Basics of Income Tax for Beginners
A person ticks off numerous milestones throughout his lifetime. Common ones include graduation, first job, wedding, family, etc. Apart from these, another significant milestone that most of us tend to come across is paying off income tax for the very first time.
As soon as the income tax return filing date steps closer, people somehow get a tad conscious as many deem it to be a little daunting task. And if you are a first-time taxpayer, it may even seem like a nightmare to you.
Thus, for all such taxpayers who look forward to filing the tax for the first time, we have jotted down the basics of income tax in this segment, which shall help you do the groundwork.
From basic income tax knowledge to understanding income tax in India, get yourself oriented with all the significant terminologies to learn income tax basics easily with our informative guide to income tax for beginners.
What are ‘Financial Year’ and ‘Assessment Year’?
To understand how to file income tax return, it is first necessary to know the primary difference between the financial year and the assessment year:-
-
Financial Year
The Financial Year is also called the Previous Year. It is the 12 months cycle that begins in April and ends in March of the next year. Irrespective of your employment start date, the tax year is fixed from April to March.
Understand this with an example,
Assume you joined a company on October 22, 2021. Your first tax year would be April 2021 to March 2022. You will be taxed on your income from October 22, 2021, until March 31, 2022.
Thus, the tax year or financial year is the year for which the tax is paid.
-
Assessment Year
The assessment year is the year after the previous year. In simple words, it is the year in which you will file your return in the prior year.
So, considering the example mentioned earlier, your previous year or tax year was 2021-22. Thus, your assessment year will be 2022-23, as you will be filing your income tax return between April 1, 2021, and September 30, 2022 (generally).
| Financial Year | Assessment Year |
| The year in which you earn the total income | The income you earn in the financial year can be taxed in the assessment year. |
Understand Your Salary Component
It is quite essential to understand your entire salary structure on the basis of which you are supposed to file your income tax return. Your salary slip consists of all the information, such as your basic salary, house rent allowance, special allowance, etc., based on your salary structure and the company’s policy.
It also contains details regarding tax deducted, professional tax, employee provident fund, etc. The difference between these two is what gets credited to your bank account as salary.
Note you can use a salary calculator, too, while assessing your salary.
Income on Which Tax Needs to be Paid
Along with your salary, as an individual, you will be entitled to some interest income generated from your savings or deposits with banks and other similar institutions.
The sources of income on which you will be paying taxes can be split into the following –
- Salary Income – This includes your salary, allowances, leave encashment, and another cash component that you may receive for rendering your services to an organization.
- Income from House Property – This includes any income you may generate from renting an owned property.
- Income from Capital Gain – Under this head, all the income that arises from transactions in capital assets such as shares/mutual funds are included.
- Income from Business or Profession – If you are conducting any business or profession along with your job, then the income from such activity will be your income from business or profession.
- Income from Other Sources – This includes interest income in a savings account or interest income from deposits with the bank, gifts, etc.
Deductions
A deduction can be considered a tax benefit that can be used to decrease your taxable income. A deduction is an amount that Income Tax Department allows you to diminish your Income, which ultimately reduces your tax liability.
It can be calculated as –
Sum of all income = Gross income
Gross Income – Deductions = Taxable Income
Thus, higher is your deduction; lower is your tax liability. Deductions are allowed under section 80 (Section 80C to 80U) of the Income Tax Act.
Tax Exemptions
You can call tax exemptions those monetary exclusions that can assist in reducing your taxable income.
Such exemptions help you avail tax reliefs, reduce tax rates or even ensure that tax is applicable on specific parts of your income only.
Understand this with an example,
Suppose you pay rent for your house. Now, you can avail yourself of an exemption on your House Rent Allowance (HRA) which is mainly calculated according to your salary. So, while calculating your taxable income, a particular portion of your HRA gets exempted from the gross income.
80C Is Your Best Friend
Under section 80C, you can reduce up to an amount of Rs 1,50,000 from your gross income. The commonly used investment vehicles under section 80C are –
- Public Provident Fund
- Employee Provident Fund
- Tax saving fixed deposit
- Equity-linked savings scheme
- Insurance premium
Tax Deducted at Source (TDS)
Tax Deducted at Source is the tax amount that is deducted and deposited on the taxpayer’s behalf by the employer with the Income Tax Department. TDS is calculated by the employer based on estimated Income tax as suggested by the employee.
The rate at which tax is deducted is dependent on the income tax slab you belong to.
Similarly, interest earned on fixed deposits is also liable for TDS. Typically, the banks deduct 10% of the interest income as TDS as they are not aware of your tax slab. However, the bank will not deduct any tax provided Form No. 15H/15G (as the case may be) is submitted to the bank by the depositor.
However, if you have mentioned your Permanent Account Number (PAN), the bank may deduct 20% of the income as well.
It is a significant element in the income tax filing procedure as it is a measurement technique that the Income Tax Department imposes to secure payment of taxes within the due time frame.
Advance Tax
Advance Tax is the sum of income tax that is paid in much advance instead of a lump-sum payment at the time of filing the ITR. This is paid mainly by businessmen and professionals.
The due dates for paying these tax instalments are fixed by the Income Tax Department of India. The dates and tax rates are mentioned below-
- On or Before 15th June: 15%
- On or Before 15th September: 45%
- On or Before 15th December: 75%
- On or Before 15th March: 100%
Self-assessment Tax
Self-assessment tax is the balance tax that is supposed to be paid by the taxpayer on his assessed income after advance tax and TDS have been taken into account before filing the return of income.
Categories of Tax Payers
- Residents and non-residents (below 60 years of age)
- Senior citizens (60 and above years but below 80 years of age)
- Resident super senior citizens (above 80 years of age)
Calculating Tax Payable
Once your taxable income is known, you will be able to compute the tax that needs to be paid.
|
Income Slab |
Old Tax Regime |
tax Regime (New until 31st March 2023) |
New Tax Regime (From 1st April 2023) |
|
Rs 0 - Rs 2,50,000 |
- |
- |
- |
|
Rs 2,50,000 - Rs 3,00,000 |
5% |
5% |
- |
|
Rs 3,00,000 - Rs 5,00,000 |
5% |
5% |
5% |
|
Rs 5,00,000 - Rs 6,00,000 |
20% |
10% |
5% |
|
Rs 6,00,000 - Rs 7,50,000 |
20% |
10% |
10% |
|
Rs 7,50,000 - Rs 9,00,000 |
20% |
15% |
10% |
|
Rs 9,00,000 - Rs 10,00,000 |
20% |
15% |
15% |
|
Rs 10,00,000 - Rs 12,00,000 |
30% |
20% |
15% |
|
Rs 12,00,000 - Rs 12,50,000 |
30% |
20% |
20% |
|
Rs 12,50,000 - Rs 15,00,000 |
30% |
25% |
20% |
|
>Rs 15,00,000 |
30% |
30% |
30% |
Note, 4% will be levied as Health and Education Cess on income tax amount computed on taxable income.
Once your final tax is computed, you are required to subtract the TDS from the tax liability.
Tax to be Paid = Tax Liability – TDS
Thus, the remaining amount after deducting TDS from tax liability needs to be paid to the Income Tax Department while filing returns.
Documents Required to File Income Tax (ITR) in India
If you are filing the income tax return online, there is a set of documents that you need to fill out and submit. The documents may vary according to the source of income. The documents are-
- Salaried Individual– Form 16, 16A, 26AS, Receipt of Rent for HRA, Payslips, Investment made under Section 80C, 80D, 80E, and 80G.
- Capital Gains– ELSS, SIPs, Mutual Fund statement, Debt fund, sale and purchase of Equity Funds. Purchase/selling price, details of capital gains, details of registration if any house property is sold. A Statement of capital gains through selling shares and stock trading.
- House Property– PAN Card details, Property address, Information of co-owner, Certificate of Home Loan interest.
- Other Sources- Bank details, information of interest received from tax-saving or corporate bonds.
Note on Standard Deduction
A standard deduction of Rs.50,000 is available from gross total income. You can claim this tax benefit irrespective of the amount spent on Transport and Medical Allowance.
The tedious process of income tax return filing and claiming deductions has now become much more simplified with the introduction of e-filing. So, being a responsible citizen of India, make sure you fulfil your obligation and file your returns within the due period.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.