Basics of Income Tax for Beginners

Understand Your Salary Component

It is quite essential to understand your entire salary structure on the basis of which you are supposed to file your income tax return. Your salary slip consists of all the information, such as your basic salary, house rent allowance, special allowance, etc., based on your salary structure and the company’s policy.

It also contains details regarding tax deducted, professional tax, employee provident fund, etc. The difference between these two is what gets credited to your bank account as salary.

Note you can use a salary calculator, too, while assessing your salary.

Income on Which Tax Needs to be Paid

Along with your salary, as an individual, you will be entitled to some interest income generated from your savings or deposits with banks and other similar institutions.

The sources of income on which you will be paying taxes can be split into the following –

• Salary Income – This includes your salary, allowances, leave encashment, and another cash component that you may receive for rendering your services to an organization.
  
  
• Income from House Property – This includes any income you may generate from renting an owned property.
  
  
• Income from Capital Gain – Under this head, all the income that arises from transactions in capital assets such as shares/mutual funds are included.
  
  
• Income from Business or Profession – If you are conducting any business or profession along with your job, then the income from such activity will be your income from business or profession.
  
  
• Income from Other Sources – This includes interest income in a savings account or interest income from deposits with the bank, gifts, etc.

Deductions

A deduction can be considered a tax benefit that can be used to decrease your taxable income. A deduction is an amount that the Income Tax Department allows you to diminish your Income, which ultimately reduces your tax liability.

It can be calculated as –

Sum of all income = Gross income

Gross Income – Deductions = Taxable Income

Thus, higher is your deduction; lower is your tax liability. Deductions are allowed under section 80 (Section 80C to 80U) of the Income Tax Act.

Tax Exemptions

You can call tax exemptions those monetary exclusions that can assist in reducing your taxable income.

Such exemptions help you avail tax reliefs, reduce tax rates or even ensure that tax is applicable on specific parts of your income only.

Understand this with an example,

Suppose you pay rent for your house. Now, you can avail yourself of an exemption on your House Rent Allowance (HRA) which is mainly calculated according to your salary. So, while calculating your taxable income, a particular portion of your HRA gets exempted from the gross income.

80C is Your Best Friend

Under section 80C, you can reduce up to an amount of Rs 1,50,000 from your gross income. The commonly used investment vehicles under section 80C are –

• Public Provident Fund
• Employee Provident Fund
• Tax saving fixed deposit
• Equity-linked savings scheme
• Insurance premium

Tax Deducted at Source (TDS)

The next term in the basics of tax is TDS. Tax Deducted at Source is the tax amount that is deducted and deposited on the taxpayer’s behalf by the employer with the Income Tax Department. TDS is calculated by the employer based on estimated Income tax as suggested by the employee.

The rate at which tax is deducted is dependent on the income tax slab you belong to.

Similarly, interest earned on fixed deposits is also liable for TDS. Typically, the banks deduct 10% of the interest income as TDS as they are not aware of your tax slab. However, the bank will not deduct any tax provided Form No. 15H/15G (as the case may be) is submitted to the bank by the depositor.

However, if you have mentioned your Permanent Account Number (PAN), the bank may deduct 20% of the income as well.

It is a significant element in the income tax filing procedure as it is a measurement technique that the Income Tax Department imposes to secure payment of taxes within the due time frame.

Advance Tax

Advance Tax is the sum of income tax that is paid in advance instead of a lump-sum payment at the time of filing the ITR. This is paid mainly by businessmen and professionals.

The due dates for paying these tax installments are fixed by the Income Tax Department of India. The dates and tax rates are mentioned below-

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

Section 87A: Tax Rebate

Section 87A of the Income Tax Act provides a rebate to resident individuals. Here are the key points:

• Amount of Rebate: The maximum rebate available is Rs. 12,500 or the amount of income tax payable, whichever is lower. This means if your total tax liability is less than Rs. 12,500, the rebate will be restricted to the amount of tax payable.
• Income Limit: For claiming this rebate, your total income for the financial year should not exceed Rs. 5,00,000. This limit is subject to change as per the prevailing tax laws.
• Amount of Rebate: The maximum rebate available is Rs. 12,500 or the amount of income tax payable, whichever is lower. This means if your total tax liability is less than Rs. 12,500, the rebate will be restricted to the amount of tax payable.
• Income Limit: For claiming this rebate, your total income for the financial year should not exceed Rs. 5,00,000. This limit is subject to change as per the prevailing tax laws.

Self-assessment Tax

Self-assessment tax is the balance tax that is supposed to be paid by the taxpayer on his assessed income after advance tax and TDS have been taken into account before filing the return of income.

Categories of Taxpayers

• 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)

Documents Required to File Income Tax (ITR) in India

If you are filing the income tax return online, there is a set of documents that you need to fill out and submit. The documents may vary according to the source of income. The documents are-

• Salaried Individual– Form 16, 16A, 26AS, Receipt of Rent for HRA, Payslips, Investment made under Section 80C, 80D, 80E, and 80G.
  
  
• Capital Gains– ELSS, SIPs, Mutual Fund statement, Debt fund, sale and purchase of Equity Funds. Purchase/selling price, details of capital gains, details of registration if any house property is sold. A Statement of capital gains through selling shares and stock trading.
  
  
• House Property– PAN Card details, Property address, Information of co-owner, Certificate of Home Loan interest.
  
  
• Other Sources- Bank details, information of interest received from tax-saving or corporate bonds.

Note on Standard Deduction

A standard deduction of Rs.50,000 is available from gross total income. You can claim this tax benefit irrespective of the amount spent on Transport and Medical Allowance.

The tedious process of income tax return filing and claiming deductions has now become much more simplified with the introduction of e-filing. So, being a responsible citizen of India, make sure you fulfill your obligation and file your returns within the due period.