Is Income calculated as Income earned or actual money received in the bank

Calculating income for income tax purposes can be tricky. Income can be accumulated through monthly salary, but it can also be acquired through gains on property, stocks, or other investments. At the same time, many people may have rental income or income from their side business.

It is crucial to calculate income correctly for income tax purposes as any mismatch could get you in trouble with the I-T Department.

In India, it is essential to note that all income is taxable unless it is explicitly excluded from taxation by some provisions of the Income Tax Act, 1961.

However, it is essential to note that your total income will be calculated based on the entire amount that you earn during the year rather than just what is credited in the bank (which is just your in-hand salary). So, the company’s payments or reimbursements to employees, in terms of provident fund contributions, leave allowance, housing allowance, and phone bills reimbursement etc. all need to be included in this calculation.

Once the whole remuneration from a cost to the company’s perspective has been determined, it is essential to calculate income from any other similar sources to be sure that no amount has been left out. This could include:

    • Wages
    • Salaries
    • Income from house and property
    • Business income
    • Capital gains
    • Interest on bank deposits
    • Retirement plan distributions
    • Stock options
    • Gifts, etc

All these income sources, together with make up the ‘taxable income’ as considered by the Income Tax department.

It is important to remember that for the I-T department, the source of income is more relevant than the amount or liquidity status. What this means is that any income earned in kind will be calculated. For instance, a company which pays only a part of the payment in cash but provides benefits in kind for almost all expenses will have to disclose all their contributions as part of your total income and you will be taxed on all of those inflows.

For example, let us say you are a software engineer in Bangalore, earning a monthly salary. But you also receive PF contribution from your employers. At the same time, you also have a property that you have rented out, and you also trade some stocks and make gains on them.

In this case, your total income will be a total of your salary in cash and kind from the employer, your rental income, capital gains from securities trade, and any other inflows.