UNDERSTANDING INCOME TAX: A BEGINNER’S GUIDE
For every person, paying their first income tax is a significant occasion. For a novice, though, the procedure may appear overly complicated and laborious, and some of the jargon may be completely unfamiliar. This is not necessary. Here is a summary of the fundamentals of income tax for beginners to help you understand the tax implications of your income (depending on your source of income).
INCOME TAX?
Income tax is a tax levied by the government on the income earned by individuals and businesses. In India, this tax is governed by the Income Tax Act, 1961. The revenue collected from income tax is used for various public services, infrastructure development, and other government activities.
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Basically, income tax returns must be filed by everybody who receives money. We’re going to give you an overview of the fundamentals of income tax today, which should help you go into your work with confi
WHAT IS ‘PREVIOUS YEAR’?
The previous year, also known as the fiscal year or your tax year, is the twelve-month period that starts on April 1 and ends on March 31 of the following year. Your tax year ends on March 31st, regardless of when you started working, and a new one begins on April 1st. Planning your taxes for each fiscal year is crucial.
ASSESSMENT
You’ll hear this phrase frequently in connection with filing taxes. The fiscal year following the preceding year is when you will “evaluate” and submit your prior year’s tax return. Therefore, the assessment year for the prior year, 2018–19, is 2019–20. The year when you file your prior year’s tax return is known as the assessment year. For example, your tax year ends on March 31, 2023, if you begin working on January 1, 2023. Your AY is 2023–24, while your prior year was 2022–23.
LET’S UNDERSTAND YOUR SALARY
Get your salary data, pay stub, and tax statement as soon as possible after starting work by contacting your payroll or HR department. This will give you an idea of the main components of your pay and the amount of tax that will be withheld from it.
Example: If you live on rent, you can save tax on the House Rent Allowance (HRA), which is provided by most firms.
SOURCES OF INCOME ON WHICH YOU HAVE TO PAY TAX
| Sources of Income | Particulars |
|---|---|
| Income from Salary | Salary, Allowances, Leave encashment all the money you receive while rendering your job as a result of your employment agreement |
| Income from House Property | Income from the house or building may be owned and self-occupied or may be rented |
| Income from Capital Gain | Income from gain or loss when you sell a capital asset |
| Income from Business or Profession | Income/loss that arises as a result of carrying on a business or profession |
| Income from Other Sources | This is the residual head – includes your income from savings bank accounts, fixed deposits, family pension or gifts received |
GETTING INTO DEDUCTIONS
Takeouts lower your gross income. These are the maximum reductions in income that the Income Tax Department permits, lowering your tax obligation.
Total of All Income Heads = Gross Income
Net Income – Subtracted Taxes = Refundable Income
The more you utilise the permitted deductions, the less tax you will owe. Section 80 of the Income Tax Act permits deductions (Section 80C to 80U).
The government did, however, establish the previous tax system and the new tax system in India in 2020. Under the previous and current tax regimes, the percentage of income tax that you pay on your whole income is different. To learn more about the previous and current tax systems, click this link.
All deductions under Sections 80C to 80U of the previous tax code were permitted, subject to certain restrictions. However, under the new tax law, only the Section 24B deduction for let-out property and the employer’s NPS contribution deduction are allowed.
DEDUCTIONS UNDER SECTION 80C
You may deduct INR 1,50,000 from your gross income under Section 80C. Some of the popular investment instruments within this division are listed below.
PPF:
Deposits into Public Provident Funds, or PPFs, are among the most common deductions under Section 80C. You must deposit a minimum of INR 500 and a maximum of INR 1,50,000 when opening a PPF account each year. When you add more money to your PPF account in the ensuing fiscal years to be eligible for deductions, the money you deposit accumulates. PPF is a reliable and conventional way to save money that you have worked so hard to get. Opening a PPF account with a bank is simple.
Tax-saving FD:
Investors can be guaranteed both capital protection and a substantial interest income with fixed deposits. It takes at least five years of investment to qualify for the tax benefits under Section 80C. Although the interest income from it is taxable, it is safe.
Tax saving mutual funds or ELSS:
The Equity Linked Savings Scheme (ELSS), one of the only mutual fund plans permitted under Section 80C, is becoming more well-known among investors due to its recent history of superior performance. The shortest lock-in period of three years is another benefit of ELSS.
TDS (Tax Deducted at Source):
Tax Deducted at Source, or TDS indicates that the payer deducts the applicable tax. The amount of tax that must be withheld by the payer is determined by the guidelines set forth by the income tax department. For example, if an employee’s taxable income exceeds INR 2,50,000, the employer will estimate the employee’s total annual income and deduct tax. Each year, taxes are withheld according to your tax slab. In a similar vein, the bank deducts TDS if you get interest on a fixed deposit. Generally, the bank will deduct 10% TDS because they are unaware of your tax slabs; but, if you haven’t specified your PAN, they may deduct 20% TDS.
DOCUMENTS REQUIRED TO FILE INCOME TAX RETURNS
A lot of paperwork needs to be prepared before the Income Tax Return (ITR) can be filed. As mentioned below, these documents differ according on the source of income:
- Paystubs, investments made under Sections 80C, 80E, 80D, and 80G, Form 16/16A, 26AS, and rent receipt for HRA are all required for salaried individuals.
- Capital gains include the sale and purchase of debt and equity funds, the ELSS statement, the mutual fund statement, the price paid for the purchase or sale of real estate, the registration information for any sold real estate, and the capital gains statement that details share sales and stock trading.
- Home property includes the address, PAN card information, co-owner information, and interest certificate from the home loan.
- Additional sources: information on bank foreign exchange and interest income from business or tax-saving bonds.
FAQs
1. Who needs to pay income tax in India?
Anyone earning an income above the basic exemption limit needs to pay income tax. This includes salaried individuals, self-employed professionals, businesses, and pensioners.
2. What are the basic exemption limits?
For the Financial Year 2023-24:
- Individuals below 60 years: ₹2,50,000
- Senior Citizens (60-80 years): ₹3,00,000
- Super Senior Citizens (above 80 years): ₹5,00,000
3. What are the different heads of income?
The five heads of income are:
- Income from Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Income from Capital Gains
- Income from Other Sources
4. What is the difference between the old and new tax regimes?
The old tax regime allows various deductions and exemptions, while the new tax regime offers lower tax rates but without most deductions and exemptions.
5. How do I choose between the old and new tax regimes?
You should calculate your tax liability under both regimes and choose the one that results in lower tax liability. The new regime may benefit those with fewer investments and deductions.
6. What are some common deductions available under the old tax regime?
- Section 80C: Investments in PPF, EPF, NSC, life insurance premiums, etc.
- Section 80D: Health insurance premiums.
- Section 24: Home loan interest.
- Section 80E: Education loan interest.
7. How do I file my income tax return?
You can file your ITR online through the Income Tax Department’s e-filing portal. Gather necessary documents, choose the appropriate ITR form, fill in the details, and submit your return. Verify your return electronically or by sending a physical copy to the CPC.