Beginner’s Guide on Income Tax: What Every Taxpayer Must Know
Updated: Oct 22
People seem to become a little more aware of the approaching income tax return filing deadline because they perceive it as a somewhat intimidating undertaking. In addition, it might even appear like a nightmare to you if you are a first-time taxpayer. Therefore, this guide has outlined the fundamentals of income tax. Also, it will assist all such people who are eager to file their taxes for the first time. This article will help beginners to master the fundamentals of income tax.
Table of content
Tax Basics for Beginners
Are you seeking employment after graduating from college? Or are you going to file the returns for income taxes for the first time having already landed the job? You need to know the basics if the specifics of income tax and investing are confusing to you. Let us explain these concepts in detail.
Financial Year
The Financial Year is also referred to as the Previous Year. The cycle lasts 12 months, starting in April and ending in March of the following year. The tax year runs from April to March, regardless of when you started working for a company. For instance, suppose you started working for a company on October 22, 2021. April 2021 through March 2022 would be your first tax year. Your income will be subject to taxation between October 22, 2021, and March 31, 2022. As a result, the year during which taxes are paid is known as the tax year or financial year.
Assessment Year
This phrase is frequently heard in relation to the filing of taxes. The fiscal year following the preceding year is when you will "evaluate" and provide your previous year's tax return. Thus, for the prior year 2018–19, the assessment year is 2019–20. The year when you file your earlier year's tax return is considered the assessment year. For example, if your employment begins on January 1, 2024, and your tax year ends on March 31, 2024, then your prior year is 2023–2024 and your AY is 2024–2025.
Salary Components
You need to obtain your pay slip, salary data, and tax statement as soon as possible after beginning work by contacting your payroll or HR department. This will provide you with an idea of the significant components of your pay and the amount of tax that will be withheld from it. For example, you can save tax if you live on rent on the House Rent Allowance (HRA), which is provided by most firms.
Sources of income
In addition to your salary, you might have income from a number of additional sources. The total of all the revenue heads shown below is your total income.
Income from Salary: Pay, benefits, encashment of leaves, gratuities, pensions—basically, all the money you get as a result of your employment contract while doing your duties
Income from House Property: Income from a home or structure, which might be rented out or owned and occupied
Income from Business or Profession: Income or loss derived from operating a business or practicing a profession
Income from Capital Gain: Profit or loss on the sale of a capital asset
Income from Other Sources: The income from savings bank accounts, fixed deposits, family pensions, and gifts is included in this residual head.
Net Taxable Income
Here's how to calculate your taxable income and tax amount now that you understand which components of your compensation are taxable.
Your gross wage is the total of the various components of your pay. All of the allowances are added to your base pay to achieve this.
After that, subtract the non-taxable half of allowances that are partially taxable, including LTA and HRA. Use the calculation provided by the Income Tax Department to determine the HRA exemption. According to the formula, the exemption ought to be the smallest of the subsequent amounts: The actual HRA that was obtained, actual monthly rent less 10% of base pay, or base pay plus 50% of actual rent (or 40% in the case of non-metro inhabitants)
At this point, professional tax and the standard salary deduction must also be taken out. The standard deduction for salaried individuals is ₹ 52,500.
Include any additional money you receive in addition to your wage. This covers capital gains, rental income, commissions, fees, and interest, among other things.
Your final figure is referred to as gross total income. You must now determine your net taxable income in order to determine your tax liability. In order to accomplish this, the gross taxable income is subtracted from the tax deductions.
Income Tax Slabs and Rates
People are needed to pay the tax rate that matches the income tax income slab that they are in. Individuals who earn less than Rs. 2,50,000 within a fiscal year are exempt from paying taxes. Both the old and new tax regimes have different tax rates, which range from 5% to 30%. The income tax slabs and corresponding tax rates are listed below:
Old Tax Regime
New Tax Regime
Age relaxation is available only in the old regime.
Income Tax Deductions
Your Gross Income is lessened by deductions. These are the maximum reductions in income that the Income Tax Department allows, thereby reducing your tax obligation.
Net Income Heads = Gross Income
Taxable Income = Taxable Income – Deductions
The more you make use of the allowed deductions, the less tax you will owe. Section 80 of the Income Tax Act permits the subtractions (Section 80C to 80U).
In 2020, the Indian government implemented two distinct tax regimes: the previous tax regime and the new tax regime. The old and new tax regimes have different percentages of income tax that you pay on your whole income. All deductions under Sections 80C to 80U of the prior tax code were allowed, subject to some restrictions. The only permitted deductions under the new tax system are the employer's NPS payment and the subtraction for let-out property under Section 24B.
Deductions as per Section 80C
Your Gross Income may be reduced by ₹1,50,000 under Section 80C. Some of the popular investment sources within this division are provided as follows:
PPF: Deposits into Public Provident Funds, or PPFs, are among the most common deductions under Section 80C. A minimum of Rs. 500 and a maximum of Rs. 1,50,000 need to be deposited when opening a PPF account every year. When you make additional deposits in the ensuing fiscal years to be eligible for deductions, the money you put into a PPF account multiplies. PPF is a trustful and conventional way to save money that you earn by working hard. It is simple and easy to open a PPF account with the bank.
Tax-Saving FD: Investors can be assured both capital protection and a substantial interest income with fixed deposits. It takes at least five years of investment to be eligible for the tax benefits under Section 80C. It is secure, but you must pay taxes on the interest you earn from it.
Mutual Funds that Save Taxes, or ELSS: The Equity Linked Savings Scheme (ELSS) is one of the only mutual fund plans permitted under Section 80C. Its recent superior performance has made it more well-liked among investors. Another advantage of ELSS is the shortest lock-in period of three years.
Standard Deduction
According to the 2018 Budget, salaried employees get a standard deduction of Rs 40,000 from their gross pay. In a financial year, the travel allowance of Rs. 19,200 and the medical reimbursement of INR 15,000 would be replaced by this standard deduction. In actuality, the taxpayer will receive an extra Rs 5,800 in income exemption. According to the Interim Budget 2019, the cap of Rs. 40,000 has been raised to Rs. 50,000, effective from FY 2019–20. This Rs. 50,000 deduction is available starting in FY 2023–2024 and can be claimed under both the old and new tax regimes.
Tax Deducted at Source (TDS)
Tax Deducted at Source, or TDS signifies that the payer subtracts the applicable tax. The amount of tax that needs to be withheld by the payer is based on the regulations set forth by the income tax department. For example, if an employee's taxable income exceeds INR 2,50,000 under the previous tax regime or INR 3,00,000 under the new tax regime, the employer will estimate the employee's total annual income and deduct tax on it. Every year, taxes are withheld in accordance with your tax slab. Likewise, the bank deducts TDS on interest on a fixed deposit. Unless you have neglected to mention your PAN, in which case a 20% TDS may be taken, the bank will normally deduct TDS at the rate of 10% as they are unaware of your tax slabs.
Illustration
For example, X is a 25-year-old professional. Since this is his first employment, he has no idea about savings or taxes. However, as January draws to a close, X overheard his buddies discussing Section 80C and how it allows them to pay no taxes. X’s yearly salary is Rs 6,60,000. These are the specifics of his pay.
Basic Salary: Rs 3,60,000 annually
HRA: Rs. 1,80,000 annually
Special Allowance: Rs. 1,20,000 annually
Upon examining his pay slip, X discovered that his company has been withholding a TDS from his monthly compensation of Rs 2,988. This will come to a total of Rs 35,860 for the year. X has been too busy living his new life to worry about how much tax he has to pay or if he can save any money on taxes. X needs to ascertain his overall revenue from all sources first. In addition to compensation, X has received
Interest of Rs 2,500 on a savings bank account. This is what he discovered on his bank statement.
Based on his online FD statement, he discovered that he would receive interest of Rs 3,500 on the Rs 50,000 fixed deposit that his father had made him set aside. The FD is set to mature on March 31, 2024.
X consults his Form 26AS to find out if any TDS has been withheld from his interest income. The information about all the taxes withheld and deposited against X's PAN is contained in Form 26AS. He discovered that his employer had been deducting TDS of Rs 2,988 every month up to January.
X shares a ten thousand rupee rent with four other housemates in a rented apartment. X is eligible for an HRA exemption if he can gather the landlord's rent receipts and obtain his PAN number. His company can make adjustments to his tax computations if he can provide the rent receipts on time.
HRA Exemption
Least of the following:
Taxable HRA= Rs 15000- Rs 7000= Rs. 8000
Tax Calculation
Rebate for Resident Individuals
Individual taxpayers can receive tax relief through Section 87A. It offers a rebate from the tax payable by an assessee who resides in India.
Rebate to a resident individual under the new tax system who is paying taxes
The refund will be equivalent to the amount of income tax due on the individual's total income for each assessment year, minus Rs. 25,000 if their total income is less than Rs. 7,00,000.
Return of taxes paid by a resident individual under the previous tax regime
The refund will be equivalent to the amount of income tax due on the individual's total income for each assessment year, or Rs. 12,500, whichever is less if their total income is less than Rs. 5,00,000.
Calculation of Tax Payable
Tax slabs or rates are applied to your taxable income, and the amount of tax due is computed. You can deduct all of the previously deducted TDS from this tax that is due.
Filing of Income Tax
Seven different Income Tax Return forms—ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, and ITR-7—have been announced by the Income Tax Department. Each taxpayer must submit their ITR by the deadline, which is July 31 of the assessment year, at the latest. The application of ITR forms differs based on the sources of income, the amount earned, and the taxpayer category (individuals, HUFs, companies, etc.). A lot of paperwork is required before filing the Income Tax Return (ITR). As mentioned below, these documents differ according to the source of income:
Salaried individual: paystubs, Forms 16/16A, 26AS, rent receipts for HRA, investments made according to Sections 80C, 80E, 80D, and 80G.
Capital gains: ELSS statement, mutual fund statement, equity/debt fund sales and purchases, house purchase/sale price, registration information if any house property is sold, and capital gains statement displaying share sales and stock trading.
House property: interest certificate from the home loan, PAN card information, address, and information about co-owners.
Additional sources: information on bank foreign direct investment and interest income from corporate or tax-saving bonds.
Advance Tax
The amount of income tax paid in advance as opposed to in one single payment at the time the ITR is filed is known as advance tax. The crucial payers of this tax are professionals and businesspeople. The Income Tax Department of India sets the deadlines for filing these tax installments. Following are the dates and tax rates:
By June 15th at the latest: 15%
By September 15th at the earliest: 45%
By December 15th at the earliest: 75%
By March 15th at the latest: 100%
Conclusion
Gaining a better understanding of these tax phrases will enable you to reduce your tax liability. Look for tools where you may take advantage of the highest tax benefits when you review your expenses and assets. For instance, to obtain higher interest rates and take advantage of deductions, invest your money in Public Provident Funds or Bank Fixed Deposits rather than simply putting it into Savings Bank Accounts. In addition to improving your financial management, effective tax preparation can assist you in paying the fewest taxes possible.
FAQ
Q1. What is net taxable income?
Gross total income is the total income determined by adding the incomes from each of the five categories of income. Your net taxable income will be determined by deducting various sections' worth of claims from your gross total income.
Q2. What is Income Tax?
A tax levied by the government on your earnings is known as an income tax. The government relies heavily on income tax revenue to support its operations and provide for the needs of the populace.
Q3. What is Corporate Tax?
Corporate tax is the term typically used to define taxes paid by corporations in accordance with the Income Tax Act.
Q4. What is the difference between a Financial Year and an Assessment Year?
The year when you made money is known as the financial year. Conversely, the Assessment Year is usually the year that follows the previous year in which you file your Income Tax Return and provide the Income Tax Department with the specifics of your income received in the Previous Year for assessment.
Q5. Which body governs the tax filing process in India?
In addition to overseeing the administration of direct tax legislation via the Income Tax Department, the Central Board of Direct Taxes (CBDT) provides crucial inputs for direct tax policy and planning in India. All income tax returns filed in India are received and processed by the Income Tax Centralised Processing Centre, or CPC Bengaluru.
Q6. Do I have to file my Income Tax Return?
There are several requirements that determine whether you must file your income tax return or not. One such fundamental requirement is that, under the new tax regime announced in the Union Budget 2023, income up to Rs. 3,00,000 is tax-free for the financial year 2023–24. If your income surpasses this amount, you must file an ITR.
Q7. What are the documents required to file an income tax return?
A lot of paperwork is required before filing of the Income Tax Return (ITR). As mentioned below, these documents differ according to the source of income:
Salaried individual: paystubs, Forms 16/16A, 26AS, rent receipts for HRA, investments made according to Sections 80C, 80E, 80D, and 80G.
Capital gains: ELSS statement, mutual fund statement, equity/debt fund sales and purchases, house purchase/sale price, registration information if any house property is sold, and capital gains statement displaying share sales and stock trading.
House property: interest certificate from the home loan, PAN card information, address, and information about co-owners.
Additional sources: information on bank foreign direct investment and interest income from corporate or tax-saving bonds.
Q8. What is the due date for filing an ITR in India?
The following dates are depicted below when an ITR must be filed:
For individuals: 31st of July of each evaluation year (non-audit case)
For Others: September 30 of each year is the evaluation date [Audit Case].
Q9. Who should pay Advance Tax?
If a person's entire tax liability in a financial year exceeds Rs 10,000, they must pay advance tax. The advance tax provision is applicable to all taxpayers. On the other hand, senior citizens who do not own a business and are 60 years of age or older are free from paying advance tax.
Q10. What is a Self-assessment Tax?
You cannot file your income tax return with the tax department until all outstanding taxes have been paid. You can occasionally find tax payable when you file your return. Online payment of this income tax is required for the return to be successfully e-filed.
Q11. What is an Income tax refund and how can you claim it?
The excess tax that you have paid and receive a return from the Income Tax Department is known as an income tax refund. For example, if you paid more than the required amount of tax—Rs. 10,000—the Income Tax Department will return the excess to you once you file your income tax return, which will reflect a tax refund of Rs. 5,000.
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