What Is Adjusted Gross Income? (And How To Calculate It)
By Indeed Editorial Team
Published 20 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When filing your tax return, knowing about retirement benefits, debt considerations and healthcare can help you calculate adjusted gross income or AGI. A salaried employee and a business professional require AGI calculation to keep track of their taxes to make financial decisions and pay taxes as per government regulations. Preparing for your tax deductions in advance can help you reduce your taxable income and increase your take-home salary at the end of the financial year.
In this article, we discuss what AGI is, learn how to calculate AGI, review some examples of calculating it and explore various terms that are useful in calculating AGI.
What Is Adjusted Gross Income?
Adjusted gross income refers to the gross income minus specific deductions offered by the Income Tax (IT) department. Calculating your AGI makes it easy to determine how much income is taxable after making these deductions. AGI is an important figure on the tax return because it helps the IT department identify how much taxes and what benefits and tax deductions you are eligible for. For AGI, amounts are deductible under sections 80CCC to 80U but not under section 80G. Calculating AGI is essential because it identifies your eligibility for tax deductions.
How To Calculate Your Adjusted Gross Income
AGI depends upon your gross income, including any financial earnings you accrue during a financial year. Calculating the AGI is essential for filing the income tax with the IT department. Use these steps to calculate the AGI:
1. Calculate your gross income
The calculation of gross income varies depending upon whether you are a salaried employee or business professional:
If you are employed, your employer may likely provide you with Form 16, which includes details about your gross income and other bonuses. You can include other benefits, such as incentives, overtime, gratuity, salary arrears, subsidised meal coupons and employer-paid utility bills. Add these to your gross income if you work in multiple jobs or have other incomes from rental property, interest income, capital gains or losses, alimony or bonds. You might find some of this information in Form 16A.
Self-employed professionals identify their gross income based on profits and financial gains. You can include business revenue generated from selling the company's shares or income you generate from selling property or surplus equipment, interest or fees. The total amount you earn from your business-related sources forms the gross income.
2. Identify the eligible deduction
The next step is identifying the eligible deductions under the income tax law. Some deductions under 80C are:
Life insurance premium paid
Payment for a deferred annuity
Contribution to provident fund
Contribution to an approved superannuation fund
Subscription to mutual funds
Contribution to notified pension funds
Subscription to equity shares or debentures
Subscriptions to mutual funds
Some deductions under section 80CCC are:
Contribution to pension scheme of Government of India (GOI)
Deduction of health insurance premium
Deduction of medical treatment
Deduction on interest for residential house property
You can claim only a specified amount under each deduction, some of which cannot exceed the maximum limit set by the IT department. Beyond that limit, you are not eligible to claim these deductions. The maximum deduction under 80C is ₹1,50,000. Apart from this deduction, you can claim deductions for short-term capital gains on shares and long-term capital gains. These deductions have restrictions, expense limits and minimum requirements. After identifying these deductions, add them up to calculate the total deductions.
3. Subtract your deductions from your gross income
After determining your total gross income and deductions, subtract deductions from total gross income to calculate your AGI. It is essential to convert your yearly gross income into monthly gross income to calculate AGI. To convert yearly income into monthly income, divide the yearly income by 12. Use the following formula for your calculations:
AGI = Gross income from all sources – Total deductions as per IT department
Examples of AGI
Here are some examples of AGI that you can use when calculating your AGI:
Here is an example of calculating AGI:
Reyansh, a school teacher, earns a yearly salary of ₹12,00,000 from his school. He contributes ₹7,000 to the provident fund, pays a life insurance premium of ₹5,000 and contributes ₹10,000 to notified pension funds.
Gross income of Reyansh: ₹12,00,000
Monthly gross income of Reyansh = 12,00,000 /12 = ₹1,00,000
Total deductions as per IT department: 7,000 + 5,000 + 10,000 = ₹22,000
AGI = 1,00,000 – 22,000
Here is another example of calculating AGI:
Sumit is a self-employed individual. He teaches tuition and earns a monthly income of ₹30,000. He pays a total of ₹10,000 in life and health insurance premiums. The total services reported is ₹45,000 per month.
Gross income = 45,000 + 30,000 = ₹75,000
Total deductions = ₹10,000
AGI = ₹75,000 – ₹10,000
Gross Income Vs AGI
Gross income or annual gross income is the total amount of money a person earns in a year before paying taxes. It refers to the gross pay or cost to the company (CTC). You earned the total salary package before reducing taxes and other deductions. The gross income is different from the take-home salary. For a business professional, you can calculate the gross income after subtracting the cost of goods sold (COGS) from the total sales revenue your business earned during the financial year. Often, individuals term gross income as gross profit or margin.
AGI is the part which is taxable. They are certain itemised deductions and exemption on an individual's tax that decreases the taxable income and ensures you pay less tax to the government.
Net Income Vs AGI
Net income is your take-home salary from your job. It is the amount you receive at the end of every month after paying the necessary taxes and other deductions. After calculating your gross income, you subtract taxes and deductions to determine your net income. AGI is your adjusted and qualified deductions permitted by the IT department. These deductions can help decrease the gross income, reducing the taxes you pay to the government.
Frequently Asked Questions (FAQs)
Some commonly asked FAQs about AGI are:
How can you lower your AGI?
You can lower your AGI by ensuring you take full advantage of the deductions offered by the IT department. Increasing your deductions to ₹1,50,000 and investing to ensure short-term and long-term capital gains can help you lower your AGI. One way to lower your AGI is by investing in shares and contributing to pension, provident and public provident funds. You can even buy or sell a new house to lower your taxable income.
What are some important terms and definitions in calculations of AGI?
Some standard terms to know while calculating AGI is:
Financial year: Financial year is the period between the current year's April 1st and the following year's March 31st. During this period, you collect relevant income documents and submit investment proofs for tax calculations.
Assessment year: When you assess the income of a certain financial year in the upcoming financial year, it is the assessment year. For instance, for the financial year 2021-2022, the assessment year is 2022-2023.
Deductions: Deductions refer to the total taxable income based on sections 80CCC to 80U and Chapter VI-A of the Income Tax Act. Some deductions can be an investment in life insurance policies, provident funds and payment of children's tuition fees.
Exemptions: It is a specific amount that you exclude from the gross income before calculating the tax and details of exemptions are available under Sections 54 and 10. The interest you earn from tax-free bonds and salary components like leave travel allowance are a few examples of exemptions.
Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.
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