Individual Taxation
Basics of Income Tax
Understanding income tax, a crucial financial milestone, involves knowing it's a government levy on your earnings. Your taxable income, post-deductions, is taxed. Income sources, filing status, deductions, and credits influence your liability. E-filing, record-keeping, and ongoing tax planning can help. Stay informed and seek professional guidance when needed. Here is a compilation of basics of income tax for beginners.
What is Income ?
Income, as defined by Section 2(24) of the Income Tax Act, is a broad and all-encompassing term. To gain a comprehensive understanding, let's explore the five primary categories of income that individuals and businesses encounter:
1. Income from Salary:
For salaried individuals, income encompasses everything received from an employer in cash, kind, or as a facility. This includes your basic pay, dearness allowance, medical allowance, transport allowance, annuity, gratuity, advance of salary, other allowances and commissions, perquisites in lieu of salary, and retirement benefits. The total, after exemptions but before deductions, is referred to as gross salary.
2. Income from House Property:
Any rental income from residential or commercial property that you own is subject to taxation. If you have a home loan, the interest portion can be considered as a deduction against this income.
3. Income from Business or Profession:
Income generated through business or profession is categorized under the "profits and gains of business or profession." The taxable income is the net amount after accounting for expenses incurred in the course of running the business or profession.
4. Income from Capital Gains:
Capital gains tax applies to profits or gains arising from the transfer of capital assets held as investments. This includes properties and jewelry, and it can be categorized as short-term or long-term gains, each with different tax rates.
5. Income from Other Sources:
Any income not falling under the previous categories is classified under "income from other sources." This encompasses various types of earnings, including interest on savings bank accounts, winnings from lotteries, and rewards from game shows. Tax is typically deducted at source for these incomes at a rate of 30%.
Exempt Income:
While most forms of income are subject to taxation, some categories are exempted from tax under Section 10 of the Income Tax Act. These tax-free incomes include various allowances, benefits, and other specific sources of revenue. These exemptions can provide substantial financial relief to taxpayers.
Who is an assessee ?
Financial Year vs Assessment year ?
Imagine the Financial Year is like a year when you get money. The Assessment Year is the next year when you tell the government how much money you got in the previous year. So, one year you get money, and the next year, you tell the government about it. That's the Assessment Year!
Deductions from Salary
Deductions play a crucial role in reducing your taxable income. They are essentially tax benefits that allow you to decrease the amount of income subject to taxation. By deducting specific expenses or investments, you can lower your tax liability.
The basic formula for calculating taxable income is:
Gross Income - Deductions = Taxable Income
Deductions are allowed under various sections of the Income Tax Act, from Section 80C to 80U. These deductions can include expenses related to investments, insurance premiums, and much more. One of the most popular sections for deductions is Section 80C, which allows you to reduce up to Rs 1,50,000 from your gross income. Some commonly used investment options under Section 80C are Public Provident Fund, Employee Provident Fund, tax-saving fixed deposits, and equity-linked savings schemes.
Tax Exemptions
Tax exemptions are monetary exclusions that can further reduce your taxable income. They can help you avail tax reliefs, reduce tax rates, or ensure that tax is applicable only to specific portions of your income. An excellent example of a tax exemption is the House Rent Allowance (HRA). If you pay rent for your house, you can claim an exemption on your HRA, which is calculated based on your salary. This exemption reduces a particular portion of your HRA from your gross income, ultimately lowering your taxable income.
What is tax deducted at source ?
Tax Deducted at Source (TDS) is a system where a certain amount of tax is deducted and deposited on your behalf by your employer or other parties. TDS is calculated based on the estimated income tax as suggested by you, the taxpayer. The rate at which tax is deducted depends on your income tax slab. Interest earned on fixed deposits is also liable for TDS. Typically, banks deduct 10% of the interest income as TDS, but if you provide Form No. 15H/15G or your Permanent Account Number (PAN), the deduction rates may vary.
TDS is a crucial element in the income tax filing process, ensuring the timely payment of taxes.
What is advance TAX ?
Advance tax is a method of paying your income tax in installments, rather than in a lump sum at the time of filing your Income Tax Return (ITR). It is primarily paid by businessmen and professionals. The due dates for these tax installments are set by the Income Tax Department, and they are as follows:
On or before 15th June: 15% of the estimated tax
On or before 15th September: 45% of the estimated tax
On or before 15th December: 75% of the estimated tax
On or before 15th March: 100% of the estimated taX
Self Assessment Tax - Balance the chaos
Self-assessment tax is the remaining tax supposed to be paid by the taxpayer after considering advance tax and TDS. It's the final step before filing your income tax return. This ensures that your tax liability is correctly calculated and paid before submitting your ITR.
Categories of taxpayers
Income tax laws categorize taxpayers into different groups, including:
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)
These categories may have different rules and benefits based on your age and residential status.
Understanding income tax, deductions, exemptions, and other aspects can help you manage your finances, plan your taxes, and ensure compliance with tax laws. It's essential to stay informed about the latest tax regulations and consult a tax professional when needed to make the most of these provisions while minimizing your tax liability.