Paying income tax for the first time marks a significant step in anyone’s life. However, the process might seem overwhelming and confusing for newcomers, with many unfamiliar terms flying around. But fear not! To help you grasp the tax basics according to your income source, here’s a simplified guide to income tax for beginners.
Getting Started
Are you fresh out of college and on the hunt for a job? Or maybe you’ve already landed a job and are gearing up to file your income tax returns for the first time. If you find yourself scratching your head over income tax and investments, don’t worry. ClearTax is here to lend a hand. Our goal is to demystify income taxes and make your financial journey smoother. Basically, if you earn an income, you’re required to file income tax returns. Today, we’re breaking down the basics of income tax to give you the confidence to tackle your taxes head-on.
Understanding Time Frames
The previous year, also known as the financial year or tax year, spans 12 months from April 1st to March 31st of the following year. No matter when you start your job, your tax year ends on March 31st, and a new one begins on April 1st. So, it’s crucial to plan your taxes for each financial year.
Assessment Year
You’ll often hear about the assessment year concerning tax filing. It refers to the financial year following the previous year, during which you’ll assess and file your return for the previous year. For example, the assessment year is 2019-20 for the previous year 2018-19. If you kick off your job on January 1st, 2023, your tax year concludes on March 31st, 2023. 2022-23 is your previous year, and your assessment year is 2023-24.
Understanding Your Income
When starting a job, reach out to your payroll or HR department to obtain your salary details, pay slip, or tax statement. This will give you insight into the main components of your salary and the corresponding tax deductions.
For instance, many companies provide House Rent Allowance (HRA), which can help you save on taxes if you’re a renter.
Income Subject to Tax
Apart from your salary, you may earn income from various other sources. Your Total Income comprises several heads of income, including:
- Income from Salary
- Income from House Property
- Income from Capital Gains
- Income from Business or Profession
- Income from Other Sources
Understanding Deductions
Deductions help reduce your Gross Income, thereby lowering your tax liability. These deductions, permitted by the Income Tax Department, allow you to trim down your taxable income. The more you utilize these deductions, the less tax you’ll owe. Deductions are available under Section 80 of the Income Tax Act (Sections 80C to 80U).
Two Tax Regimes
In 2020, the government introduced two tax regimes in India: the old tax regime and the new tax regime. The percentage of income tax you pay on your total income differs between the old and new regimes.
Under the old tax regime, deductions are allowed under Sections 80C to 80U, subject to conditions. However, under the new tax regime, only specific deductions are permitted, such as let-out property under Section 24B and employer’s contribution to NPS.
Understanding Section 80C Deductions
Section 80C allows you to deduct up to INR 1,50,000 from your Gross Income. Some popular investment options under this section include:
- Public Provident Fund (PPF)
- Tax-saving Fixed Deposits
- Equity Linked Savings Scheme (ELSS)
Tax Deducted at Source (TDS)
TDS, or Tax Deducted at Source, refers to tax deducted by the payer while making payments. For example, employers deduct tax on employees’ income if it exceeds INR 2,50,000. Similarly, banks deduct TDS on interest earned from Fixed Deposits.
Calculating Tax Payable
Tax slabs or rates are applied to your Taxable Income to calculate the final tax payable. You can offset the tax payable by deducting any TDS already deducted.
Standard Deduction
Salaried employees are entitled to a standard deduction from their gross salary, currently set at Rs. 50,000 from FY 2023-2024 onwards, applicable to both the old and new tax regimes.
Income Tax Returns
The Income Tax Department has introduced seven different Income Tax Return forms, each catering to various taxpayer categories. It’s essential to file your ITR before the specified due date, typically July 31st of the assessment year, using the appropriate form based on your income sources and earnings.
Income Tax Slabs
Tax rates vary depending on the income tax slabs individuals fall under. Those earning below Rs. 2,50,000 in a financial year are exempt from paying taxes. Tax rates range from 5% to 30% under both the old and new tax regimes.
Familiarizing yourself with these basics will empower you to navigate the realm of income tax with confidence and ease.
Additional Tax Planning Tips
Now that you’ve got a handle on the basics of income tax, let’s delve into some practical tax planning tips to help you make the most of your earnings and minimize your tax burden.
1. Invest in Tax-saving Instruments
Explore investment options like Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and tax-saving Fixed Deposits (FDs) to maximize your deductions under Section 80C. These investments not only help you save on taxes but also provide avenues for wealth creation in the long run.
2. Utilize HRA Exemption
If you’re a renter, make sure to claim the House Rent Allowance (HRA) exemption by providing rent receipts to your employer. This can significantly reduce your taxable income and lower your tax liability.
3. Stay Informed About Tax Law Changes
Keep yourself updated on changes in tax laws and regulations to take advantage of new deductions or exemptions that may benefit you. Being aware of the latest developments in tax policies can help you optimize your tax-saving strategies.
4. Consider Health Insurance
Investing in a health insurance policy not only provides financial protection in case of medical emergencies but also offers tax benefits under Section 80D. Ensure that you explore this option to secure both your health and finances.
5. Plan Your Investments Wisely
Diversify your investment portfolio across various asset classes such as equities, bonds, and real estate to spread risk and maximize returns. Consult with a financial advisor to develop a customized investment plan tailored to your financial goals and risk tolerance.
In Conclusion
By understanding the basics of income tax and implementing effective tax planning strategies, you can optimize your finances, minimize your tax liability, and work towards achieving your long-term financial goals. Remember to stay proactive, stay informed, and seek professional guidance when needed to make informed financial decisions. With the right approach, you can navigate the complex world of income tax with confidence and achieve financial success.
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