Net income

Net Income is the income that remains after deducting all allowable expenses from an individual’s or business’s gross income. It represents the actual amount on which income tax is calculated.

Formula:

Net Income = Gross Income – Allowable Deductions

Components:

1. Gross Income: All earnings before deductions, such as salaries, business income, rental income, interest, dividends, and capital gains.
2. Allowable Deductions: Expenses permitted by the government, like business or professional costs, investment-related expenses, retirement contributions, and depreciation.

Importance: Net income shows true financial performance, ensures fair taxation, and forms the basis for computing tax liability.

Example: A self-employed person earns ₹10,00,000 and has ₹3,00,000 in business expenses. Their net income is ₹10,00,000 – ₹3,00,000 = ₹7,00,000. Tax is calculated on ₹7,00,000, not the full ₹10,00,000.