In order to file Income Tax return and settle your tax liability, the first thing you need to do is calculate your taxable income on which your tax is calculated. To arrive at the net taxable income you first need to calculate the gross total income and give adjustments to it. Wondering what does taxable income mean? FinanceShed has an answer to this.
What is Taxable Income?
Taxable income is the basic income on which income tax is calculated. Taxable income basically refers to an individual’s or firms’ or company’s’ income or compensation which is used to determine tax liability. This is the amount that gives how much an individual or company owes to the government as payment of tax. Taxable income is derived by deducting any exemptions and deductions allowable to individual or company from gross total income.
What does taxable income include?
Broadly speaking, a taxable income includes each and every kind of income received by a taxpayer. Here are some basic heads of income which collectively forms taxable income. The first kind of income included is income from salary. You can compute income from your salary using the TDS certificate issued by your employer. Also, you can derive your salary income by the salary slips along with the bonus and other allowances. The second income is from income from house property. This income mainly consists of rental income from the house which is let out. There are different criteria for calculating house property.
Capital gains whether long term or short term is included in your taxable income. Capital gains include gain from selling your investments such as shares and securities to selling your capital assets. Other very important income includes Income from any business or profession. The calculation of these incomes can be challenging as it includes various kind of heads. At last, the incomes from other sources such as interest income on savings, dividend incomes, gifts, pension income etc. are included in the calculation of total income.
All these income collectively forms the Adjusted Gross income of an individual or company. One has to claim the standard deduction or a list of itemized deductions. This itemized deduction includes contributions to individual retirement accounts (IRAs), interest paid on mortgages, some medical expenses and contribution towards life insurance schemes and other business-related expenses for companies.
Which incomes are non-taxable income?
Almost each and every income is taxable for the calculation of taxable income but there are certain incomes which are not taxable and declared as non-taxable income by the government. These incomes include income by way of employee achievement award, life insurance payment on an event of a deceased family member, inheritance, cash rebates from items bought, welfare benefits, and a lot more (depending on the country and government you fall in). Although such compensation cannot be taxed, they still need to be reflected in the tax return.
Although, the list given here includes the basic taxable and non-taxable income, the applicability by and large depends upon the government under which you are included as an assesse. as income tax rules are constantly changing and varied in different countries depending upon the country’s tax structure and it’s GDP.