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Essential Guide: Income Tax Basics for Beginners in India

Publish Date: June 26, 2024

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Basics of Income Tax For Beginners

 

Paying income tax for the first time is a significant milestone in anyone’s life. It can be daunting, especially for first-time taxpayers who may find the process complex and intimidating. To help ease this journey, we’ve put together a comprehensive guide covering the basics of income tax in India. Whether you’re a beginner or just need a refresher, this guide will provide the foundational knowledge you need to file your taxes confidently. For more consultation connect Laudable Legal Solutions Experts

 

Understanding the Basics: Financial Year and Assessment Year

 

Financial Year (FY): The Financial Year, also known as the Previous Year, is a 12-month period that runs from April 1st to March 31st of the following year. This period is consistent regardless of when you start your employment. For instance, if you join a company on October 22, 2021, your first tax year would be from April 2021 to March 2022. You will be taxed on your income from October 22, 2021, to March 31, 2022.

Assessment Year (AY): The Assessment Year is the year following the Financial Year, during which you file your income tax returns for the previous year. Using the example above, if your Financial Year was 2021-22, your Assessment Year would be 2022-23.

 

Decoding Your Salary Slip

 

Understanding your salary slip is crucial as it contains all the necessary details needed to file your tax returns. Key components include:

  • Basic Salary: The core part of your salary.
  • House Rent Allowance (HRA): A component that can be partially exempt from tax.
  • Special Allowance: Various other allowances.
  • Deductions: These include Provident Fund (PF) contributions, professional tax, and tax deducted at source (TDS).

 

Sources of Income on Which Tax is Paid

Your taxable income can come from various sources:

 

Salary Income: This includes your salary, allowances, and other benefits received from your employer.

Income from House Property: Income earned from renting out your property.

Income from Capital Gains: Profits from the sale of assets like shares and mutual funds.

Income from Business or Profession: Earnings from business or professional activities.

Income from Other Sources: Interest from savings accounts, fixed deposits, gifts, etc.

 

Understanding Deductions and Exemptions

 

Deductions: Deductions reduce your taxable income, thereby lowering your tax liability. Common deductions are covered under Section 80 of the Income Tax Act, including:

 

  • Section 80C: Allows deductions up to Rs 1,50,000 for investments in Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving fixed deposits, Equity Linked Savings Scheme (ELSS), and insurance premiums.

 

Exemptions: Exemptions reduce specific parts of your income from being taxed. For instance, the House Rent Allowance (HRA) can be partially exempt based on certain conditions.

 

Tax Deducted at Source (TDS)

 

TDS is the tax amount deducted by the employer or bank and deposited with the Income Tax Department. It ensures timely collection of taxes. For salaried individuals, TDS is deducted based on the income tax slab rates. For interest on fixed deposits, banks typically deduct 10% as TDS, unless Form 15G/15H is submitted.

 

Advance Tax

 

Advance Tax is paid in installments throughout the year, mainly by individuals with business or professional income. The due dates and percentages are as follows:

  • By June 15: 15%
  • By September 15: 45%
  • By December 15: 75%
  • By March 15: 100%

 

Self-Assessment Tax

 

Self-assessment tax is the balance tax payable after accounting for advance tax and TDS. It is paid before filing the income tax return.

 

Categories of Taxpayers

 

Taxpayers in India are categorized as:

Residents and Non-Residents (below 60 years of age)

Senior Citizens (60 to 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 SlabOld Tax RegimeTax Regime 

(New until 31st March 2023)

New Tax Regime 

(From 1st April 2023)

Rs 0 – Rs 2,50,000
Rs 2,50,000  – Rs 3,00,0005%5%
Rs 3,00,000 – Rs 5,00,0005%5%5%
Rs 5,00,000 – Rs 6,00,00020%10%5%
Rs 6,00,000 – Rs 7,50,00020%10%10%
Rs 7,50,000 – Rs 9,00,00020%15%10%
Rs 9,00,000 – Rs 10,00,00020%15%15%
Rs 10,00,000 – Rs 12,00,00030%20%15%
Rs 12,00,000 – Rs 12,50,00030%20%20%
Rs 12,50,000 – Rs 15,00,00030%25%20%
>Rs 15,00,00030%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 for Filing Income Tax Returns

 

To file your returns, you’ll need:

  • Salaried Individuals: Form 16, Form 16A, Form 26AS, rent receipts for HRA, pay slips, and investment proofs under sections 80C, 80D, 80E, and 80G.
  • Capital Gains: Mutual fund statements, details of share transactions, and property sale documents.
  • House Property: PAN card details, property address, co-owner information, and home loan interest certificates.
  • Other Sources: Bank details and interest income statements.

 

Standard Deduction

A standard deduction of Rs 50,000 is available from gross total income, regardless of actual expenses on transport and medical allowances.

 

E-filing: Simplifying the Process

The process of filing income tax returns has become more straightforward with e-filing. Ensure you file your returns within the due date to avoid penalties and stay compliant.

By understanding these basic concepts and gathering the necessary documents, you can approach your first-time tax filing with confidence. Being informed and prepared is the key to a smooth and stress-free tax filing experience.


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