Understanding the Basics of Income Tax for Beginners
Each of us go through several common milestones in our lives—graduation, first job, marriage, family, to name a few. Similarly, paying income tax for the first time is a common achievement for many people.
When people in India hear the word income tax, they become concerned and anxious, and they perceive it to be a difficult task. Although we accept that the process appears to be difficult due to the lack of a standard flat rate, many people believe it is not as bad.
We hope that this blog will be useful to our readers, particularly those filing their taxes for the first time. In this chapter, we have gathered the fundamentals of income tax to assist you in laying the groundwork.
Anyone with a source of income (from any source) is required to file income tax returns. There is a distinction to be made between filing and paying.
Earning money does not imply that you will have to pay taxes. Before your tax obligation gets calculated, defined criteria get evaluated.
Understand that a person with an annual income of Rs. 3-4 lakhs (by salary) will not pay tax but will instead file tax papers with the Income-tax department. All else who earn more than Rs. 4 lakhs are required to pay taxes.
What is the 'Previous year' and 'Assessment year'?
The previous year, also known as the financial year or the tax year, is a 12-month period that runs from April to March of the following year. The tax year runs from April to March, regardless of when you started working.
Let us assume you started a job on September 22, 2018. April 2018 to March 2019 is the first tax year. From September 22, 2018, to March 31, 2019, you will get taxed on your earnings.
As a result, the tax year (or previous year) for which the tax gets collected in the tax year.
It is a word you have probably used a lot in the context of taxation. The year following the previous year is the assessment year. Simply put, it is the year in which you can file your previous year's tax return.
So, in the case above, the previous fiscal year or tax year was 2018-19. As you will be filing your income tax return between April 1 and August 30, 2019, your assessment year will be 2019-20.
Understand your salary component
You will get a payslip when you start your new job. If you have not yet received it, contact your payroll or HR department, and make a request.
Every major component of your compensation gets detailed in your salary slip. Based on your pay structure and the company's policies, it will include details such as your basic salary, house rent allowance, special allowance, and so on.
You can also receive details on taxes deducted, technical taxes, and employee provident funds, among other things.
The amount that gets paid to you in your bank account is the difference between the two.
Income on which tax needs to be paid
You would be entitled to interest income from your savings or deposits with banks and other similar organisations, in addition to your salary. As a result, you will split your taxable income into the following categories:
This includes your pay, allowances, leave encashment, and any other monetary compensation you can earn for providing services to a company.
Income from house property:
This includes any income you might get from renting out a home you own.
Income from capital gain:
All income derived from investments of capital assets such as stocks and mutual funds gets included under this heading.
Income from business or profession:
If you have a business or career in addition to your work, the income from that practice would be your business or professional income.
Income from other sources:
This includes interest from a savings account, interest from bank deposits, and gifts, among other things.
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