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Learning about the basics of Income Tax can help you understand how to pay them on time, how the different terms work, and how you can save the right way!
Graduation, first job, marriage, and starting a family are just a few of the common milestones in our lives. Learning the basics of income tax and paying it for the first time is also a typical accomplishment for many people.
People in India get frightened and apprehensive when they hear the phrase income tax, believing it to be a tough undertaking.
Although we acknowledge that the procedure looks challenging because there is no uniform flat charge, many individuals think it is not as awful as it appears.
We've made it simple for anyone undertaking this task, especially those filing the taxes for the first time. We've assembled the foundations of income tax in this chapter to help you get started. You can also keep a track of your ITR Refund which can be your next read on this Financial Learning journey.
Who is eligible to pay tax?
Paying your first income tax is a watershed moment in the life of any citizen. However, the procedure may appear too onerous and tiresome for a beginner, and some phrases may fly straight over your head. This isn't necessary; it only takes a little effort to understand how taxes work.
Anyone who earns money (from whatever source) must submit income taxes. There is a contrast between filing and paying taxes. Earning money may not entail having to pay taxes. Before your tax liability is estimated, certain conditions are reviewed.
Understand that a person with a salary of Rs. 3-4 lakhs would not pay tax but would file tax paperwork with the IT department. Anyone earning more than Rs. 4 lakhs is expected to pay taxes.
In general, anyone earning money must file income tax forms. Here are a few of the terms to be aware of:
Important terms for filing income tax
Some of the most commonly used terms while applying for income tax include:
The previous year
The previous year, also known as the fiscal year or your tax year, is a 12-month period that begins on April 1 and ends on March 31 of the following year. Your tax year ends on March 31, regardless of when you start your work, and a new tax year begins on April 1. As a result, it is critical to prepare your taxes for every fiscal year.
The assessment year
It's a word you'll hear a lot when it comes to tax preparation. It is the fiscal year after the prior year where you will 'evaluate' and file your previous year's return. As a result, the assessment year for the prior year, 2018-19, is 2019-20.
The assessment year is when you file your prior year's tax return. For example, if you started your work on January 1, 2021, your tax year ended on March 31, 2021. Your previous year was 2020-21, and your current year is 2021-22. The deadline for filing your return is July 31, 2021.
Understanding your paycheck
When you start your new work, contact your payroll or the HR department to obtain your salary data, pay slip, and tax statement. You will get an overview of the primary components of your pay and how much taxes will be withheld depending on them here.
Your wage slip details every key component of your income. Depending on your pay structure and business standards, it will include information such as your base income, housing rental allowance, and special allowance. The difference between the two is the amount deposited into your bank account.
You can also get information on deducted taxes, technical taxes, and employee PF, among other things.
For example, most employers provide House Rent Allowance (HRA), which you can deduct from your taxes if you live in a rental property.
Understanding your income tax deductions
The IT Department primarily cuts Income Tax from five major groups. They are as follows:
Salary earnings or Income from Salary
The amount you earn from your job each month is classified as salary income.
According to the legislation, an employer-employee connection is required to regard the amount as salary income; otherwise, it would be classified under another heading, and therefore the exemptions and allowances given to salaried persons will be unavailable.
Salary includes basic pay, dearness allowance, medical, transportation, annuity, advance of salary, allowances, gratuity, commission, perquisites in lieu of salary, and retirement benefits, among other things.
After exemptions but before deductions, the total of the above incomes is known as Gross Salary and is charged under the heading income from salary. (You may see your taxable salary amount in column 6 of your Form-16.)
House property income
Rental income from your residential or business property will be taxed. If you have a house loan, the interest portion of it is also considered negative income from real estate.
Income from Business or profession
Profits and gains from a business or profession are taxed where the income subject to taxation must be net of costs.
Income from capital gains
Any profit or gain from transferring a capital asset held as an investment (such as a home or jewelry) is taxable under the capital gains category. The growth might be due to both short-term and long-term gains.
Income from other sources
Any income that does not fall under one of the four categories listed above is taxed under income from other sources. Savings bank interest, for example, or lottery winnings.
How to save on tax
It's always a fun question to answer. Finding ways to save on paying your income tax is one of the most creative jobs, and people get paid a lot to find loopholes and methods. But for simplification, we'll explain the most common way, which is Section 80(C)
Section 80C allows you to deduct an amount of up to INR 1,50,000 from your gross income. Some of the most popular investment instruments in this category are listed below.
The Public Provident Fund, or PPF
Deposits to the Public Provident Fund, or PPF, are among the most frequent deductions under Section 80C. You must invest a minimum of INR 500 and a max of INR 1,50,000 yearly when registering a PPF account.
Money placed in a PPF account multiplies when more money is put in succeeding fiscal years to receive deductions. PPF is a conventional and secure way to save your hard-earned money. A PPF account is simple to start with a bank.
Fixed deposits provide investors with capital protection and a large interest income. It is secure, but the interest it generates is taxed. To receive tax benefits under Section 80C, you must invest for at least 5 years.
ELSS, or tax-advantaged mutual funds
ELSS (Equity Linked Savings Scheme), one of the only mutual fund schemes permitted under Section 80C, is gaining appeal among investors due to its historically stronger performance in recent years. Another advantage of ELSS is that it has the shortest lock-in time of three years.
India's income tax department has computerized the whole procedure of income tax collecting and return filing in recent years. Individuals and corporations may now pay their taxes online, file returns, and finally, trace the record of their payments through the Income Tax Department's numerous websites.
Your income tax dollars are directly invested in nation-building efforts. The tax assists the government in improving our country's infrastructure, providing better governance, and running the numerous public services properly. As a result, all taxpaying Indians contribute somewhat to a better future for our homeland.
With these pointers in mind, you'll be able to effectively pay your taxes and continue doing so for many more years. Make sure you invest in tax-saving instruments like the ones mentioned above and make life easier for you!