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Law of Taxation
Subjects / Law of Taxation / Computation of Total Income
Unit 1 · Unit 1

Computation of Total Income

Total income is the final figure on which tax liability is computed.

Total income is the final figure on which tax liability is computed. It is derived by aggregating income under all five heads (S.14), setting off losses, and then deducting amounts allowable under Chapter VI-A (S.80C to S.80U). The computation follows a statutory step-by-step procedure mandated by the Act.

Legal Framework

Provision Content
S.14 Classification of income into five heads
S.80B(5) Definition of Gross Total Income
S.2(45) Definition of Total Income
S.70 Set off of loss from one source against another under same head
S.71 Set off of loss from one head against another head
S.72-80 Carry forward and set off of losses
S.80C-80U Deductions from Gross Total Income (Chapter VI-A)
S.4 Tax charged on total income at rates in Finance Act

Step-by-Step Computation

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    A(["fa:fa-inr Compute income under each Head"]):::start
    A --> B["fa:fa-file-text Head 1: Salary S.15-17"]:::process
    A --> C["fa:fa-building Head 2: House Property S.22-27"]:::process
    A --> D["fa:fa-briefcase Head 3: Business/Profession S.28-44"]:::process
    A --> E["fa:fa-arrow-up Head 4: Capital Gains S.45-55A"]:::process
    A --> F["fa:fa-inr Head 5: Other Sources S.56-59"]:::process
    B & C & D & E & F --> G["fa:fa-calculator Set off losses S.70-71"]:::process
    G --> H["fa:fa-check Gross Total Income S.80B(5)"]:::document
    H --> I["fa:fa-shield Deductions S.80C-80U"]:::process
    I --> J(("fa:fa-gavel TOTAL INCOME S.2(45)")):::success

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Computation Format

Step Description Reference
1 Compute income under Head 1: Salary S.15-17
2 Compute income under Head 2: House Property S.22-27
3 Compute income under Head 3: Business/Profession S.28-44
4 Compute income under Head 4: Capital Gains S.45-55A
5 Compute income under Head 5: Other Sources S.56-59
6 Aggregate income from all heads
7 Set off current year losses (intra-head S.70, inter-head S.71) S.70-71
8 Set off brought forward losses S.72-80
9 Gross Total Income (GTI) S.80B(5)
10 Less: Deductions under Chapter VI-A S.80C-80U
11 Total Income S.2(45)
12 Apply tax rates from Finance Act S.4
13 Add surcharge and cess Finance Act
14 Less: Rebate (S.87A), relief (S.89, S.90, S.91)
15 Tax Payable

Set Off and Carry Forward Rules

Rule Section Application
Intra-head set off S.70 Loss from one source set off against income from another source under same head
Inter-head set off S.71 Loss from one head set off against income from another head
Exception: Speculation loss S.73 Can only be set off against speculation income
Exception: Capital loss S.74 LTCL only against LTCG; STCL against any capital gain
Carry forward period S.72 Business loss: 8 years; Capital loss: 8 years; House property loss: 8 years
Exception: Unabsorbed depreciation S.32(2) No time limit for carry forward

Why: The set off mechanism prevents double taxation and ensures that a taxpayer's true economic income is taxed. Losses reduce the tax base because they reduce actual economic capacity.

Key Deductions (Chapter VI-A)

Section Deduction Maximum
S.80C Life insurance, PPF, ELSS, tuition fees Rs.1,50,000
S.80CCD(1B) Additional NPS contribution Rs.50,000
S.80D Medical insurance premium Rs.25,000 (Rs.50,000 for senior citizens)
S.80E Interest on education loan Full interest (no cap), 8 years
S.80G Donations to charitable institutions 50% or 100% (with/without limit)
S.80TTA Interest on savings account Rs.10,000
S.80U Person with disability Rs.75,000 / Rs.1,25,000

Worked Example: Full Computation of Total Income

Facts: Ms. Kavitha (age 32, resident) has the following income for AY 2026-27:

Source Amount
Gross salary (after standard deduction) Rs.8,50,000
Loss from self-occupied house property (interest on home loan) (Rs.2,00,000)
Profit from freelance writing (profession) Rs.1,20,000
Short-term capital gain on shares (STT paid) Rs.60,000
Short-term capital loss on mutual funds (Rs.90,000)
FD interest Rs.40,000
PPF investment Rs.1,50,000
Medical insurance premium (self) Rs.18,000

Step-by-step computation:

Step Head / Particular Amount
1 Salary Rs.8,50,000
2 House Property (loss) (Rs.2,00,000)
3 PGBP (freelance) Rs.1,20,000
4 Capital Gains: STCG Rs.60,000 minus STCL Rs.90,000 (Rs.30,000) set off intra-head → NIL (balance Rs.30,000 STCL carried forward)
5 Other Sources (FD interest) Rs.40,000
6 Aggregate 8,50,000 − 2,00,000 + 1,20,000 + 0 + 40,000
7 Inter-head set off: HP loss (Rs.2,00,000) against Salary Already done above
8 Gross Total Income Rs.8,10,000
9 Less: S.80C (PPF) (Rs.1,50,000)
10 Less: S.80D (medical insurance) (Rs.18,000)
11 Total Income Rs.6,42,000

Key points illustrated:

  • HP loss set off against salary (max Rs.2,00,000 allowed u/s 71(3A)) ✓
  • STCL set off only against STCG (not against salary/FD) → balance carried forward 8 years
  • Deductions applied AFTER aggregation (on GTI, not on individual heads)
  • Tax will be computed on Rs.6,42,000 at applicable slab rates

Recall Check

  1. What are the five heads of income under S.14?
  2. What is the difference between intra-head set off (S.70) and inter-head set off (S.71)?
  3. For how many years can business loss be carried forward?

Key Cases

CIT v. Harprasad and Co (1975) CIT-v-Harprasad-and-Co-1975 Issue: Whether computation of total income must strictly follow the heads prescribed under S.14. Rule: Income must be classified under one of the five heads; the head determines the deductions and exemptions available. Held: The scheme of computation under the Act is that income must fall under one specific head. Each head has its own code for computation. Income that does not fall under Heads 1-4 goes to the residuary Head 5 (Other Sources).

Distinctions

Feature Gross Total Income Total Income
Computation stage After aggregation and set off After Chapter VI-A deductions
Section S.80B(5) S.2(45)
Deductions applied No (deductions not yet subtracted) Yes (Chapter VI-A applied)
Tax computation Not directly used for tax Tax computed on this figure
Relevance Base for computing deduction limits Final taxable base
Formula Sum of 5 heads minus losses set off GTI minus deductions u/s 80C-80U

Flashcards

Q: What are the five heads of income under S.14? A: (1) Salary, (2) House Property, (3) Profits and Gains of Business or Profession, (4) Capital Gains, (5) Income from Other Sources.

Q: What is Gross Total Income? A: The aggregate of income computed under all five heads after setting off losses (S.80B(5)).

Q: What is Total Income? A: Gross Total Income minus deductions under Chapter VI-A (S.80C to S.80U).

Q: Can a long-term capital loss be set off against salary income? A: No. LTCL can only be set off against LTCG (S.74).

Q: For how long can unabsorbed depreciation be carried forward? A: Indefinitely (no time limit under S.32(2)).

Q: What is the maximum deduction under S.80C? A: Rs.1,50,000 per financial year.

Q: What is the residuary head of income? A: Income from Other Sources (S.56). Any income not classifiable under Heads 1-4 falls here.

Exam Scenario

Mr. Sharma has the following income for AY 2026-27: Salary Rs.8,00,000; Loss from house property Rs.2,50,000; Profit from business Rs.3,00,000; Short-term capital loss Rs.1,00,000; Interest on FD Rs.50,000. He invested Rs.1,50,000 in PPF. Compute his Total Income.

Approach:

  1. Salary: Rs.8,00,000
  2. House Property: Loss Rs.2,00,000 (set off allowed against other heads, max Rs.2,00,000 per year; balance Rs.50,000 carried forward 8 years)
  3. Business: Rs.3,00,000
  4. Capital Gains: STCL Rs.1,00,000 (can only be set off against capital gains; no CG this year; carry forward 8 years)
  5. Other Sources: Rs.50,000
  6. GTI: 8,00,000 minus 2,00,000 + 3,00,000 + 0 + 50,000 = Rs.9,50,000
  7. Less S.80C (PPF): Rs.1,50,000
  8. Total Income: Rs.8,00,000