If you’ve been looking for a quick beginner’s guide to income tax to help you understand the law, it’s essential to start at the basics. The following 10 points can help clear up some of the jargon associated with income tax:
1. Permanent Account Number:Each taxpayer in India is required to apply for and possess a Permanent Account Number (PAN). It’s a unique 10-digit alphanumeric identifier issued by the Income Tax Department.
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.
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.
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.
5. Heads of Income:Heads of income allow you to categorise the income that you earn according to its source. The 5 different heads specified by the IT department are as follows.
- Income from Salary
- Income from House Property
- Income from Capital Gain
- Income from Business or Profession
- Income from Other Sources
6. Deductions:Deductions allow you to reduce your total gross income, thereby decreasing your income tax liability. 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:Slab rates are predefined levels of income that determine the rate of tax charged. Currently, there are 4 different slabs, with rates at 0%, 5%, 20%, and 30% respectively.
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.
9. 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.
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.