Navigating the landscape of income tax for the first time can be a significant milestone in any individual’s life. While the process may initially appear daunting and tedious, breaking down the fundamentals can help demystify the terminology and complexities associated with filing taxes. Understanding the tax implications of your income, depending on its source, is crucial for newcomers to this financial responsibility. To facilitate a smoother entry into the world of income tax, let’s delve into the basics for beginners.
In India, the government implements a direct tax system called Income Tax, which is levied on individuals known as “assessees” according to the Income Tax Act of 1961 and Income Tax Rules of 1962. The term “assessee” covers a diverse range of entities, including individuals ( such as salaried individuals or proprietors ), Hindu Undivided Families ( HUFs ), partnership firms, limited liability partnership ( LLP ) firms, and registered companies with the Registrar of Companies.
Individuals subject to income tax are broadly categorized based on their sources of income and the nature of their entities. This encompasses salaried employees, sole proprietors of businesses, joint family entities ( HUFs ), partnerships involving multiple individuals, and corporate entities with a distinct legal identity.
One crucial aspect of this taxation system is the use of the Permanent Account Number ( PAN ) by the Income Tax Department to uniquely identify and monitor the financial transactions of each assessee. PAN serves as a crucial identifier, linking various financial activities, making it an essential component in the taxation process.
Overall, the Income Tax Act and associated rules establish a framework for assessing and collecting direct taxes, ensuring a systematic approach to taxation that encompasses a broad spectrum of individuals and entities engaged in diverse economic activities.
The person’s income is categorized into five heads for income tax assessment and total income calculation:
1. Salary Income
2. House Property Income
3. Profit and Gain from Business or Profession
4. Capital Gains
5. Income from Other Sources
The “Previous year” is essentially the 12-month period from April 1st to March 31st, regardless of when someone begins their job. This time frame is crucial for tax planning, as it marks the duration during which income is assessed for tax purposes.
On the other hand, the “Assessment Year” follows the Previous year. It’s the year in which individuals review, assess, and file their tax return for the Previous year. To put it simply, if someone starts a job on January 1, 2023, their Previous year would be 2022-23, and they would file their tax return in the Assessment Year 2023-24. The Assessment Year is when the actual evaluation and submission of tax returns take place based on the income earned during the Previous year.
Understanding Deductions: A Simple Guide
Deductions and Your Income Tax
Deductions play a crucial role in managing your income tax. Essentially, they are specific amounts approved by the Income Tax Department that allow you to decrease your overall income.
The equation: breaking it down your total income is the sum of all sources, known as Gross Income. Now, when you subtract the approved deductions from this Gross Income, you arrive at your Taxable Income. In simpler terms, deductions help in reducing your taxable income, ultimately lowering your tax liability. It’s a key aspect to understand when navigating the world of income tax.
Sum of All heads of Income = Gross Income
Gross Income – Deductions = Taxable Income
Smart Tax Moves: Making the Most of Deductions
Getting the Best from Deductions
By using deductions wisely, you can significantly lower the amount of taxes you need to pay. These deductions, found in Sections 80C to 80U of the Income Tax Act, offer ways to shrink your taxable income.
Understanding Tax Systems
Since 2020, the Indian government introduced two tax systems: the old and the new. It’s important to know that the percentage of income tax you pay depends on the system you choose. grasping these differences helps you make savvy decisions to minimize your tax bill.
In the old tax system, you could reduce your taxable income through various deductions, like those under Sections 80C to 80U. However, the new tax system only allows deductions for a rented property (Section 24B) and the employer’s contribution to the National Pension System ( NPS ).
Section 80C Deductions: Saving on Taxes
Public Provident Fund ( PPF ):
One of the common ways to reduce your taxable income is by depositing money in a Public Provident Fund ( PPF ). Opening a PPF account requires a minimum deposit of INR 500, and you can deposit up to INR 1,50,000 annually. The deposited money compounds over the years, providing a safe and traditional way to save money. Anyone can easily open a PPF account with a bank.
Tax-saving Fixed Deposits:
Fixed deposits offer both capital protection and a considerable interest income. To avail tax benefits under Section 80C, you must keep your money invested for a minimum of 5 years. While it is a secure option, the interest income generated is taxable.
Equity Linked Savings Scheme ( ELSS ):
ELSS, a type of tax-saving mutual fund, is the only mutual fund scheme allowed under Section 80C. ELSS, also known as Equity Linked Savings Scheme, has become popular due to its historically higher performance in recent years. Another advantage is its short lock-in period of just 3 years. Investing in ELSS can be a smart move to save on taxes while potentially earning good returns.
TOP 10 SECTION 80C INSTRUMENTS AND THEIR TAXATION RULES
| INSTRUMENT | TAXATIONRULE |
| Employee Provident Fund ( EPF ) / Voluntry Provident Fund ( VPF ) | Completely exempt unless withdrawn before completion of 5 years of service |
| Public Provident Fund ( PPF ) | Completely exempt |
| Equity Linked Savings Scheme ( ELSS ) | Principal invested is tax deductible. Returns are taxble if annual capital gains exceed Rs. 1 lakh |
| Life Insurance Premium Payment | Amount paid annually as premium is tax deductible |
| National Pension Scheme | Amount deposited annually is tax deductible/ pension pay- out is taxable as per slab rate |
| Senior Citizens’ Savings Scheme | Investments are tax deductible/ Returns taxed as per slab rate of senior citizens |
| Sukanya Samriddhi Yojana | Investments are tax deductible |
| Tax Saver Fixed Deposits ( Bank /Post office ) | Investments are tax deductible / interest earned is taxable at payout |
| National Savings Certificate | Principal invested and reinvested interest are tax deductible/final years’s interest is taxable |
| Unit Linked Insurance Plan | Investments are tax Deductible/Returns are taxable if maturity value exceeds 10 times of annual premium |
Documents Needed for Income Tax Filing
For Salaried Individuals:
– Form 16/16A
– 26AS
– Rent receipt for HRA
– Payslips
– Investment proofs under Section 80C, 80E, 80D, and 80G
For Capital Gains:
– ELSS statement
– Mutual fund statement
– Details of equity/debt funds transactions
– House purchase/sale details
– Registration information for property sale
– Capital gains statement for shares and stock trading
For House Property:
– PAN card details
– Co-owner information
– Property address
– Home loan interest certificate
For Other Sources:
– Bank FD details
– Interest received from tax-saving or corporate bonds
Income Tax Slabs
Individuals pay taxes based on their income slab. Those earning below Rs.2,50,000 in a financial year are exempt. Tax rates range from 5% to 30% under both the new and old tax regimes.
| INCOME SLAB | OLD TAX REGIME | NEW TAX REGIME ( until 31st March 2023 ) | New Tax REGIME ( From 1st April 2023 ) |
| ₹0% – ₹ 2,50,000 | – | – | – |
| ₹2,50,000 – ₹ 3,00,000 | 5% | 5% | – |
| ₹3,00,000 – ₹5,00,000 | 5% | 5% | – |
| ₹5,00,000 – ₹6,00,000 | 20% | 10% | 5% |
| ₹6,00,000 – ₹7,50,000 | 20% | 10% | 10% |
| ₹7,50,000 – ₹9,00,000 | 20% | 15% | 10% |
| ₹9,00,000 – ₹10,00,000 | 20% | 15% | 15% |
| ₹10,00,000 – ₹ 12,00,000 | 30% | 20% | 15% |
| ₹12,00,000 – ₹12,50,000 | 30% | 25% | 20% |
| ₹12,50,000 – ₹15,00,000 | 30% | 25% | 20% |
| >₹15,00,000 | 30% | 30% | 30% |
Income Tax Returns
Filing Income Tax Returns involves the use of specific forms designated by the Income Tax Department, namely ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6 & ITR-7. It is imperative for every taxpayer to submit their ITR on or before the stipulated due date, which is typically July 31st of the assessment year. The relevance of these ITR forms depends on factors such as the sources of income, the total income earned, and the taxpayer’s category, whether an individual, HUF, company, etc.
Know About ITR
The term ITR denotes Income Tax Return. The Income Tax Act of 1961 issues various ITR forms, outlining the procedures to be adhered to. This article provides a comprehensive exploration of the ITR definition and the different types of ITR forms.
Filling out an Income Tax Return ( ITR ) is like sharing details about how much money you made and the taxes you owe with the tax department. There are 7 different forms ( ITR-1 to ITR-7 ) based on things like where your money comes from and what kind of taxpayer you are ( like an individual or a company ). It’s important to submit your ITR by the due date.
Why should you bother filing ITR?
1. Get Tax Refund: If you’ve paid too much tax, you can get some money back.
2. Dealing with Foreign Income/Assets: If you earned or invested money outside your country during the year, you need to report it.
3. Visas or Loans: Sometimes, you may need to show your ITR to apply for a visa or a loan.
4. For Companies or Firms: Whether a company made a profit or not, they need to file ITR.
5. Losses: If you had losses in your business or investments, filing ITR on time allows you to carry them forward to Professionals
Understanding Mandatory Income Tax Return Filing in India
Income tax return ( ITR ) filing is a crucial aspect of financial responsibility, and the obligation extends beyond just having a gross total income exceeding the basic exemption limit. Even if your income falls below this limit, certain conditions necessitate the filing of a tax return.
1. Basic Exemption Limit:
If your gross total income surpasses the basic exemption limit, filing an income tax return becomes mandatory. This forms the foundational criterion for individuals to fulfill their tax obligations.
Age Group: Below 60 years
Basic Exemption Limit: Rs 2.5 lakh
Age Group: 60 years and above but below 80 years
Basic Exemption Limit: Rs 3.0 lakh
Age Group: 80 years and above
Basic Exemption Limit: Rs 5.0 lakh
2. Bank Deposits:
Individuals must file their tax returns if they deposit Rs 1 crore or more in ‘current’ bank accounts. Notably, this requirement doesn’t apply to deposits made in post office current accounts.
3. Savings Account Deposits:
A mandatory tax return filing is triggered when the cumulative deposits in ‘savings’ bank accounts reach or exceed Rs 50 lakh. This aims to ensure transparency in financial dealings.
4. Foreign Travel Expenses:
Those who incur expenses exceeding Rs 2 lakh on foreign travel, whether for personal or other individuals, are obligated to file their income tax returns. This measure is designed to monitor significant foreign expenditures.
5. Electricity Expenditure:
Individuals must file tax returns if their electricity consumption costs surpass Rs 1 lakh during the previous year. This serves as a means to track substantial electricity usage.
6. TDS/TCS Threshold:
Crossing the threshold of Rs 25,000 in tax deducted at source ( TDS ) or tax collected at source ( TCS ) during the previous year mandates the filing of income tax returns. For senior citizens above 60 years, this limit is elevated to Rs 50,000.
7. Business Turnover:
Businesspersons are required to file tax returns if their total sales, turnover, or gross receipts exceed Rs 60 lakh in the previous year. This is aimed at ensuring compliance among business entities.
8. Professional Income:
Professionals engaged in a trade or profession must file tax returns if their gross receipts exceed Rs 10 lakh during the previous year. This ensures that professionals contribute their fair share to the tax system.
In conclusion, understanding these criteria beyond the basic exemption limit is vital for individuals to comply with tax regulations and contribute to the effective functioning of the country’s revenue system. By adhering to these requirements, individuals can navigate the intricate landscape of income tax obligations with confidence and transparency.
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