Basics of Income Tax in India - Explained with examples

Fundamentals of Income Tax  

Every one of us goes through life with certain milestones. Graduation, first job, marriage, family, first car, first house, to name a few. Similarly, paying income tax for the first time is a significant milestone.

When we hear the word income tax in India, we become conscious and nervous, believing it to be a daunting task. While we agree that the lack of a standard flat rate makes the process appear somewhat complicated, it is not a nightmare as many believe.

This isn't necessary. Here is a compilation of income tax basics for beginners to help you understand them.

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

Basics of Income Tax

Are you fresh out of college and looking for work? Have you already gotten the job and are about to file your first income tax return? If you're confused about income taxes and investments, Jordensky is here to help.

In general, anyone who earns money is required to file income tax returns. Today, we'll go over the fundamentals of income tax, which will help you understand what the concepts of income tax in India are.

Previous Calendar Year (P.Y.)

The previous year, also known as the fiscal year or the tax year, is a 12-month period that begins in April and ends in March of the following year.

The tax year begins in April, regardless of when you start working.

For example,

Assume you joined a company on April 10, 2021. Your first tax year would be April 2021 to March 2022. You will be taxed on your income from April 10, 2021, until March 31, 2022.

Thus, the tax year or previous year is the year for which the tax is paid i.e. FY 2021-22.

Assessment Year (A.Y.)

This phrase is frequently used in taxation. The assessment year is the year following the previous year.

Using the preceding example, your PY or tax year was 2021-22. As a result, because you will file your income tax return between April 1, 2021, and July 31, 2022, your assessment year will be 2022-23. (generally).

What is the difference between exempt/tax-free income and taxable income?

Exempt income is not taxable under Income Tax law, so it is not included in the total income for the purpose of tax calculation. Exempt income is income that is tax-free. For example, interest earned from a PPF, etc.

While taxable income, such as salary, house property, capital gains income, income from other sources, and so on, is taxed and called as Taxable Income.

What is PAN?

PAN is an abbreviation for Permanent Account Number, which is a ten-digit unique alphanumeric number issued by the Income Tax Department that serves as our unique identification.

It is a one-of-a-kind identification number used to identify the entity and individuals. Our PAN identifies whether we are an Individual, HUF, Company, Firm, or any other assessee. PAN is required for ITR filing; the tax department tracks all communications, returns, refunds, and other Income Tax-related activities through our PAN.

How PAN numbers are generated

The first five digits will always be Alphabetic, the next four digits will always be Numeric, and the last digit will always be Alphabetic. However, the fourth letter is significant because it denotes the type of assessee (Individual ,Company, Firm Etc.)  

What is TAN?

Tax Deduction Number (TAN) is a 10-digit alphanumeric number assigned to those who are required to deduct TDS and deposit it with the Income Tax Department.

TAN Format- JPRD00234F

How TAN numbers is devised

First Four digit Alphabetic, then after Five digit Numeric and last digit is Alphabetic.

Sources of Income

The income on which you will pay taxes is classified as follows:

1. Salary income consists of your salary, allowances, leave encashment, and any other cash compensation for your services to a company or firm.
2. Income from house property is the income generated by renting out a home that is owned.
3. Income from capital gain - Income derived from transactions in capital assets such as stocks/mutual funds, real estate, and so on.
4. Income from business or profession - If you have a business or a profession in addition to your job, the income from that activity is your income from business or profession.
5. Other sources of income include interest income from a savings account or interest income from bank deposits, gifts, and so on.

Deductions

When filing your income tax, the income tax department allows you to claim a variety of deductions. Deductions are given to encourage people to save. Deductions reduce gross income, which in turn reduces income tax liability.

As a result, it can be shown mathematically as -

Total income = Gross income

Deductions - Gross Income = Taxable Income

As a result, the greater your deduction, the lower your tax liability. Deductions are permitted under Section 80 of the Income Tax Act (sections 80C to 80U).

What is Income tax?

An income tax is a tax levied by the central government on your earnings. Income tax is a major source of funds for the government, which it uses to fund its operations and provide services to the public.

For the purpose of paying income tax, various income tax slabs are defined.

Is it necessary for me to file my income tax return?

A number of factors influence whether or not you must file an income tax return. One such fundamental requirement is that if your income exceeds Rs. 2,50,000 in a fiscal year, you must file an ITR.

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

What  is TDS?

According to the Income Tax Act, certain payments, such as salary and interest, have tax deducted at the source, which is known as Tax Deducted at Source.

TDS is finally adjusted with taxes payable at the time of final income computation.

What are Income Tax Forms?

These are prescribed forms that a person can use to provide the Income Tax Department with information about their earnings and taxes paid.

When the ITR forms are successfully submitted to the tax department, they become the Income Tax Return.

Section 80C

Section 80C allows you to save up to Rs 150,000 from your gross income. Section 80C investment vehicles that are commonly used include:

• Public Provident Fund

• Employee Provident Fund

• Tax saving fixed deposit

• Equity-linked savings scheme

• Insurance premium

Standard Deduction Reminder

The Finance Minister announced in the 2021 Union Budget that all salaried individuals would be entitled to a standard deduction of Rs 50,000 from their gross salary.

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