Given the different sources of income, depending upon the nature of income the tax treatment of the income of the individual varies :-
- In case of the income earned by the tax payer, all incomes shall be subject to taxation except:-
- If individual is a part of a firm, in case of his share in the profits of the firm, his income is exempt (under section 10(2A) of the Act) from taxation. But with respect to his salary and interest from the firm, these are taxable as business income of the individual.
- If individual is a part of association of persons(AOP) or body of individuals(BOI), if the association or body is taxable at the maximum marginal rate (or at a higher rate), then the individuals share of profit is not taxable under the Act.
Steps to find out the taxable income of individuals:-
- Find out the income under the different 'heads of income', which include:-
- Income from House property
- Profits and gains of business or profession
- Capital Gains
- Income from other sources
- The income is subjected to 'adjustment of losses' of the current years and earlier years. The income after the adjustment of losses is the "gross total income".
- From the gross total income the prescribed 'deductions' under the Income Tax Act are made.
The balance so obtained is known as "Net Income" or Taxable Income.