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An Overview of Income Tax Basics for Beginners

A significant moment in every citizen's life is the first time they pay income taxes. However, for someone who has never done it before, the process could appear overly difficult and time-consuming, and some of the phrases might seem unfamiliar. Do not worry; Corpbiz is here to provide a compilation of income tax basics for beginners to assist you in understanding the tax implications of your income.

What do the terms "financial year" and "assessment year" mean?

It is first required to be aware of the key distinction between the financial year and the assessment year in order to comprehend how to file an income tax return:

Financial Year

The previous year is another name for the financial year. It is the 12-month period that runs from April to March of the following year. The tax year runs from April to March, regardless of when you begin working.

Assessment Year

The assessment year follows the preceding year. Simply put, it is the year in which you will submit your prior-year return.

Know Your Salary Component

Understanding your full compensation structure, which is the basis for which you must file your income tax return, is very important. Based on your pay structure and the policies of the organisation, your pay cheque slip contains all the information, including your basic salary, housing rent allowance, special allowance, etc.

Additionally, it includes information on taxes deducted, professional taxes, employee provident funds, and more. What is credited to your bank account as salary varies between these two.

Income that is subject to Tax

You will be entitled to some interest income from your savings/deposits with banks and other such institutions in addition to your wage. The following categories best describe the types of income you will be taxed on:

1. Salary Income

This category includes basic pay, annuities, advances, allowances, travel expenses, perquisites, and retirement perks, among others, as well as additional payments you receive from your employer in the form of salary. Your post-exemption gross wage is the sum of all of them. You may find all the information concerning your income from salary in Form 16, column 6.

2. Rental income

The legal term for this type of income is "Income from House Property." This includes any rent that you earn from residential or commercial property that you own.

3. Occupational and Business Income

Your income in the form of wages or profits will be taxed under this category whether you are a business owner, salaried professional, or independent contractor. Here, your expenses will be subtracted to determine your taxable income.

4. Capital gains 

Income Gain from the sale of a capital asset kept as an investment, such as real estate, jewellery, company shares, bonds, etc., is referred to as income under this heading. Gift-acquired assets, such as inheritances, are not counted in this category unless they are sold.

5. Revenue from unrelated sources

Income from other sources is any money earned that is not part of the aforementioned four categories. Both types of income can be recurring, such as interest (acquired from post office savings, bank deposits, savings bank deposits, and recurring deposits), and non-recurring, such as revenue from the lottery, game shows, or gambling, is money that is only received once.

Deductions

You might think of a deduction as a tax break that you can use to lower your taxable income. A deduction is a sum that the Income Tax Department (ITD) permits you to deduct from your income, thus lowering your tax obligation.

You can compute it as -

Sum of all income = Gross income

Gross Income – Deductions = Taxable Income

Therefore, if your deduction is bigger, your tax burden will be smaller. The tax regulations permit deductions that can be subtracted from gross income in light of the financial burden a taxpayer must face to secure the future of his family, pay for medical and educational costs, and provide for the family. Therefore, your net taxable income equals your gross income less any deductions. Section 80 of the Income Tax Act lists several deductions (Section 80C to 80U).

These deductions include, among others:

  • Section 80C: Investment deductions up to Rs. 1.5 lakh. To put it another way, you can subtract this amount from your gross income to determine your net taxable income.
  • Section 80CCC: Insurance premiums paid to service an annuity are deductible.
  • Section 80CCD: A tax deduction for the pension contribution. This cannot be more than 20% of your total income or 10% of your compensation.
  • Section 80TTA: Interest on savings account deductions.
  • Section 80GG: The deduction for dwelling rent paid when no HRA is available.
  • Section 80E and 80EE: Interest paid on student loans and mortgages is deductible.
  • Section 80CCG: A tax deduction for Rajiv Gandhi Equity Savings Scheme investments (RGESS).
  • Sections 80D, 80DD, and 80DDB: Medical insurance deductions, medical expenses, and rehabilitation of people with disabilities.
  • Section 80 G- Deduction for donations to qualified charities, political parties, and other entities.
  • Section 80TTB: Interest income deductions.
  • Section 80RRB: Royalty deductions for patents.

What does "Standard Deduction" mean?

There is a Rs. 50,000 standard deduction available from gross income. No matter how much you spend on transportation and medical expenses, you are still eligible to claim this tax benefit.

With the advent of e-filing, the laborious procedure of preparing an income tax return and claiming deductions has now been greatly simplified. So, as a responsible Indian citizen, make sure you fulfil your duty and submit your returns on time.

Tax Exemptions

Tax exemptions are those monetary exclusions that help to lower your taxable income. These exemptions assist you in receiving tax breaks, lowering tax rates, or even limiting the application of Tax to a portion of your income exclusively.

Tax Deducted at Source (TDS)

Tax Deducted at Source or TDS is the amount of Tax that is withheld and deposited by the employer with ITD or the Income Tax Department on behalf of the taxpayer. The employer determines TDS based on the estimated income tax provided by the employee.

Depending on the income tax bracket you fall under, different amounts of Tax are subtracted.

In a similar manner, TDS is also applicable to interest on fixed deposits.

Since the banks are unaware of your tax bracket, they typically deduct 10% of the interest revenue as TDS. However, if the depositor provides the bank with Form No. 15H/15G (as applicable), the bank will not deduct any taxes.

However, if you have provided the bank with your Permanent Account Number (PAN), they may also withhold 20% of your income.

It is an important component of the income tax filing process since it is a measurement tool used by the Income Tax Department to ensure that taxes are paid on time.

Advance Tax 

Advance Tax is the amount of Income Tax (IT) that is paid in instalments rather than in one big sum when the ITR is filed. Businessmen and professionals are the main payers of this. The Income Tax Department of India sets the due dates for these tax instalment payments.

The following dates and tax rates are listed:

  • On or Before June 15: 15%
  • On or Before September 15: 45%
  • On or Before December 15: 75%
  • On or Before March 15: 100%

Self-Assessment Tax

Self-assessment tax is the remaining amount of Tax that must be paid by the taxpayer on his assessed income before submitting an income tax return after advance Tax and TDS have been deducted.

Different Types of Taxpayers

  • Residents & non-residents (below 60 years of age).
  • Senior citizens (60 & above years but below 80 years of age).
  • Super senior citizens (above 80 years of age).

Tax Payable Calculation

You will be able to determine the amount of Tax that must be paid after you are aware of your taxable income.

Income Tax Slab

New Regime Income Tax Slab Rates FY 2021-22

(Applicable for All Individuals & HUF)

Rs 0.0 – Rs 2.5 lakh

NIL

Rs 2.5 lakh – Rs 3.00 lakh

5% (tax rebate u/s 87a is available)

Rs 3.00 lakh – Rs 5.00 lakh

Rs 5.00 lakh- Rs 7.5 lakh

10%

Rs 7.5 lakh – Rs 10.00 lakh

15%

Rs 10.00 lakhs – Rs 12.50 lakh

20%

Rs 12.5 lakhs – Rs 15.00 lakh

25%

> Rs 15 lakh

30%

 

Note that 4% of the income tax amount calculated on taxable income will be added as a Health and Education Cess.

The TDS must be subtracted from the tax liability after your final tax calculation.

Tax to be paid = Tax Liability – TDS

The remaining sum must be paid to the Income Tax Department when submitting returns after subtracting TDS from the tax burden.

Income Tax (ITR) Filing in India: Required Documents

There are several forms that you must fill out and send if you are submitting your income tax return online. Depending on the source of income, the paperwork could change. The documents include:

Salaried Individuals

Forms 16, 16A, 26AS, receipts of rent for HRA, payslips, and investments made in accordance with Sections 80C, 80D, 80E, and 80G for salaried individuals.

Capital Gains

Gains from ELSS, SIPs, Mutual Fund statements, Debt Funds, and the sale and purchase of Equity Funds are all capital gains. Price of purchase or sale, information on capital gains, and registration information if any real estate is sold. A statement of capital gains from stock trading and share sales.

Household Property

PAN Card Information, Property Address, Co-Owner Information, and Interest Certificate for Home Loan.

Other Sources

Other sources include bank details and information on interest paid through tax-saving or business bonds.

Frequently Asked Questions

A tax on your income is one that the government imposes. The primary source of funding for the government's operations and provision of public services is the income tax.

Corporate Tax is the term typically used to describe taxes paid by corporations under the Income Tax Act.

The Central Board of Direct Taxes (CBDT), through the Income Tax Department, oversees administering the direct tax legislation while also providing crucial inputs for policy and planning regarding direct taxes in India.

A lot of factors determine whether you must file your income tax return or not. One such fundamental need is that you must file an ITR if your income for a Financial Year exceeds Rs. 2,50,000.

According to the Income Tax Act, some payments, such as salaries and interest, require the payer to withhold Tax from the payment, a practice known as Tax Deducted at Source. At the conclusion, TDS is adjusted to reflect taxes due at the time of final income computation.

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