What Is Annual Income? And How To Calculate Your Income
Calculating your annual income gives you a better understanding of your financial health, and you can determine it using simple calculations. Understanding and knowing how to calculate annual income can help salaried individuals prepare their budget, apply for a loan and prepare their tax return. A business person requires annual income calculation to keep track of their business expenses, make financial decisions and pay taxes. In this article, we explain what is annual income, explore the difference between gross and net income, determine how to calculate annual income and look at an example of annual income calculation.
What Is Annual Income Of An Individual?
Annual income is the total money you earn during one financial year before deducting applicable taxes. A fiscal or financial year is April 1st to March 31st of the next year. A majority of the annual income calculation relies on fiscal year calculation. Your annual income can include:
Salary, bonuses, commissions and overtime pay
Provident fund (PF)
House rental allowance (HRA)
Medical, transport and city compensatory allowance
Dearness allowance (DA)
Net income from operating a business or doing a second job
Dividends and interest
What Is A Company's Annual Income?
The annual income of a company is the total money it earns from its business operation during one financial year. You can calculate the annual income by adding the following components:
Income from selling products or services
Capital gains from selling the shares of the company
Income from selling surplus equipment or property of the company
Income from interest or fees levied on the company's intellectual property
Importance Of Annual Income
For individuals, annual income is important because banks and lending institutes require your annual income to become eligible for applying for a home, car or personal loan. Using your annual income, these financial institutes calculate whether you can repay their loan on time. For a business owner, the annual income helps measure the profit your business generates during a fiscal year. Your annual income helps understand other key financial indicators like profit margin and debt-to-income ratio, among others. These financial indicators provide an overview of your business's financial health and help you plan the expansion of your business.
What Does Annual Income Include?
Annual income may include a variety of incomes like:
Salary and employment income: It includes your salary, overtime pay and bonuses before any deduction. All the money you earn by completing your work throughout the year is a part of your annual income.
Capital gain and interest income: Capital gains refer to the revenue you generate from the assets you hold. This can include resale of properties, bonds, jewellery, stock, debenture or equities. Also, your annual income includes income you earn as interest from your savings bank account.
Rental income: Your annual income may include any rental income you collect from a property you own.
Business and profession income: Business and profession income includes the income you generate from self-employment or a business that you own. The income from self-employment comes as contracts or sales commissions.
Income from other sources: Income from other sources may include gifts received from family and friends, rental income from property other than house property and gifts earned by winning reality shows or TV programs.
Difference Between Gross Annual Income And Net Annual Income
Often, you hear the terms gross annual income or net annual income in place of annual income. While both gross income and net income are a type of yearly income, they are different in the following ways:
Gross annual income
Gross annual income is the income you receive during one fiscal year before taxes and deductions. Lenders and landlords often use this income to determine whether an individual is worthy of being a renter or borrower.
Net annual income
Net annual income is the income you receive after taxes and deductions. Your net income is the money available for living expenses. You can use your net income for paying utility bills, food, transportation and housing. In a business, net income is the profit a company earns during one fiscal year.
How To Calculate Annual Income
Use these steps to calculate your annual income:
1. List all your sources of income
The first step involves identifying and listing all sources from where you are earning an income. It may be from your full-time job or a freelance project you worked during weekends or your interest income. Be sure to mention how much you earn from each source.
2. Add your yearly income
In the next step, add all the income you earned in one full year from April 1st to March 31st. For example, if you earn ₹9,000 from interest payments yearly, ₹5,00,000 per year working as a full-time employee and ₹10,000 from capital gains during a fiscal year, you can add these figures.
Yearly income = ₹5,00,000 + ₹9,000 + ₹10,000 = ₹5,19,000
3. Add all your monthly income
Any income you receive monthly, but you are still to reach a full year of income, requires you to find the estimated annual income.
Estimated yearly income = Monthly income × 12
You multiply by 12 because there are twelve months in a year.
For example, if you earn ₹2,000 per month from a part-time job and receive ₹10,000 as house rent, add these two figures and multiply by 12.
Estimated yearly income = (2,000 + 10,000) × 12 = ₹ 1,44,000
4. Calculate the annual income
The last step is adding your monthly and yearly income calculations together to get annual income.
For example, using the above examples, add your yearly and monthly income.
Annual income = ₹5,19,000 + ₹1,44,000 = ₹6,63,000
As this annual income is before reducing taxes and deductions, it is the same as gross annual income
How To Calculate The Net Annual Income
Follow these steps to calculate the net annual income:
1. Determine your gross annual income
Using the steps above, calculate your annual income or gross annual income by adding all sources from where you earn money. Always report this figure for one fiscal year.
2. Subtract deductions other than income tax
The next step is to reduce any deductions like professional or corporate tax and contribution to Public Provident Fund (PPF) on your gross income. This becomes your taxable income.
Taxable income = Gross annual income – Professional tax – PPF – other deductions
3. Deduct the income tax
After finding your taxable income for a fiscal year, based on the tax slab under which your income falls, make income tax reductions. The income tax slab rates vary depending upon your taxable income. The Income Tax Department of India decides the tax slabs.
Net annual income = Taxable income – Income tax
Annual Income Calculation Example
Here is an example of how to calculate your gross and net annual income:
Samarthya earns ₹7,50,000 per year working as a mechanical engineer. He works as a freelance technical writer during weekends and gets ₹ 25,000 per month for his contribution. Samarthya recently won an online quiz show, earning ₹ 1,00,000 as prize money. He has made investments in the bank that fetches him ₹20,000 per year as interest payment. If his annual income is taxable at 20% and pays ₹400 professional tax each month and contributes ₹3,500 per month towards PPF, what is his gross and net annual income? (Assume that there is no other deduction).
Yearly income = ₹7,50,000
Freelance income per month = ₹25,000
So, freelance income per year = ₹25,000 × 12 = ₹3,00,000
One-time earning from quiz show = ₹1,00,000
Yearly earning from interest payments = ₹20,000
Annual income or gross annual income = Yearly income + yearly freelance income + one-time earning + yearly interest payments
Annual income or gross annual income = 7,50,000 + 3,00,000 + 1,00,000 + 20,000 = ₹11,70,000
Now, to calculate net income, find the taxable income.
Professional tax per month = ₹400
Professional tax per year = ₹400 × 12 = ₹4,800
PPF contribution per month = ₹3,500
PPF contribution per year = ₹3,500 × 12 = ₹42,000
Taxable income = Gross annual income – professional tax – PPF – other deductions
Taxable income = 11,70,000 – 4,800 – 42,000 = ₹ 1,23,200
Income tax = 20% of ₹ 11,23,200 = ₹ 2,24,640
Net annual income = Taxable income – Income tax
Net annual income = 11,23,200 – 2,24,640 = ₹8,98,560
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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