Difference Between Gross and Total Income for Tax Calculation (2024)

Income tax is a crucial aspect of the financial landscape for individuals and businesses alike. It is the amount of money that taxpayers are legally obligated to pay to the government based on their income. The difference between gross income and total income has significant implications for determining one’s income tax liability.

Income tax calculation appears baffling to many taxpayers due to the jargon involved. But if your annual earnings fall under the taxable income slabs, you need to pay the correct tax amount to avoid penalty charges.

However, the first step to computing your payable tax is to know your gross and total taxable income. It also helps in tax planning with tax-saving instruments and claiming deductions and exemptions to reduce your tax burden. If the two terms confuse you, read on to learn about Gross total income vs total income.

What are the 5 Heads of Income?

As per the Income Tax Act (ITA), 1961, you can earn income from different sources, termed income heads. Your gross income is the aggregate of your earnings under all those heads, including

In the realm of taxation, income is a key concept that determines the amount of tax an individual or entity is liable to pay. Income can be categorized into various heads, which are used to classify different types of income for the purpose of taxation. In many countries, including the United States, India, and others, there are five commonly recognized heads of income. Let’s delve into each of these heads and gain a deeper understanding of them.

Income from Salary

Income from salary is one of the most common types of income for individuals who are employed. It includes the salary, wages, commissions, bonuses, and other monetary benefits received by an employee from their employer. It also encompasses any allowances, perquisites, or benefits in kind provided to an employee. Income from salary is usually taxed at the applicable slab rates as per the income tax laws of the country.

Income from House Property

Income from house property pertains to the rental income received by an individual for letting out a property. This can include income from residential or commercial properties, vacant land, or even letting out a part of one’s own house. The income is calculated based on the annual value of the property, which is determined by various factors such as location, size, amenities, and rental rates prevailing in the area. Income from house property is subject to taxation as per the applicable slab rates after allowing for certain deductions such as standard deduction, municipal taxes, and interest on home loans.

Income from Business or Profession

Income from business or profession covers income earned by an individual or entity engaged in any trade, business, or profession. This includes income from self-employment, freelancing, consultancy, and any other entrepreneurial activities. The income is calculated after deducting allowable business expenses such as rent, salaries, utilities, and other expenses incurred for the purpose of the business or profession. Income from business or profession is taxed at slab rates applicable to individuals or at a specific rate for entities like partnerships or proprietorships.

Income from Capital Gains

Income from capital gains is generated when an individual or entity sells or transfers a capital asset, such as stocks, real estate, or other investments, and makes a profit. The profit made on the sale of the asset is considered as capital gains and is subject to taxation. Capital gains can be classified as short-term capital gains (STCG) or long-term capital gains (LTCG) based on the holding period of the asset. Short-term capital gains are taxed at the applicable slab rates, while long-term capital gains are taxed at a lower rate or may even be exempted, depending on the nature of the asset and the holding period.

Income from Other Sources

Income from other sources is a residual category that includes any income that does not fall under the four heads mentioned above. It can include income from interest on savings accounts, fixed deposits, bonds, dividends, lottery winnings, gifts, and any other income not specifically covered under the other heads. Income from other sources is added to the total income of an individual or entity and is taxed at the applicable slab rates.

Is Classification of Income into Different Heads of Income Necessary?

Income classification is an important aspect of tax systems in many countries. It refers to the categorization of income earned by individuals or entities into different heads or categories for tax purposes. The purpose of income classification is to determine the appropriate tax treatment for different types of income, ensuring that taxpayers pay their fair share of taxes and comply with tax laws.

Tax Compliance

Classification of income into different heads of income is necessary to ensure tax compliance. Different types of income are subject to different tax rates, exemptions, and deductions. By categorizing income into different heads, tax authorities can enforce compliance by ensuring that taxpayers report their income accurately and pay the appropriate amount of taxes. This helps in preventing tax evasion and ensuring that taxpayers fulfil their tax obligations.

Fairness and Equity

Income classification promotes fairness and equity in the tax system. Different types of income have different economic characteristics and may warrant different tax treatments. For example, income from salary and wages is usually subject to tax at source, while income from investments or capital gains may be subject to different tax rates or exemptions. Income classification helps in creating a progressive tax system where taxpayers with higher incomes pay a proportionately higher amount of taxes, while taxpayers with lower incomes pay a lower amount of taxes. This ensures that the burden of taxation is distributed equitably based on taxpayers’ ability to pay.

Simplification and Clarity

Classification of income into different heads of income provides simplicity and clarity in the tax system. Tax codes can be complex, and different types of income may have different rules and regulations associated with them. By categorizing income into different heads, taxpayers can easily identify the relevant tax treatment for their income and comply with tax laws. It also makes tax administration more efficient as tax authorities can streamline their processes based on the different categories of income.

Encourages Economic Activities

Income classification can incentivize certain economic activities. Tax policies may be designed to promote specific economic activities, such as investments in certain industries or regions, research and development, or charitable donations. By categorizing income into different heads, tax authorities can provide preferential tax treatment for specific types of income, which can encourage taxpayers to engage in those activities. For example, tax incentives for investments in renewable energy may encourage taxpayers to invest in clean energy projects, leading to positive environmental and economic impacts.

International Taxation

Income classification is particularly relevant in the context of international taxation. Income earned by taxpayers in different countries may be subject to different tax laws and rates. Income classification helps in determining the appropriate tax treatment for income earned by taxpayers in different jurisdictions and avoids double taxation or tax disputes. For example, income earned by a multinational corporation in different countries may be classified as foreign-source income, and specific tax rules may apply to such income, such as foreign tax credits or tax treaties.

How to Calculate Gross Income?

For employees, calculating gross income is relatively straightforward. It typically involves adding up all forms of compensation received during a specific period, such as a year, from the employer(s) and other sources of income.

Here’s a step-by-step guide on how to calculate gross income for employees:

1. Identify Your Residential Status

Your residential status decides the earnings you are to include in your taxable income.

2. Classify Your Income

Categorize your earnings under the five income overheads:

3. Calculate the Amount Earned From Each Head

For this, you need to be aware of the tax-exempt income types, like agricultural income. You do not have to include those earnings in your gross income.

4. Club Your Income

You must include in your gross income some types of income your spouse or minor child earns, as per the tax laws.

5. Set Off and Carry Forward Losses

Some income heads can include various income sources. You might receive profits from one source while incurring losses from another under the same head. You can set off losses from one source against the gains from another. The tax rules also allow inter-head adjustment of such losses and profits. Moreover, you can apply previous years’ losses to the current year’s income to reduce your tax liability.

6. Compute Your Total Gross Income

The final figure from the previous steps’ calculations gives your gross income.

How to Calculate Total Income?

Section 2(45) of the ITA defines total income, and the scope is defined by Section 5.

The Steps to Calculate Your Total Income are as follows:

1. Deduct the Following from Your Gross Income

Tax rebates, if any advance tax already paid deducted leave Travel Allowance, house rent allowance, exempt reimbursem*nts from your employer, such as mobile bills, food coupons, etc. Interest paid on your home loan (under Section 24) Income, including

2. Round it Off

After you find your total income by claiming relevant deductions from your gross income, you have to round it off to the nearest multiple of 10.

According to Section 288A, you have to take the following factors into account:

3. Apply Surcharges and Cess

Your total income is the basis for determining the tax amount you need to pay. Next, you can calculate the tax per the rate applicable to your income slab. Then, take away rebates, if any. Finally, add the applicable surcharges and Cess to get the amount you need to deposit with the tax department.

Gross Total Income vs Total Income

While they may sound similar, gross total income and total income have distinct differences in their definitions and implications. Let’s delve into and understand the difference between gross income and total income.

Gross Total Income Example

Gross total income (GTI) refers to the total income earned by an individual during a financial year before claiming any deductions, exemptions, or allowances. It includes income from all sources, such as salary, business or profession, capital gains, house property, and other sources, without any deductions. GTI serves as the starting point for calculating taxable income.

For example, let’s consider Mr. Smith, who works as a software engineer and earns a salary of ₹60,000 per year. He also has a small business on the side that generates an additional income of ₹10,000. Furthermore, he earns ₹2,000 from interest on his savings account and ₹3,000 from renting out a property. In this case, Mr. Smith’s GTI would be the sum of all these incomes: ₹60,000 + ₹10,000 + ₹2,000 + ₹3,000 = ₹75,000.

Total Income Example

Total income, on the other hand, is the income that is calculated after claiming eligible deductions, exemptions, and allowances from the GTI. It is also referred to as “taxable income”, as it is the income on which an individual’s tax liability is calculated.

For example, let’s continue with the example of Mr. Smith. Assuming he claims a deduction of ₹5,000 for investments made in a tax-saving scheme and ₹2,000 for health insurance premiums, his total income would be calculated as follows:

GTI: ₹75,000

Deductions: ₹5,000 + ₹2,000 = ₹7,000

Total Income: GTI - Deductions = ₹75,000 - ₹7,000 = ₹68,000

In this case, Mr Smith’s total income would be ₹68,000, which is the amount on which his tax liability would be calculated.

Conclusion

Although total income and gross total income sound similar, the two are not interchangeable. Income tax applies only to the latter. With careful tax planning and investments in tax savings schemes, you can reduce your total income and lower your income tax outgo.

Key takeaways

• Income can be categorized into various heads, which are used to classify different types of income for the purpose of taxation.
• Your salary, dividends, capital gains, company revenue, retirement payouts, and other sources of income are all included in your gross income.
• The purpose of income classification is to determine the appropriate tax treatment for different types of income, ensuring that taxpayers pay their fair share of taxes and comply with tax laws.

FAQ

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