## Computing Total Income and Tax Liability — The 9-Step Framework
Computing tax follows a fixed sequence. Learn the order — many later chapters slot into these steps.
Step 1 — Determine Residential Status (decides scope of taxable income).
Step 2 — Decide the Tax Regime (Default New Regime u/s 115BAC vs Old Regime).
Step 3 — Compute Income under each of the 5 Heads of Income:
1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession (PGBP)
4. Capital Gains
5. Income from Other Sources
- Apply exemptions (see Section 14A note below).
- Deduct all eligible expenses/allowances under each head to get net taxable income per head.
Step 4 — Apply Clubbing of Income, then Set-off & Carry Forward of Losses.
Step 5 — Arrive at Gross Total Income (GTI).
Step 6 — Deduct Chapter VI-A Deductions from GTI to arrive at Total Income.
Step 7 — Compute Tax on Total Income.
Step 8 — Calculate Alternate Minimum Tax (AMT) if applicable (only under the optional/old regime where profit-linked or investment-linked deductions are claimed).
Step 9 — Choose the Beneficial Regime — compare tax under the Default regime (115BAC) and the Old regime, and pick the one with the lower tax liability.
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### Note 1 — Section 14A: Disallowance of Expenditure on Exempt Income
- Rule: Any expenditure directly or indirectly attributable to earning exempt income is NOT deductible.
- Logic: If the income is not taxed, the cost of earning it cannot be allowed against taxable income.
- Assessing Officer's role: Where the assessee's working is not satisfactory, the AO may estimate the disallowable expense using a CBDT-prescribed method (Rule 8D).