Basics of Income Tax

Here is a simplified guide on income tax for beginners. Know about terms like PAN, TAN, 80 C Deductions etc.

Basics of Income Tax

Basics of Income Tax

There are milestones that each one of us go through in our lifespan. To name a few – graduation, first job, marriage, family, buying a car, first house, etc. Similarly, one of the most important milestones is also paying your income tax for the first time.

In India, the moment you hear the word income tax, we get conscious and nervous and believe it to be a daunting task. While we agree to the fact that due to the absence of a standard flat rate, the process seems somewhat complicated, as many might think of it as a nightmare, truth to be told it is not.

To help you understand the basics of Income Tax, here is a compilation for beginners.

  • Basics of Income Tax.
  • Defining the ‘Previous year’.
  • Assessment Year.
  • Exempt Incomes/Tax Free Income and Taxable Incomes.
  • What is PAN.
  • What is TAN.
  • The Income on which you pay the Tax.
  • Deductions.
  • How do I file my Income Tax Return?
  • TDS or Tax deducted at source.
  • Income Tax Forms.
  • Calculating Tax Payable.
  • 80 C Deductions.
  • Standard Deduction.

Basics of Income Tax for Beginners

Are you out of college and looking for a job? Already landed the job and are going to file your income tax returns for the first time? If income tax and investments confuse you, Jorden & Sky Advisor is here to help.

Basically, anybody with an income is liable to file income tax returns. Today we bring to you the basics of Income Tax which will help you to understand what concept of Income tax in India are:

Previous Year (P.Y.) 

Previous year also known as the financial year or the tax year is 12 months that commences in April and ends in March of next year.

Irrespective of your employment start date, the tax year is fixed from April to March. 

For example, let us assume you joined a company on Feb 10, 2020. Your first tax year would be from April 2019 to March 2020. You will be taxed on your income from Feb 10, 2019 until March 31, 2020.

Thus, the tax year or previous year is the year for which the tax is paid i.e. FY 2019-20.

Assessment Year (A.Y.)

You would've often heard this term in tax matters. Assessment year is the year after the previous year.

So, considering the example mentioned above, your PY or tax year was 2019-20. Thus, your assessment year will be 2020-21 as you will be filing your income tax return between April 1, 2020 and September 30, 2020 (generally).

What are Exempt Income/Tax Free Income and Taxable Incomes?

Exempt Incomes are not chargeable to tax as per Income Tax law i.e. they are not included in the total income for the purpose of tax calculation. Income which is Tax free is exempt income. For example, Interest earned from PPF etc.

While taxable incomes are chargeable to tax e.g. Salary, House Property, Capital Gains Income, Income from Other Sources etc.

What is PAN?

PAN stands for Permanent Account Number, it’s a ten-digit unique alphanumeric number issued by the Income Tax Department that acts as a unique identification forum.

It’s a unique Identification number to identify the entity and individuals. Whether we are an Individual, HUF, Company, Firm, or any other assessee, the same can be known through our PAN. PAN is compulsory for filing ITR, tax department traces all communications, returns, refunds, and other activities relating to Income Tax through our PAN.

How are PAN numbers devised?

First five digits will always be Alphabetic. Next four digits will be Numeric and the Last digit will be Alphabetic but the 4th letter is important as it denotes type of assessee (Individual ,Company, Firm Etc.)

What is TAN?

TAN refers to Tax Deduction Number which is a 10-digit alphanumeric number allotted to those who are liable to deduct TDS and deposit to the Income Tax Department.

How TAN numbers are devised?

First four digit Alphabetic, then next five digit Numeric and last digit is Alphabetic.

TAN Format-JPRD00234F.

Sources of Income

Income on which you will be paying taxes can be divided into the following:

Salary income– This includes salary, allowances, leave encashment and another cash component for rendering your services to a company/firm.

Income from a house property- income generated from renting an owned property.

Income from capital gains– Income that arises from transactions in capital assets such as Shares/Mutual funds, Land, Building etc.

Income from a business or profession– if you are conducting any business or profession along with your job, then the income from such activity will be your income from business or profession.

Income from other sources– this includes interest income in a savings account or interest income from deposits with the bank, gifts, etc.

Deductions

Income tax department allows numerous deductions while filing your Income Tax. Deductions are given to encourage savings. Hence, deductions result in a reduction of gross income and thereby reducing income tax liability.

So, mathematically it can be shown as–

Sum of all income= Gross income.

Gross Income – Deductions= Taxable Income.

Thus, higher is your deduction, lower is your tax liability. Deductions are allowed under section 80(Section 80C to 80U) of the Income tax act.

What is Income Tax?

An income tax is a tax imposed by Central government on income earned by you. Income tax is a key source of fund that the Government uses to fund its activities and serves the public.

Various Income Tax slabs are defined for Paying of Income tax.

Do I have to file my Income Tax Return?

Whether you are required to file your income tax return or not depends on a number of conditions. One such basic condition being, if your income exceeds Rs. 2,50,00 in a Financial Year you are required to file ITR.

However, it is always advisable to file your income tax return even if your income is below the taxable limits.

What is TDS?

As per Income Tax Act, there are certain payments including salary, interest etc. in which the tax deducted is known as Tax Deducted at Source.

At the end TDS is adjusted with taxes payable at the time of making final computation of income.

What are Income Tax Forms?

These are prescribed forms through which a person can provide the details of income earned and taxes paid to the Income Tax Department.

The ITR forms on successful submission to the tax department becomes an Income Tax Return.

Make Section 80C your best friend

Under the section 80C, you are entitled to savings of Rs 1,50,000 from your gross income. Some of the widely used investment vehicles under section 80C are: 

  • Public Provident Fund.
  • Employee Provident Fund.
  • Tax saving fixed deposit.
  • Equity-linked savings scheme
  • Insurance premium.

Note on Standard Deduction (FY 2018-19)

In the union budget of 2018, the Finance Minister announced that all salaried individuals should be entitled to a standard deduction of Rs 40,000 from the gross salary.

The standard deduction will replace the medical reimbursement and conveyance allowance of Rs 15,000 and Rs 19,200 respectively.

Happy Investing!