What is the difference between income and taxable income?

Income Tax (India)
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income vs taxable income

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Income is the total money that you earn from different sources. On the other hand, taxable income is the part of income that the government actually taxes you on.

Gross Income

It is the total amount that an individual earns during a financial year from various sources like incomes from salary/wages, income from capital gains, etc.

Formula:

Income = Income from salary/wages + Business income + Rental income + income from interest/dividends + Capital gains + income from other sources

Taxable Income

It is that portion of total income that the government actually taxes you on. It is obtained after subtracting deductions and exemptions from total income.

Formula:

Taxable income = Income - Tax deductions - Tax exemptions

What are deductions and exemptions?

  • Exemptions are a part of your annual income that are not considered for tax at all. For example, House Rent Allowance (HRA), Leave Travel Allowance, etc.

  • Deductions are a part of your gross income that are not considered for tax based on where they are spent. For example, principal repayment on home loan, investment in public provident funds, etc.

Example

Let’s suppose the annual salary of Mr. X is Rs. 10,00,000. Also, he earns an interest of Rs. 2,00,000 from his savings account. Apart from that, Rs. 3,00,000 from his annual salary comes under HRA, and he invests Rs. 50,000 in the Public Provident Fund.

In this case, Mr. X’s total income will be Rs. 12,00,000 (10,00,000 + 2,00,000)

His taxable income will be Rs. 8,50,000 (12,00,000-3,00,000-50,000).

Individual vs Firm Distinction

While the definition of gross and taxable income is the same for both individuals and firms, the method of calculating them is very different.

Gross Income

  • For indivduals, it comes under 4 heads: Income from salary, capital gains, rent and other sources.
  • On the other hand, for firms, it is primarily the revenue/turnover of the firm.

Deductions

  • For individuals, the decutions are based on saving, investments, donations or repayment of loans. For example - investing in a Public Provident Fund, Donating to PM Relief Fund, etc.
  • For firms, the deuctions are business expenses. Therefore, the income after deductions is the profit (revenue - expenses).

Exemptions

  • For an individual, the exemptions are given by the employer and are directly reduced from gross income, like HRA and LTA.
  • For firms and companies, the expemtions are not provided by the employer. Instead, they are provided by the governemnt and added into the policy itself. For example, if a firm sets up a unit in a Special Economic Zone (SEZ), a part of its profit is exempted from tax for a few years.

Tax Rates and Slabs

  • An individual follows a progressive tax system. You only pay the higher tax rate over and above the money that comes under the lower tax slabs.
  • Firms follow a flat tax rate. They pay a flat corporate tax on their net taxable income. For example, 30% or 50% on their entire profit.
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