# Computing Total Income & Tax Liability — The 9-Step Framework
Every problem in income tax follows the same skeleton. Memorise the sequence; the order matters because each step feeds the next.
| Step | Action |
|---|---|
| 1 | Determine Residential Status (decides scope of taxable income) |
| 2 | Decide the Tax Regime (Default 115BAC vs Old/Normal regime) |
| 3 | Compute income under each of the 5 heads |
| 4 | Apply Clubbing of Income, then Set-off and Carry Forward of Losses |
| 5 | Arrive at Gross Total Income (GTI) |
| 6 | Subtract Deductions (Chapter VI-A) from GTI |
| 7 | Arrive at Total Income and compute tax |
| 8 | Calculate Alternate Minimum Tax (AMT) if applicable |
| 9 | Evaluate the beneficial regime (compare 115BAC vs Old, pick lower liability) |
## Step 3 — The five 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
Within each head: apply exemptions first, then deduct eligible expenses/allowances to reach net income for that head.
## Note 1 — Disallowance of expenses on exempt income [Section 14A]
- Rule: Any expense — directly or indirectly attributable to exempt income — is not deductible.
- AO's power: If the assessee's claim is not satisfactory, the Assessing Officer can estimate the disallowable expenditure using a CBDT-prescribed method (Rule 8D).
- Logic: You cannot claim a deduction for the cost of earning income that itself escapes tax.
## Step 8 — AMT (overview)
- Applies only under the optional (old) regime and only where profit-linked or investment-linked deductions have been claimed.
- Detailed treatment comes in the last chapter.
## Step 9 — Beneficial regime
Taxpayers compare liability under the Default Tax Regime [Section 115BAC] and the Old/Normal Tax Regime (OTR) and choose whichever gives the lower tax.