Income Tax For Beginners

This article about the basics of income tax for beginners will help every taxpayer, whether you have just started paying income tax or have been filing for a long time. Paying your income tax for the first time is a big step for any citizen. But it can feel overwhelming and confusing especially with all the unfamiliar terms. Don't worry, it doesn't have to be that way. To make things easier here's a simple guide to help you understand what income tax means for you based on where your income comes from.

What is ‘Previous year in income tax?

The tax year also known as the financial year runs from April 1st to March 31st of the following year. No matter when you start working, your taxes for the year end on March 31st and a new tax year begins on April 1st. This means it's crucial to plan your taxes for each year during this time frame.

What is Assessment Year in income tax?

The assessment year is the period when you file your tax return for the income you earned in the previous year. For example, if you start a job on January 1, 2023, your tax year ends on March 31, 2023. The year you earned income in this case, 2022-23 is the previous year and the year you file your tax return which is 2023-24 is the assessment year.

Understanding your Salary

When you start a job, contact your payroll or HR department to get your salary details, pay slip and tax statement. This will give you an understanding of the main parts of your salary and how much tax will be taken out. For instance, many companies provide House Rent Allowance, which can help you save on taxes if you're renting a place to live.

Income on which you pay Tax

Apart from the salary you earn, you might also have income from other sources. Your total income is the combination of all these different sources of income.

What are Deductions?

Deductions are like discounts on your income that the Income Tax Department allows reducing your overall tax burden. Your total income is made up of various sources and after deducting these allowed amounts you get your taxable income. The more deductions you use the less tax you pay.

There are different tax regimes old and new. Under the old regime you can apply various deductions listed in Sections 80C to 80U of the Income Tax Act provided you meet certain conditions. However, the new regime has fewer deductions available. Only deductions for let out property under Section 24B and the employer's contribution to NPS are allowed under the new regime.
 

Deductions Under Section 80C

Section 80C lets you deduct up to INR 1,50,000 from your total income. Here are some popular options:

PPF: You can deposit money into a PPF account starting from INR 500 up to INR 1,50,000 per year. The money you deposit grows over time and you can claim deductions on it. PPF is a safe way to save money and you can open an account easily with a bank.

Tax saving FD: Fixed deposits offer security for your capital and provide interest income. To get tax benefits under 80C, you must invest for at least 5 years. However, the interest income earned is taxable.

Tax saving mutual funds or ELSS: ELSS is a type of mutual fund that allows you to invest under 80C. It has gained popularity for its good performance in recent years and has a shorter lock in period of 3 years compared to other options.
 

What is TDS or Tax deducted at source?

TDS or Tax Deducted at Source means that tax is taken out of your income before you receive it. For example, if you work for a company they'll estimate your yearly income and deduct tax if it's over INR 2,50,000. This tax deduction is based on the tax rate you fall into. Similarly, if you earn interest from a Fixed Deposit, the bank will also take out TDS. Usually, they deduct 10% but if you haven't given your PAN number they might deduct 20%.

Calculating Tax Payable

When calculating your tax different tax rates are applied to your taxable income. After calculating the tax you owe, you can subtract any TDS already deducted from your income.

Standard Deduction

Starting from the Budget of 2018, salaried employees can claim a standard deduction of Rs. 40,000 from their gross salary. This replaces the previous benefits of medical reimbursement (INR 15,000) and transport allowance (INR 19,200) giving an extra tax exemption of INR 5,800. From the Financial Year 2019-20, this standard deduction was increased to Rs. 50,000. As of the Financial Year 2023-2024 this Rs. 50,000 deduction is available under both the old and new tax systems.

Rohit is a 25 year old software engineer living in Mumbai. He recently started his first job and is enjoying his newfound financial freedom. He doesn't know much about taxes or saving money yet. However, as January comes to a close he overhears his friends discussing Section 80C and how it helps them pay less tax. Rohit earns Rs 6,60,000 per year.

Rohit’s HRA exemption

Documents Required to File Income Tax Returns

Documents required for filing Income Tax Returns vary based on income sources:

Salaried Individual: Form 16/16A, 26AS, rent receipts for HRA, payslips and proof of investments under Sections 80C, 80D, 80E and 80G.

Capital Gains: Records of equity/debt fund transactions, ELSS and mutual fund statements, property purchase/sale details including registration and statements showing shares and stock trading.

House Property: PAN card details, property address, co owner information and home loan interest certificate.

Other Sosurce: Bank FD details and interest received from tax saving or corporate bonds.

These documents are essential for accurate and hassle free filing of the Income Tax Return.
 

Note on Standard Deduction

You can benefit from a standard deduction of Rs. 50,000 from your total income regardless of how much you spend on Transport and Medical Allowance. Filing your income tax return has become easier with e filing, making the process simpler and more convenient. As a responsible citizen of India make sure to fulfill your obligation by filing your returns on time.

Categories of Taxpayers

There are three types of taxpayers based on age:

1. Regular taxpayers: Below 60 years old, can be residents or non residents.
2. Senior citizens: Aged between 60 and 80 years old.
3. Super senior citizens: Above 80 years old.
 

What are Income Tax Slabs?

What are Income Tax Returns?

An Income Tax Return is a form that you need to fill out and submit to the Income Tax Department of India. This form includes details about your income and the taxes you owe for a specific period which is a financial year running from April 1st to March 31st of the following year.

Conclusion

Everyone needs to grasp the basics of income tax to navigate India's tax system. Understanding things like different types of taxes, tax rates and how to file your tax returns is crucial. This knowledge isn't just useful for people in India but also for those living abroad.