Income Tax Rules for Beginners: First-time taxpayers experience a milestone period as the income tax process can be tedious and daunting. It becomes difficult for first-timers to comprehend and understand the terms of the process. To help you understand the To plan taxes through these options, it is first necessary to understand these important tax terms and the tax implications based on your income source. This article presents you with a compilation of the income tax basics for beginners.
A Basic Outline of Income Tax Structure
First-time employees with a source of income are liable to pay income tax. The first step is to understand the previous/ current financial year or the tax year. A tax year is a 12-month period that begins on April 1of the current year and ends on March 31 of the next year. Remember that, irrespective of the time you begin employment, your tax closes on March 31 and a new tax year begins on April 1.
Now, what is the assessment year? An assessment year is a period (year) in which you file the tax returns for the previous year. For instance, if you start employment in February 2020, your tax year closes on March 31, 2020, and this falls under the previous year and your assessment year is 2020-2021.
The next step in understanding the rules is reaching out to your HR or payroll department to collect the components regarding Tax statements or Pay Slips. This will provide you with an idea of all the major components of your pay structure and give you details of how tax deduction takes place.
Sources of Income
| Salary | Income from salary, or leaves encashment, and allowances, basically all the money an individual who receives the amount while rendering the job and employment agreement |
| House property | Income from building, property, or house. This may be either owned or self-occupied or even may be rented |
| Business or Profession | Income or losses incurred that is a consequence of running a business or profession |
| Capital Gain | Income that is incurred as a result of gain or loss when an individual sells a capital asset |
| Other sources | These are residual heads which include income from savings accounts, pension amounts, fixed deposits, or even gifts received |
Deductions
Deductions play a significant role in Gross Income. The amounts that the Income Tax Department allows you to reduce bring down the tax liability.
Tax deductions are calculated as follows:
The sum of All heads of Income is the Gross IncomeGross Income – Deductions which equals to the Taxable Income
The more deductions are used, the lower the tax shall be. Deductions are made based on Section 80 of the Income Tax Act.
About Section 80 for Income Tax Rules
Section 80 under the Income Tax Act, 1961 allows taxpayers to avail tax exemptions and lower their taxable income. The best method to deem eligible to avail tax deduction of up to Rs 150,000 in a financial year is through investment. Given below are some of the widely-used investment vehicles that fall under Section 80 of the ACT.
Public Provident Fund
PPF is only one of the most popular deductions under 80C. A PPF account requires a minimum of INR 500 and a maximum of INR 1,50,000 deposits per year. The money deposited in a PPF account is eligible to make deductions. PPF is the most traditional and safe saving avenue to save and compound your hard-earned money. This account can be easily opened with a bank.
Tax-saving Fixed Deposits
Fixed deposits assure capital protection and offer a sizable interest income for investors however, you need to stay invested for at least five years. FD is a haven, but the Interest Income from it is taxable.
What is TDS?
Tax Deducted at Source is the tax amount deducted by the employer or the individuals crediting the payment. The employee is bound to deduct tax amounts based on the rules prescribed by the Income Tax Department. Tax is deducted based on the tax slab the employee is a part of each year.
Similarly, if you earn interest through a Fixed deposit, the bank is liable to deduct TDS. However, since the banks remain unaware of your tax slabs, they usually deduct TDS at 10 percent unless the details are mentioned in your PAN, in that case, you are liable for 20 percent TDS.
Calculating Tax Payable
Based on the tax rates and tax slabs, the final tax is calculated and updated on the Taxable Income. From this tax payable amount, you get the option to reduce all the TDS that has already been deducted. Another competent way is making use of a Tax Calculator.
Standard Deduction
As per the Budget 2018, all salaried employees are entitled to a standard deduction of Rs 40,000 from the gross salary which will replace the medical reimbursement amounting to INR 15,000 and transport allowance amounting to Rs. 19,200 in a financial year.
Effectively, the taxpaying citizen will also get an additional income exemption of Rs 5,800. The deduction limit of Rs. 40,000 was increased to Rs. 50,000 for the Financial year 2019 to 2020.
FAQ’s on Income Tax Rules for Beginners
Question 1.
What are various sources of income tax?
Answer:
Income tax is applicable for salaries, capital gains, business or processions, house property- where land, house, or rented and other sources like savings accounts, pension amounts, fixed deposits, or even gifts received.
Question 2.
Is TDS deducted for Fixed Deposits?
Answer:
Yes; if you earn interest through a Fixed deposit, the bank is liable to deduct TDS. However, since the banks remain unaware of your tax slabs, they usually deduct TDS at 10 percent unless the details are mentioned in your PAN, in that case, you are liable for 20 percent TDS.
Question 3.
How are tax deductions calculated?
Answer:
Tax deductions are calculated as follows:
The sum of All heads of Income is the Gross IncomeGross Income – Deductions which equals to the Taxable Income