As per Indian Income tax Law agricultural income is exempt from tax but agricultural income is considered for

computation of average aggregate tax to be applied on the non- agricultural income: This above principle is applicable only if the assesses income is above basic exemption income slab that is INR 180,000 This principle is applicable only on computation of income tax for individual There are 2 methods of computation of Income which is explained below for understanding

Income Tax working of Paul Financial Year 2011-12 Method 1 Computation of Tax on Agricultural + Non Agricultural Income and then reducing the same with Tax computed on Agricultural + Basic exempted income slab Method 2 Computation of Average aggregate tax rate based on Agricultural income & Non- agricultural income and apply the aggregate tax rate on the Non- Agricultureral income Step 1: Compute tax on Aug & Non-Aug Income Agricultural Income of Paul Non- agricultural Income of Paul salary Total (A + B) Less: Deduction U/s 24 (Interest on housing loan) Investment U/s 80 C (Exempted as per Law) Net Taxable Income [C- E-F]

Step 1: Compute tax on Aug & Non-Aug Income Agricultural Income of Paul Non- agricultural Income of Paul salary Total (A + B) Less: Deduction U/s 24 (Interest on housing loan) Investment U/s 80 C (Exempted as per Law) Net Taxable Income [C- E-F]

A B C E F G

800,000 3,600,000 4,400,000 (150,000) (100,000) 4,150,000

A B C E F G

800,000 3,600,000 4,400,000 (150,000) (100,000) 4,150,000

Computation of Tax Tax slabs 0-180000 180,001 - 500,000 500,001 - 800,000 800,001 and above Total Tax after including agricultural income

Rate 0 10% 20% 30% H

Taxes 32,000 60,000 1,005,000 1,097,000

Computation of Tax Tax slabs 0-180000 180,001 - 500,000 500,001 - 800,000 800,001 and above Total Tax after including agricultural income

Rate 0 10% 20% 30% H

Taxes 32,000 60,000 1,005,000 1,097,000

Step 2: Compute tax on Aug & Exempted Income slab Agricultural Income of Paul Basic exempted income slab Total (I + J) Computation of Tax Tax slabs 0-180000 180,001 - 500,000 500,001 - 800,000 800,001 and above Total Tax I J K 800,000.0 180,000.0 980,000.0

Step 2: Finding the average aggregate tax rate Total tax compute as per Divided by: Net Total Income as per Therefore Net Average aggregate tax rate Taxes 0 10% 20% 30% L Step 3 : Apply the Avg. aggregate tax rate on the Total Non- Agricultural Income 32,000 60,000 54,000 146,000 Total Net Aggregate tax rate Multiply it with: Total Non- Agricultural Income Net tax payable [ I x B] I B J 26% 3,600,000 951,000 H G I 1,097,000 4,150,000 26%

Rate

Step 3 : Net tax payable Total Tax as per Step 1 Less: Total Tax as per Step 2 Net Tax payable [ H-L]

H L M

1,097,000 146,000 951,000

Note: In the above working we have considered the following 1 Paul's agricultural income is INR 800,000 2 Paul's monthly salary is INR 300,000 3 Paul is got a housing loan and he pays interest of housing loan up to INR 150,000 per annam 4 Paul has tax saving investment up to INR 100,000 per annam