A 10 Point Beginner's Guide to Income Tax in India

What is Income Tax

An Income tax is a tax charged on individuals or entities in respect of the income or profits earned by them (commonly called taxable income). Income Tax is a tax is paid directly to the government on the basis of the respective income or profit. Income tax is collected by the Government of India and is undoubtedly the most important source of revenue for the Indian Government. The Government utilize the taxes in order to meet its objectives which includes fulfilling the development & defence needs of the country, creating of new employment opportunities, building infrastructure and so on.

Income tax mean individual income taxes, paid by employees or other people who earn income. However, companies, estates, trusts, and many other types of entities also pay income taxes based on revenue or income.

Here’s a 10 points can help you understand some of the tax-related terms.

1. Permanent Account Number (PAN) vs. Tax Deduction Number (TAN)

PAN stands for Permanent Account Number

It works as our identification and is a ten-digit, one-of-a-kind alphanumeric number issued by the Income Tax Department. Our PAN can reveal if we are an Individual, HUF, Company, Firm, or any other type of taxpayer. Where :

• The first five digits will always be alphabetic,
• The following four digits will always be numeric
• The last digit will always be alphabetic
• The fourth letter is crucial since it indicates the type of taxpayer (Individual, Company, Firm etc.)
• The fifth alphabet of first five digits will always be the initial of last name in case of individuals.

The tax department can track all of our communications, returns, refunds, and other actions related to Income Tax using our PAN, which is a requirement for submitting ITR.TAN refers to Tax Deduction Number

This is a 10-digit alphanumeric number assigned by the Income Tax Department to individuals who must deduct TDS.

• Tax Format, for example is ABCD12345E
• The first four digits are alphabetic, followed by five numeric digits, and the final digit is alphabetic.

2. Previous Year

Previous year is the financial year in which a taxpayer earns income and becomes liable to pay tax. It starts on April 1st and ends on March 31st. Regardless of when you begin your job, your tax year ends on March 31st and a new one begins on April 1st. Planning your taxes for each fiscal year is crucial.

3. Assessment Year

An assessment year is a year that immediately succeeds the previous year. Your income is assessed and taxed in the assessment year. Therefore, the AY - assessment year - for the preceding year 2021–22 is 2022–23. The year that you file your return for the prior year is the assessment year. For instance, if you begin working on January 1, 2022, the end of your tax year is March 31, 2022. Your current year is 2022–23, while your prior year was 2021–22. The due date to submit your return is July 31, 2022.

4. Basic Exemption Limit

This is an income limit set by the IT authorities. Any taxpayer whose income in a financial year is equal to or below the threshold limit is not required to pay taxes. The basic exemption limit for the Assessment Year 2022-23 as per the Income Tax Act is 2,50,000.

5. Heads of Income (Sources of Income)

A person may earn income from different sources. For example, a salaried person earns income by way of salary. He might also receive interest from bank savings account/fixed deposits. In case he has invested in shares, there might arise dividend income and when he sells these shares, he may earn profit on such sale. In case he owns a residential property which he has let out, he would earn rental income. Since there are many heads of income its important to under the nature of income so that it can be taxed under the respective head.

CLASSIFICATION OF INCOME TAX HEADS:

• Income from Salary
• Income from House Property
• Income from Profits and Gains of Profession or Business
• Income from Capital Gains
• Income from Other Sources

Income from Salary: An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary.

An employer will be liable to deduct TDS of the employee according to his/her tax bracket and pay it to the government.

Salary includes:

• Wages;
• Any Annuity or Pension;
• Any Gratuity;
• Advance Salary paid;
• Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
• Annual accretion to the balance of Recognized Provident Fund;
• Leave Encashment;
• Transferred balance in Recognized Provident Fund;
• Contribution by Central Govt. or any other employer to Employees Pension A/c as referred in Sec. 80CCD

Income from House Property:

Any amount of money that is received by the landlord from tenant for using the property is called rental income. Here, property refers to any building including house, office building, warehouse etc. and any land attached to the building like compound, garage, car parking space etc. Different types of house property (like rental or self-occupied property) are taxed differently.

Rent received from tenant to Landlord is considered as Income from House Property in the hands of the Landlord and he has to include it in his income while filling his Income Tax Return. Classification of income has a significant impact on your tax while filing ITR. Classifications as follows:

• Income from house property;
• Even classified as ‘business income’ if the owner’s primary business is letting out property.

Income from Profits and Gains of Profession or Business:

Any income shown in profit and loss account after taking into account all the allowed expenditures by an assessee. The income also includes both positive (profit) and negative incomes. Here is a list of the income chargeable under the head:

• Profits earned by the assessee during the assessment year
• Profits on income by an organization
• Profits on sale of a certain license
• Cash received by an individual on export under a government scheme
• Profit, salary or bonus received as a result of a partnership in a firm
• Benefits received in a business

Income from Capital Gains:

Any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head 'Capital Gains'. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.

Income from other sources

Any income that is not eligible for tax under any other head of income and cannot be excluded from the total income is taxed as residual income under the head "Income from Other Sources".

The following three conditions must be satisfied according to Section 56 of the Income Tax Act for an income to qualify as income from other sources.

• Income is generated.
• Any other provision of the Income Tax Act does not exempt such income.
• Income from such sources cannot be claimed as salary, house property income, profits and gains from business or profession, or capital gains.

6. Tax Deductions

Deductions allow you to reduce your total gross income, thereby decreasing your income tax liability.

Sum of All heads of Income = Total Income

Total Income – Deductions = Taxable Income

Standard Deduction

According to the 2018 Budget, salaried workers are entitled to a basic deduction from their gross pay of Rs 40,000. The medical reimbursement of INR 15,000 and the transportation allowance of INR 19,200 per fiscal year will be replaced by this standard deduction. The taxpayer will really receive an additional deduction of Rs 5,800 in income exemption. In the Interim Budget for 2019, the ceiling of Rs. 40,000 was raised to Rs. 50,000 starting in FY 2019–20.

Make Section 80C your best friend

While several sections of the Income Tax Act provide deductions, Section 80C is the one that is most widely used by taxpayers.

7. Slab Rates

Individual taxpayers in India are taxed based on a slab system. Income tax slabs refer to different tax rates applied to different income ranges. These tax rates increase as the taxpayer's income increases. Typically, this type of taxation allows for progressive and fair tax systems. Every year, the tax slab structure changes during the Union budget.

"Individual taxpayers" can be classified into three categories as per Indian Income Tax:

• Individuals under the age of 60, including residents and non-residents
• Resident Senior citizens (60 to 80 years of age)
• Resident Super senior citizens (aged more than 80 years)

8. Tax Deducted at Source (TDS)

For certain specified incomes, the person who makes the payment is required to withhold a portion and remit it directly to the IT department on behalf of the recipient. The withheld portion is termed as TDS.

For instance, if an employee's taxable income exceeds INR 2, 50,000, the employer will estimate the employee's annual income and deduct tax from it. Depending on the tax bracket you fall under each year, tax is subtracted. Similar to this, the bank likewise deducts TDS when you get interest on a fixed deposit. Unless you haven't mentioned your PAN, the bank typically deducts TDS at 10% because they are unaware of your tax slabs. In case you haven’t mentioned your PAN a 20 percent TDS may be deducted.

9. Tax Refund vs. Tax Exemption

Tax Refund - If the tax deducted from your income is more than your liability, the IT department returns the excess amount of tax paid. This return of excess tax is termed as a tax refund. To claim a tax refund, you need to file your income tax returns within the prescribed due dates.

Tax exemption – It is monetary exclusion that can reduce your taxability. These exemptions either provide you tax relief, reduce tax rates or ensure that tax is applicable only on certain portions of your income. For example, if you pay the rent of your house, you can avail of an exemption on your House Rent Allowance that is calculated as per your salary. While calculating your taxable income, a certain portion of your HRA gets exempted from the gross income.

10. Return Filing

As a taxpayer, you are legally required to file a return of your income for the previous year within the stipulated due date, which is the 31st of July of every assessment year. This income tax return is required to be filed irrespective of whether the income you earned is taxable or not.

Documents Required to File ITR in India

You will need a specific collection of documents in order to file the ITR online. Depending on the source of income, these documents change. Details about the same are provided below:

Note

There are more required documents in addition to the ones already listed, such as a PAN card, Aadhar Card, Tax Payment Challan, Original Return/Notice and bank account information.

Income Tax Forms

The forms that the income tax department has approved are known as income tax forms. These are the ones that taxpayers utilize to provide details about the earned income and taxes paid for that fiscal year. There are seven such forms in all, and each one is specific to a certain group of taxpayers.

As a result, salaried people cannot use a form that has been approved for income tax in India for professionals, and the opposite is also true.

Conclusion

Understanding these tax concepts will enable you to reduce your tax liability and save money in the process. Look for tools where you can benefit most from tax advantages while examining your assets and expenses. Effective tax preparation can help you manage your finances more effectively and pay the least amount of tax possible.