Basics of Income Tax for Beginners

Earning your first paycheck is a major milestone in life. Along with this milestone, there’s another turning point that you may go through around this time — that of paying income tax on your earnings. For beginners, the concept of income tax can be tough to grasp. However, this simple yet comprehensive guide on the basics of income tax for beginners can help you understand the fundamentals of taxation in India.

What is the meaning of ‘Financial Year’ and ‘Assessment Year’?

These are two of the most important concepts of income tax for beginners. They are the key to understanding which income tax return to choose and when to file the said return. Here’s what they mean.

• Financial Year

  The Financial Year (FY) is also known as the Previous Year for the purpose of income tax computation. It is the year for which the income is assessed and taxed. The Financial Year begins on April 1 of one calendar year and ends on March 31 of the subsequent calendar year. For example, FY 2022-23 extends from April 1, 2022 to March 31, 2023.

• Assessment Year

  The Assessment Year (AY) follows the Financial Year. It is the year in which the income earned in the Previous Year is assessed. You have to file your income tax returns in the relevant Assessment Year. For instance, for FY 2022-23, the AY is 2023-24 (ranging from April 1, 2023 to March 31, 2024).

Understand the Components of Your Salary

If you are a salaried individual, getting to know the components of your salary is an essential part of understanding the basics of income tax for beginners. Typically, your salary may be broken up into the following components:

• Fully Taxable Components

  Some components of your salary, such as the basic salary, dearness allowance, overtime allowance etc. are fully taxable.

• Partially Taxable Allowances

  There are some salary components like the House Rent Allowance (HRA) and the Leave Travel Allowance (LTA) that are only partially taxable.

• Deductions

  Apart from the allowances, there are also some deductions made from your salary, like professional tax and your contribution to your Employees’ Provident Fund account.

Note on Standard Deduction

Standard deduction is a special kind of deduction available to salaried individuals and retired people with pension income. As per this provision, a deduction of ₹50,000 is available to eligible taxpayers. The deduction is made from the gross salary.

Types of Income on Which Tax Needs to be Paid

The next important part of income tax basics for beginners involves getting to know the types of income on which tax is levied as per the Income Tax Act, 1961. There are five heads of income that you need to pay tax on.

• Income From Salaries

  This includes all the income you earn as a part of your salary. Pension income is also grouped under this category.

• Income From House Property

  Any rental income you earn from the house properties you own fall under this category of taxable income.

• Profits And Gains From Business Or Profession

  If you are self-employed as a professional or if you run your own business, the profits you make from your business or profession will be taxed in this category.

• Capital Gains

  If you make any gains from the sale of a capital asset (such as equity shares, land or a house property), the profits are taxed as capital gains.

• Income From Other Sources

  Any other income that does not fall in the above five categories are considered as income from other sources and taxed accordingly.

Deductions

The Income Tax Act, 1961, also has provisions for various deductions, which help bring down your total taxable income. Learning about these deductions is also an important part of understanding income tax for beginners. These deductions are mostly contained within Chapter VI A of the Act, from sections 80C to 80U.

The sum of the earnings under the five heads of income discussed above is called the gross income. Here is how the deductions feature in your income tax calculation.

Gross Income – Deductions = Taxable Income

Tax Exemptions

If you’re learning about the basics of income tax for beginners, exemptions are also an important part of the journey. Unlike deductions, which are subtracted from the gross income, exemptions are those types of incomes that are not taxable at all, in the first place.

Some types of income are fully exempt (like agricultural income or the proceeds received as death benefits from a life insurance policy). Others, like the House Rent Allowance (HRA) are partially exempt from tax.

Section 80C: Your Best Friend

Section 80C of the Income Tax Act, 1961, is one of the most important concepts of income tax for beginners. This section contains a comprehensive list of deductions for various investments and expenses. Some of the deductions allowed under section 80C of the Income Tax Act, 1961, are listed below.

• Premiums paid for life insurance

• Principal component of home loan repayment

• Investment in Public Provident Fund (PPF)

• Investment in Employees’ Provident Fund (EPF)

• Investment in National Savings Certificate (NSC)

• Investment in Senior Citizen Savings Scheme (SCSS)

• Investment in 5-year tax-saving fixed deposit

The maximum deduction you can claim under section 80C is ₹1.5 lakhs during any given financial year. Also, you can only claim these deductions if you opt for the old tax regime.

Tax Deducted at Source (TDS)

No discussion about the basics of income tax for beginners is complete without the mention of tax deducted at source (TDS). As the name indicates, TDS is simply tax deducted at the source of an income, before it is paid out to the recipient. The Income Tax Act, 1961, lays out the incomes for which tax must be deducted at source, as well as the TDS rate.

Here are some types of income for which tax is deducted at the source.

• Salary income

• Rental income

• Insurance commission

• Interest on bank deposits

• Brokerage or commission

• Prize money obtained from winning a lottery, crossword puzzles or other games

Advance Tax

Advance tax is another important concept in income tax for beginners. This is a kind of income tax that needs to be paid in advance, at different points during the financial year. Any taxpayer whose tax liability exceeds ₹10,000 during the FY needs to pay advance tax in 4 installments, as shown below.

Self-Assessment Tax

Self-assessment tax is another key aspect of the basics of income tax for beginners. The term refers to the balance tax that you need to pay, after accounting for the advance tax paid and the taxes deducted at source. The self-assessment tax must be paid before you file your income tax returns for any given assessment year.

Categories of Taxpayers

The Income Tax Act, 1961, also recognises different categories of taxpayers based on their age and residential status. The rate of tax applicable depends on the category that a taxpayer belongs to. These categories are:

• Resident and non-resident individuals below the age of 60

• Senior citizens aged 60 years or more, but below 80 years of age

• Super senior citizens aged 80 years or more

Calculating the Tax Payable

The tax payable is calculated on the total taxable income, at the income tax slab rate applicable to you. The slab rate depends on the tax regime you choose, your age and your total taxable income. The rates applicable are tabulated below.

Documents Required to File Income Tax Returns (ITR) in India

Once you have paid your income tax, you also need to file your income tax returns (ITRs) within the due date. The details about income tax returns for beginners may seem confusing. However, once you know what it is and when to file it, you’ll find it’s fairly simple.

The income tax return is a form that taxpayers need to submit to the Income Tax Department. It contains the details of your income, tax deductions, tax paid and refund due, if any. The due date for filing the ITR is generally July 31 of the relevant assessment year for individual taxpayers who do not require any tax audit.

The following documents can make it easier to fill in income tax returns for beginners.

• Income From Salaries

  1. Form 16

  2. Form 16A

  3. Form 26AS

  4. Payslips

  5. Proof of investments made under Chapter VI A of the Income Tax Act, 1961

• Income From House Property

  1. Rental receipts

  2. Proof of home loan repayments

• Capital Gains

  1. Documents that act as proof of purchase of the capital asset (like purchase deed, mutual fund statement etc.)

  2. Documents that act as proof of sale of the capital asset (like sale deed)

  3. Capital gains statement

• Income From Other Sources

  1. Bank FD Receipt

  2. Bank statement