Navigating the world of income tax can be daunting for beginners. However, a solid understanding of the fundamental concepts can demystify the process and make tax filing a manageable task. This blog aims to introduce the basics of income tax in India, highlighting key terms and their meanings to provide a clear foundation for new taxpayers.
What is Income Tax?
Income tax is a direct tax imposed by the government on the income of individuals and entities. The primary purpose of this tax is to generate revenue for the government to fund public services and infrastructure. In India, income tax is governed by the Income Tax Act of 1961, which lays out the rules and regulations for tax computation, payment, and compliance.
Key Terms and Concepts
1. Assessment Year (AY) and Financial Year (FY)
– Financial Year (FY): The period during which income is earned. In India, the financial year starts on April 1st and ends on March 31st of the following year.
– Assessment Year (AY): The year following the financial year in which the income is assessed and taxed. For example, income earned in FY 2023-24 is assessed in AY 2024-25.
2. Gross Total Income
Gross Total Income is the aggregate of all income earned by an individual from various sources before any deductions or exemptions. It includes income from salaries, house property, business or profession, capital gains, and other sources like interest or dividends.
Types of Income and Their Taxability
Understanding the different types of income and their taxability is crucial for accurate tax computation. Here are the main categories of income as per Indian tax laws:
1. Income from Salary
This includes all monetary benefits received by an individual from an employer, such as:
– Basic Salary
– Allowances (e.g., House Rent Allowance, Leave Travel Allowance)
– Perquisites (e.g., company car, rent-free accommodation)
– Bonus and Commission
Salary income is fully taxable under the head “Income from Salary.” However, certain exemptions (like HRA and standard deduction) and deductions (like professional tax) are available.
2. Income from House Property
This refers to the rental income earned from property owned by the taxpayer. Even if the property is not rented out, a notional rent (deemed rent) may be considered as income if the taxpayer owns more than one house property.
Taxability:
– Gross Annual Value (GAV): The rent received or receivable for the property.
– Deductions: Municipal taxes paid, standard deduction of 30% on Net Annual Value (NAV), and interest on home loan (up to Rs. 2 lakh for self-occupied property).
3. Income from Business or Profession
Income earned from any trade, business, profession, or vocation is covered under this head. This includes:
– Profits from Business
– Professional Fees
Taxability:
– Net income after deducting all allowable business expenses (like rent, salaries, depreciation) is taxable.
– Specific deductions are available for certain professions under sections like 44ADA for professionals.
4. Income from Capital Gains
This includes income from the sale of capital assets such as property, stocks, or mutual funds. Capital gains are classified into two categories:
– Short-Term Capital Gains (STCG): Gains from assets held for a short duration (usually less than 36 months).
– Long-Term Capital Gains (LTCG): Gains from assets held for longer durations (more than 36 months for most assets, but 24 months for immovable property and 12 months for listed securities).
Taxability:
– STCG: Taxed at applicable individual slab rates, except for certain assets (like equity shares) taxed at 15%.
– LTCG: Taxed at 20% with indexation benefits for most assets, and 10% without indexation for equity shares and equity mutual funds.
5. Income from Other Sources
This includes any income not covered under the other heads, such as:
– Interest Income (from savings accounts, fixed deposits)
– Dividends
– Gifts received
Taxability:
– Fully taxable at the applicable slab rates for the individual, except for certain exemptions and deductions available for specific incomes (like interest on savings accounts up to Rs. 10,000 under Section 80TTA).
This Blog is Published by CA Yash Maheshwari
Deductions
Deductions are specific expenses that can be subtracted from the gross total income to arrive at the taxable income. These are provided under various sections of the Income Tax Act, such as:
– Section 80C: Includes investments in schemes like Public Provident Fund (PPF), National Savings Certificates (NSC), and life insurance premiums. The maximum deduction under this section is Rs. 1.5 lakh.
– Section 80D: Provides deductions for health insurance premiums.
– Section 80E: Deduction for interest paid on education loans.
Exemptions
Exemptions are specific types of income that are not subject to tax. For instance, certain allowances and benefits provided by employers, like House Rent Allowance (HRA) and Leave Travel Allowance (LTA), may be exempt from tax, subject to conditions.
Tax Slabs
Income tax is levied based on the taxpayer’s income, which falls into different slabs. Each slab has a corresponding tax rate. The slabs and rates can vary for different categories of taxpayers, such as individuals below 60 years, senior citizens (60-80 years), and super senior citizens (above 80 years).
For AY 2024-25, the tax slabs for individuals below 60 years under the Old Tax Regime are:
– Up to Rs. 2.5 lakh: Nil
– Rs. 2.5 lakh to Rs. 5 lakh: 5%
– Rs. 5 lakh to Rs. 10 lakh: 20%
– Above Rs. 10 lakh: 30%
Under the New Tax Regime, the slabs are simplified and rates are lower, but many deductions and exemptions available in the old regime are not applicable. The new tax slabs for individuals below 60 years for AY 2024-25 are:
– Up to Rs. 2.5 lakh: Nil
– Rs. 2.5 lakh to Rs. 5 lakh: 5%
– Rs. 5 lakh to Rs. 7.5 lakh: 10%
– Rs. 7.5 lakh to Rs. 10 lakh: 15%
– Rs. 10 lakh to Rs. 12.5 lakh: 20%
– Rs. 12.5 lakh to Rs. 15 lakh: 25%
– Above Rs. 15 lakh: 30%
Tax Return
A tax return is a form that taxpayers file with the Income Tax Department, declaring their income, deductions, and tax payments. The most commonly used forms are ITR-1 (Sahaj) for salaried individuals and ITR-4 (Sugam) for small business owners and professionals.
The Filing Process
Filing an income tax return involves several steps:
1. Collecting Documents: Gather necessary documents like Form 16 (for salaried employees), interest certificates, and investment proofs.
2. Calculating Income: Compute total income from all sources and apply eligible deductions.
3. Determining Tax Liability: Calculate the tax payable based on applicable tax slabs.
4. Filing the Return: Submit the tax return online through the Income Tax Department’s e-filing portal.
5. Verification: After filing, verify the return through methods like Aadhaar OTP, net banking, or by sending a signed physical copy to the Centralized Processing Center (CPC).
Conclusion
Understanding the basics of income tax is crucial for every taxpayer. Familiarity with key terms such as gross total income, deductions, exemptions, and tax slabs can significantly simplify the process of calculating and filing taxes. With this foundational knowledge, individuals can approach their tax obligations with confidence and ensure compliance with the law. As you continue your journey in the world of taxation, remember that staying informed and organized is the key to a hassle-free tax filing experience.