab taxed at the top rate (illustratively 30%), applied in a progressive/slab-wise manner — meaning each slab of income is taxed only at its own rate, not the whole income at the highest rate reached. …