Income Tax Basics for Beginners – TDS, Deductions and Salary
Earning an income and paying your first income tax on such earning is a moment that every citizen would feel proud about and yearn for in his or her life. However, for a first-timer, the procedure might seem overwhelming and cumbersome due to the inexperience not just in the field but also about the financial management and proper tax planning. There are also certain jargons which are used by experts that are difficult for a layman. This does not have to be the case and for solving the same here is given a list of income tax basics for beginners to assist you understand what tax is about and the basic implications of your income and the tax arising on the same.
Basics of Income Tax
Are you a recent college graduate seeking for work?
Or have you already gotten placed at your dream job and are about to file your first income tax return?
Or have you set your own small start-up business and started earning a handful of revenue and profit from the same?
Then Kanakkupillai is the right place as we are here to assist you with the planning of your income tax and investments. Our goal is to make your financial lives easier by simplifying income taxes and the management of all your financial needs. Anyone who is earning an income from a definite or other source is required to file income tax returns or the ITRs as per the Income Tax Act. Today, we’ll go through the fundamentals of income tax that you’ll need to know, which should help you take a confident first step into your new employment and tax planning future.
What is Previous Year?
The previous year, which is also known as the financial year or your tax year, is a 12-month period.This financial or previous year would begin on the 1st of April and ends on 31st of March arriving during the next year.
Say, the 1st April of 2021 marks the starting of your financial year or previous year and this would end of 31st March of 2022.
So, it can be said that your previous year would endon 31st of March, regardless of when you started your job, and a new previous year which is the tax year begins on the 1st of April. As a result, it is vital that you plan your taxes for each financial year.
What is Assessment Year?
Assessment Year is a term you’ll hear a lot when it comes to tax preparation and we can say that it is often heard and used more than the term previous year. It is the financial year after the previous year in which you will evaluate your earnings and file your previous-year’s ITR or Income Tax Return.
Say for the previous year discussed above that is 1st April 2021 to 31st of March 2022, the assessment year would be 2022- 2023. Or we can say that the assessment year for the previous year 2019-20 would be 2020-21.
The assessment year is the year in which you will file your income tax return for furnishing the details of income earned during such year. For example, if you begin working on 1st of January 2021, your previous year will end on 31st of March 2021 itself. Your previous year was 2020-21 here, and accordingly your assessment year would be 2021-22.
And as per this the deadline for filing your income tax return would be 31st of July, 2021 which has been extended to 31st of December 2021.
Earning from Salary
When you begin your new work, it would be recommended to contact your payroll manager or HR department personnel to obtain information regarding the salary paid or the pay slip along with the tax statement (if any provided separately).This will help you gain an understanding of the primary components of your salary here, as well as how much tax will be withheld based on them.
Say, the entity is deducting the TDS or Tax Deducted at Source from your payment then the payslip should hold details of such deductions made. And there will also be a breakup provided for your salary, which would contain payment of HRA or House Rent Allowance. If you are living on rent then this allowance can be used for claiming deduction.
Paying Tax on Incomes
At times an individual may be earning income from multiple sources along side his or her salary income. In such cases, the total taxable income of the person would be the sum total of the income earned under different heads including the salary coming under the head, ‘Income from Salary’.
Sources of Income given under Income Tax Act
As per the Income Tax Act, there re basically 5 heads or sources form which a person would earn income and can be summarized so. These 5 heads of income as per the Income Tax Act are given below:
Income from Salary
Salary payment, leave encashments and allowances, are all examples of payments you receive in the form of moneyas a result of the employment agreement while performing your job or the employment.
Income from House Property
This includes the income which is earned by the person or assessee from a building or house. It can be self-occupied or rented.
Income from Capital Gain
This would include those income/gain or loss that the assessee might earn from the sale of a capital asset.
Income from Business or Profession
It would constitute the income or the loss that is earned from the carrying out of the business or profession.
Income from Other Sources
This given head is considered to be a residual head which would include the income earned in the form of interest from savings account or the fixed deposits, family pensions or the gifts that are received.
Deductions to be Made
Deductions are claimed basically to reduce the gross income earned by the assessee. And when the gross income is reduced, it will also reduce the taxable income and thereby the tax liability.
Say, the income earned under each or the 5 heads of income would be summed up which would make the Gross Income. And from this the deductions shall be reduced giving you the taxable income.
It should be noted that the deductions as per Income Tax Act are ranging from section 80C to 80U. And making use of the maximum of these would bring down your tax liability also.
Section 80C can be a Saver
Section 80C of the Income Tax Act allows you to get a deduction up to INR 1,50,000 from your gross income earned during a previous year. Some of the most often utilised investment opportunities for claiming 80C are listed below in this area.
Deposits that are made to the PPF which stands for the Public Provident Fund, are one of the most popular deductions under Section 80C. Here the minimum deposit to be made would be INR 500 and whilemaximum would be of INR 1,50,000 in a year to start a PPF account. Money deposited in a PPF account accumulates over time, and would then allow you to claim deductions in later or the future years. PPF is a conventional and secure way to save your hard-earned cash. A PPF account is simple to set up with a bank.
Fixed deposits provide investors with a certain capital protection. And the large interest income would also provide them a standing and an assured return on deposited amount. To qualify for tax benefits under Section 80C, you must invest your money in fixed deposit for at least 5 years. It’s secure, but the interest it earns is taxable as per the provisions of the Income Tax Act.
Tax-advantaged mutual funds or the ELSS
ELSS basically is standing for Equity Linked Savings Scheme. And it one of the only mutual fund schemes that is approved under Section 80C. It is gaining appeal among investors due to its historically stronger performance in recent years. Another advantage of ELSS is that it has the shortest lock-in time, which is only three years.
Other Section 80 Deductions
The below given are some of the deductions that an assessee can claim as per section 80 of the Income Tax Act:
- Section 80C – Investments
- Section 80CCC – Insurance Premium
- Section 80CCD – Contribution of Pension
- Section 80TTA – Interest which is earned on balance in the Savings Account
- Section 80GG – Paying of House Rent
- Section 80E – Education Loan
- Section 80EE – Claiming deduction on interest remitted on the housing loan taken
- Section 80CCG – RGESS
- Section 80D – Medical Insurance
- Section 80DD – Disabled Dependant
- Section 80DDB – Medical Expenditure
- Section 80U – Physical Disability
- Section 80G – Donations
- Section 80GGB – Company Contribution
- Section 80GGC- Contributionprovided to the Political Parties
- Section 80TTB – Interest Income
Concept of TDS
TDS stands for Tax Deducted at Source, which means the tax is deducted at the point of payment. it is deducted by the payer, and should be an amount of tax according to the income tax department’s provisions or standards.
For example, if an employee’s total salary payment or Taxable Income exceeds INR 2,50,000, during a previous year, then the employer will estimate his entire annual income and deduct tax from his pay. Each year, tax is deducted based on whatever tax bracket you fall into as an income tax payer.
Similarly, if you earn interest on a Fixed Deposit, TDS is deducted by the bank in which you are holding such fixed deposit. This is because, the bank is unaware of your tax brackets, and TDS is normally deducted at a rate of 10% unless you haven’t mentioned your PAN. And in case of not mentioning or providing your PAN details, the TDS deduction would be 20%.
Computation of Tax Payable
Tax slabs or rates are applied to your taxable income, and the final tax payable is computed. You can deduct all of the TDS that has already been deducted from this tax payable.
So, we can say that,
the tax payable by assessee during a year = Tax Payable on Total Taxable Income – TDS Deducted and Credited.
As per the provisions of Income Tax Act, salaried employees are entitled to a standard deduction of INR 40,000 from their gross income from salary. This was provided by the budget of 2018. In a financial year, this standard deduction will replacethe transportation allowance of Rs. 19,200and the medical reimbursement of INR 15,000. The taxpayer will effectively receive an exemption of additional income amounting toINR 5,800. In the Interim Budget belonging to the year of 2019, the INR 40,000 cap was raised to INR 50,000 from FY 2019-20 onwards.
The article here is only meant to give you a simple overview of paying income tax and the possible basic deductions and elements that you would need as a beginner. Payment or remittance of income tax is an important duty of a citizen as this is one major monetary aid that would help the country and its government achieve the development, infrastructural and otherwise for our country and its people.
Without paying tax, there are higher chances that the Income Tax Authority will make note of this and send notice to you, forcing to file the tax returns and also end you up pay higher amount of penalty or interest on such non filing and remittance of the income tax. It is wise to avoid any such cost as this would increase the legal cost which should be incurred by you.
So, it would always be recommended to talk to an expert and plan your tax liability and also the financial management as this would help you get stability with regard to earnings also. Kanakkupillai is one such destination where you can talk to the experts and get your finance and tax sorted. We would assist you in such a manner that your every point regarding tax and finance would be updated to the dot and confidential, secure and safe.