Basics of Income Tax
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So guys, In the previous post, we obtained information related to accounting. This time we will get information about Income Tax. So let's start -
If you are filing Income Tax Return (ITR) for the first time to pay your income tax then you need to know basic things about income tax and some related information. So let start-
After reading this article will you be able to understand that:-
- What is the Income Tax?
- Defining the ‘Previous year’
- Assessment Year
- Understanding your Salary
- Income on which you pay Tax?
- Deductions
- Understanding Section 80C as your best friend
- TDS or Tax deducted at source?
- Calculating Tax Payable
- Standard Deduction
1. What is Income Tax
Income Tax the tax you have to pay directly on your income and profit. That is collected by the government of India. There are two types of taxes-
1. Direct Tax.
2. Indirect Tax.
Direct tax is the tax an individual and organizations pay directly to the government and it is levied on your profits and income For example - Property tax. However indirect tax is the tax an individual and organizations pays on goods and services and is collected by someone else on your behalf and is paid to the government like Hotels, theaters, restaurants and etc. For example service tax is what you pay in a Hotel and is an indirect tax whereas Income Tax that is deducted from your salary in the form of TDS, is an example of direct tax.
1. Direct Tax.
2. Indirect Tax.
Direct tax is the tax an individual and organizations pay directly to the government and it is levied on your profits and income For example - Property tax. However indirect tax is the tax an individual and organizations pays on goods and services and is collected by someone else on your behalf and is paid to the government like Hotels, theaters, restaurants and etc. For example service tax is what you pay in a Hotel and is an indirect tax whereas Income Tax that is deducted from your salary in the form of TDS, is an example of direct tax.
2. Defining the ‘Previous year’
The previous year, financial year, and your tax year is the Twelve month period that begins on 1st April and ends on the 31st March of the next year. It's not a matter that when you start your job, your tax year ends on 31st March and a new tax year starts on 1st April. Therefore, it is very important to do your tax planning for each financial year.3. Assessment Year
You must have heard this word while calculating your tax or while filing your tax return. It is the year after comes the Previous Year. In this year you will assess the tax for the previous year and file your return. Thus, the Assessment Year is 2020-21 for the Previous Year 2019-20.For instance, if you start your job on 5 February 2019, your tax year closes on 31 March 2019. So, here 2018-19 is your previous year and your A.Y. is 2019-20.4. Understanding your Salary
When you start your job in any organization/company/institution So that gives you an annually salary statement. it shows you your gross salary and his deductions. Most companies or organizations give House Rent Allowance (HRA), and you can save tax on that if you are living on rent.
5. Income on which you pay Tax
The income you earn does not necessarily salary income. Apart from this, you can also earn income from many other sources. Your Total Income can also be through all these sources given below.Sources of Income
| Income from Salary | Get basically all the money while providing your job as a result of salary, allowances, your employment agreement. |
| Income from House Property | Income from house or building, it can be owned and self-occupied or can be rented. |
| Income from Capital Gain | Income from capital gain or capital loss when you sell capital assets. |
| Income from Business or Profession | Income / loss resulting from carrying on a business or profession |
| Income from Other Sources | If your income none of the above 4 heads is income, then it goes to income from other sources. includes your income from bank accounts, FDs, family pension, or etc. |
6. Deductions
Deductions reduce your Gross Income. This is the amount in which the Income Tax Department gives you the facility to exempt some amount from your tax liability.Sum of Total heads of Income = Gross Income – Deductions = Taxable Income
If you want to reduce your tax liability then you have to use the permission to deduct as much as possible. Deductions are described in Income Tax Act under section 80C to 80U.
7. Make Section 80C your best friend
Section 80c can be a good option for you to reduce your tax liability. It can free you from tax liability of up to 150000 Rs. Some investments to use this section are as follows-a. PPF
PPF investment is considered most suitable to reduce your tax liability in this section. When you open a PPF account, You need to deposit at least ₹ 500 in a year and maximum ₹ 150000 in PPF account. PPF is a safe investment, it protects your hard-earned money, You can easily open a PPF account by going to a bankb. Tax-saving FD
A fixed deposit gives you the option of capital savings as well as a large interest income for investors. You need to be an investor for at least 5 years to take advantage of 80C. It is a safe investment but the interest earned on it is taxable.c. Tax-saving mutual funds or ELSS
One of the only mutual fund schemes allowed under 80C, ELSS (Equity Linked Savings Scheme) is gaining popularity among people for its historically higher performance in recent years.
TDS is Tax Deducted at Source – it means that the tax is deducted by the person making payment. The payer has to deduct an amount of tax based on the rules prescribed by the income tax department. For instance, An employer will estimate the total annual income of an employee and deduct tax on his Income if his Taxable Income exceeds INR 2,50,000. Tax is deducted based on which tax slab you belong to each year. Similarly, if you earn interest from a Fixed Deposit, the bank also deducts TDS. Since the bank does not know your tax slabs, they usually deduct TDS @ 10%, unless you haven’t mentioned your PAN (in that case a 20% TDS may be deducted).
9. Calculating Tax Payable
On your Taxable Income, tax slabs or rates are applied and final tax payable is calculated. From this tax payable, you can reduce all the TDS that has already been deducted.Final Tax Payable = Tax Payable on Total Taxable Income - TDS already Deducted.
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