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Taxation
Taxable income vs gross income: Know the real difference
Ever glanced at your salary slip and wondered why the amount that lands in your bank account bears little resemblance to what’s written at the top? Well, the reason behind this is income taxation. Many people assume they owe tax on their entire earnings, but only taxable income is subject to tax.
What is gross income?
Gross income refers to your total earnings in a financial year, before any deductions like tax or your financial obligations take their share. Think of it as the full amount you earn before anything is subtracted.
Here’s what gross income typically includes for salaried individuals:
Components of Gross Income
- Basic salary – The core, fixed part of your pay – usually a major portion of your salary.
- Allowances – Additional sums paid for specific needs (e.g., HRA, travel, medical).
- Perquisites – Non-cash benefits from the employer, like company car or rent-free housing.
- Other income streams – Extra earnings such as bonuses, commissions or investment income.
For instance:
Ms Patel's annual salary- ₹8,00,000
Rental income from her property- ₹1,20,000
Total gross income- ₹9,20,000
This amount represents everything Ms Patel earned during the year. But luckily, she won't be paying taxes on the entire amount.
What is Taxable Income?
This sum is what's left over after deducting all allowable expenses from your gross income. It is the number that counts when figuring out how much you owe in taxes. The Indian tax system offers many ways to reduce this amount.
Here are a few-
- Section 80C – Allows deductions up to ₹1.5 lakh for investments like PF, PPF, ELSS, LIC, NSC, etc.
- Section 80D – Deduction for health insurance premiums:
1. Up to ₹25,000 for self/family
2. Additional ₹25,000 (or ₹50,000 if senior citizen) for parents - HRA exemption – If living in rented house, HRA exemption based on salary, rent paid, and city of residence (metro/non-metro).
- Standard deduction – Flat ₹50,000 deduction for salaried individuals and pensioners.
- Home loan interest deduction – Under section 24(b), up to ₹2 lakh per year on interest paid for self-occupied property.
Why does this matter?
- Gross Income ≠ Taxable Income. You will not be paying taxes on your entire earnings, and the difference can be considerable.
- Strategic tax planning becomes possible when you know which investments/expenses can reduce your taxable income.
- Tax regime choice is influenced by your deduction profile. The new regime offers lower rates but fewer deductions. It can potentially alter your taxable income calculation.
- Budgeting accuracy improves when you can predict your actual tax liability. It is better than assuming a percentage of your gross salary.
Conclusion
It is important to understand the distinction between gross and taxable income. You can strategically reduce your taxable income through legitimate deductions. This way, you are not just avoiding taxes but rather making the most of provisions specifically designed to help you save.
Disclaimer: This article is for information purposes only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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