Tax Computation – CMA Intermediate
Business Law & Taxation – Module 2
1. Simple Explanation
Tax computation is the process of determining the amount of tax payable by a taxpayer (individual, partnership, company, etc.) after applying all relevant income‑tax rules, exemptions, deductions and tax rates.
- Start with the gross income (income before deductions).
- Subtract all allowable deductions (under Sections 80‑A to 80‑U).
- Apply the applicable tax rates (basic, surcharge, health & education cess).
- Add any tax on capital gains, interest, etc.
- Result is the Tax Payable.
The computation is governed by the Income Tax Act, 1961 and the Finance Act (annual changes).
2. Key Points
| Category | What to Note | Typical Values (FY 2025‑26) |
|---|---|---|
| Gross Income | Salary, business/professional income, capital gains, other sources. | N/A |
| Deductions | 80C (investments), 80D (health), 80E (education loans), 80G (donations), 80TTA/80TTB (interest on savings/retirement), 24(b) (interest on home loan), etc. | 80C: ₹1,50,000 |
| Tax Rates (Individuals) | 5% for income up to ₹2.5 L, 20% for ₹2.5–₹5 L, 30% for >₹5 L. | |
| Tax Rates (Companies) | 25% for turnover <₹400 Cr, 30% for >₹400 Cr. | |
| Surcharge | 2%–12% on tax, depending on income. | |
| Health & Education Cess | 4% on tax + surcharge. | |
| Advance Tax | 15% of expected tax paid in instalments. | |
| Tax on Capital Gains | Short‑term (≤12 mo) 15%, long‑term (₹1 L+ assets) 20% (with indexation). | |
| Tax on Other Sources | Interest, dividend distribution tax (DDT), etc. | |
| Tax on Partners | Partners taxed at individual rates on share of profits. | |
| Tax on Companies | Tax on undistributed profits is 30% + surcharge + cess. |
Important Formulas
| Purpose | Formula | Note |
|---|---|---|
| Taxable Income | Taxable Income = Gross Income – Deductions |
|
| Tax Payable | Tax Payable = (Basic Tax + Surcharge) × 1.04 |
1.04 = 4% cess |
| Surcharge | Surcharge = Tax × Surcharge Rate |
Rate depends on taxable income |
| Advance Tax | Advance Tax = (Tax Payable × 15%) |
Must be paid in instalments |
3. Worked Example
Scenario
An individual (Mr. A) earned the following in FY 2025‑26 (assessment year 2026‑27):
| Source | Amount (₹) |
|---|---|
| Salary | 12,00,000 |
| House Rent Allowance (HRA) | 1,80,000 |
| Interest from savings account | 12,000 |
| Interest on home loan | 60,000 |
| Capital gains (short‑term) | 1,00,000 |
| Other income (dividends) | 30,000 |
Deductions claimed:
- 80C: ₹1,20,000 (EPF + PPF)
- 80D: ₹25,000 (health insurance)
- 24(b): ₹60,000 (interest on home loan)
- 80TTA: ₹12,000 (interest from savings)
Compute tax payable.
Step‑by‑Step
| Step | Calculation | Result (₹) |
|---|---|---|
| 1. Gross Income | Salary + HRA + Interest + Home loan interest + Capital gains + Dividends | 12,00,000 + 1,80,000 + 12,000 + 60,000 + 1,00,000 + 30,000 = 16,32,000 |
| 2. Standard Deduction | ₹50,000 (available for salaried individuals) | - 50,000 |
| 3. Deductions | 80C + 80D + 24(b) + 80TTA | 1,20,000 + 25,000 + 60,000 + 12,000 = 2,37,000 |
| 4. Net Taxable Income | Gross Income – Standard – Deductions | 16,32,000 – 50,000 – 2,37,000 = 13,45,000 |
| 5. Basic Tax | Income Tax brackets | |
| - 0 – 2,50,000 | 0 | |
| - 2,50,001 – 5,00,000 | 5% of 2,50,000 = 12,500 | |
| - 5,00,001 – 10,00,000 | 20% of 5,00,000 = 1,00,000 | |
| - 10,00,001 – 13,45,000 | 30% of 3,45,000 = 1,03,500 | |
| Total Basic Tax | 12,500 + 1,00,000 + 1,03,500 = 2,16,000 | |
| 6. Surcharge | 10% |