Want to Educate yourself on Income Tax?
We are sure you have heard of the term Income Tax at some point during a family conversation that is revolving around finance. Or researched about ways to minimize the tax you pay. Well, if in case it seemed daunting to think about it, in this article, we cover some of the basic facts about income tax.
Basic Facts about Income Tax
1. To begin with the basics about what is income tax, quite simply, it is the tax you pay to the government for the income you earn.
These taxes that we pay become a source of revenue for the government to run the country.
2. There are two types of taxes: Direct tax and indirect tax. Income tax falls under the category of direct tax since it is taxed directly on the money one makes.
The excise duties on fuel, liquor, tobacco products, and GST, etc. are some of the examples of indirect tax.
3. Now there are two terms to keep in mind when it comes to income tax payments. The previous year and the assessment year.
As per the Income Tax Act, we pay the income tax for the income of the previous year. That is, we pay at the end of the year.
One thing to note is that the financial years are not in accordance to our calendar years and they start from 1st of April and end on 31st of March. In this case let’s say you are filing returns, which is the process of documenting the income you earned over the year and submitting it for income tax purposes. Now let’s say the financial year ends on 31st March 2021.
Now technically, you are paying for the year that elapsed and you are paying for the income earned in that year. This makes the year you are paying the income tax for as the ‘previous year’ i.e. FY 20-21
The year in which your income is assessed and evaluated for tax is the assessment year. The assessment year in this case would be post 31st March 2021 i.e. FY 21-22
Essentially, the previous year is the year to which the income belongs and the assessment year is the year in which you are liable to pay for the previous year’s income.
4. Now let’s discuss about the sources of income for which you have to pay taxes.
To begin with, the most direct form of income tax is from your salary. The salary you earn is accounted for as income on which you have to pay taxes.
Next is, income from house property. Any income that arises out of a property, that includes a house, office, building, warehouse, in the form of rental is referred to as income from house property. This income is taxable as well.
Another form of tax is Capital gains tax. This is the tax you pay when you make any profit or gains from transferring a capital asset. Examples of assets in this case are apartments or flats, shares, land, mutual funds, gold and more.
Income from Business and Profession is next. This is the income you earn for the business you run or the profession you are in yourself. The profits on the business you do are taxable. You may remove the expenses from the amount that is taxable.
Additional Read: Income Tax Allowances and Deductions Allowed to Salaried Individuals
5. Any income that does not fall under any of the above categories finally falls under what is called as Income from Other Sources.
Examples of these are any dividend that is earned, Interests from deposits and bonds, one-time income from lotteries, betting, gambling, etc., gifts such as money or property are also taxable under this category.
6. Now let’s move to another interesting concept known as tax deductions.
As the term suggests, it is the concept of deduction or more simply reducing the taxable income.
Okay so we know we pay taxes on the income we get in a year. But the income we gain doesn’t all count as cash in hand right?
We have a variety of things we spend money on and ultimately don’t actually get the amount we earn as cash in hand.
Now of course there is no deduction on buying luxury items or shopping, but to develop a habit of saving in people, some tax laws work in our favour to reduce the amount of tax we pay.
This is done by showing certain expenditures which are subtracted from your income, therefore resulting in a smaller income amount and in turn reducing the income tax.
7. So, what are these expenses that can count for deductions?
The most common and popular example of tax deduction is Sec 80 C. If you have Invested in tax saving mutual funds, principal repayment of a home loan, PPF – which is public provident fund, National Pension Scheme, life insurance premium etc. The other popular sections are Section 80 D which Is used for health Insurance policies, Section 24 for home loan Interest payment etc. The other most common deductions are HRA (House Rent Allowance), Standard deduction etc.
8. So now you have deducted your taxable income and are left with a certain amount. But how do you know how much tax you have to pay?
Here’s where tax slabs come into play.
Tax slabs are essentially slabs with different ranges of income with their corresponding tax rates.
Tax slabs work on the simple principle of taxing people based on the income that they earn. The slabs are divided into multiple ranges of income and incur a corresponding tax rate. Depending on the amount of income one earns, they pay a tax rate corresponding to that slab.
Your final income decides which slab you fall into and you have to pay your taxes accordingly.
9. We discussed about how much we have to pay depending on which slab we fall into. But how do we pay our taxes? How do we file our taxes?
Now with the world going digital, filing returns is digital too. This is termed as e-filing. Broadly, here are the main steps involved in filing returns online.
- You log onto the official income tax India e filing website. Register yourself using your PAN.
- Download the appropriate Income Tax Return form, also known as ITR form.
- Enter details from Form 16.
- Complete all related tax details and confirm them.
- Submit the returns.
- Then complete the authorisation by signing digitally.
- And lastly E-verify your returns.
There you go, it’s that simple.
10. No original documents required to be submitted along with your ITR
There is no need to submit any document in original to the I-T department during the process of filing income tax returns. However, these documents can be shown later if required by the income tax department.
Additional Read: What are the Benefits of Filing Income Tax Return on Time?
Let’s recap what we covered today:
- There are 2 types of taxes that we pay: one is direct tax and the other is indirect tax. Income tax is a direct tax.
- Previous year is the year for which the income is earned while the assessment year is the year in which the income tax is paid.
- There are 5 categories under which your income can fall: Income from salary, from house property, from capital gains, from business and profession and from other sources.
- Tax deductions are the way to reduce taxable income by making certain expenses or investments that are tax deductible.
Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, filing of tax related services are not Exchange traded products and hence, all disputes with respect to this activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Information mentioned herein is based on the prevailing tax laws and tax laws are subject to change from time to time. Investors accessing this information do hereby agree to consult with a qualified tax advisor prior to taking any investment/ tax related decisions. Please verify the veracity of all information on your own before considering it as final tax computation. The contents herein mentioned are solely for informational and educational purpose.