Income tax is a mandatory contribution that individuals and businesses have to make to the government based on their income or profits. While it can be a daunting task for beginners to navigate the intricacies of the income tax system, understanding the basics of exemptions, deductions, and TDS can go a long way in making the process simpler.
Exemptions and deductions can help lower the taxable income, which in turn reduces the amount of tax that an individual or business has to pay. TDS or Tax Deducted at Source is a mechanism through which the government collects taxes from the source of income itself. These three components are critical in understanding how the income tax system works and how taxpayers can optimize their tax liabilities.
In this article, we will provide a beginner's guide to income tax, including an overview of exemptions, deductions, and TDS. We will explain what these concepts mean, how they work, and the different types of exemptions, deductions, and TDS that taxpayers need to be aware of. By the end of this article, readers will have a good understanding of how the income tax system operates and the steps they can take to minimize their tax burden.
What is income tax?
Income tax is a type of tax levied by the government on the income earned by individuals and businesses. It is a direct tax, which means that it is paid by the person who earns the income or generates the profits, as opposed to an indirect tax, which is paid by the end consumer.
The income tax system varies across different countries, but typically, individuals and businesses are required to file tax returns, which provide details of their income, deductions, and exemptions. Based on these details, the government calculates the amount of tax that needs to be paid.
Income tax is a significant source of revenue for governments and is used to fund various public services and infrastructure projects. The amount of tax paid by an individual or business depends on their income level, tax rate, and the deductions and exemptions they are eligible for.
How income tax is calculated?
In India, income tax is calculated based on a progressive tax system, where tax rates increase as income levels rise. The income tax calculation for individuals can be broken down into the following steps:
- Determine the total taxable income: This includes income from all sources, including salary, income from business or profession, capital gains, and income from other sources. Deduct any allowable deductions, such as expenses related to earning the income, contributions to a retirement account, or donations to charitable organizations.
- Identify the applicable tax slab: There are different tax slabs based on the individual's income level, ranging from 0% to 30%. Identify the applicable tax slab based on the total taxable income.
- Calculate the tax liability: Apply the tax rate for each slab to the income falling within that slab. Add up the tax liability for each slab to arrive at the total tax liability.
- Deduct any applicable tax credits: Tax credits can be deducted from the total tax liability, such as tax deducted at source (TDS) or taxes paid in advance.
The income tax calculation for businesses in India is more complex and depends on the type of entity, such as a sole proprietorship, partnership, or company. It is recommended to seek advice from a tax professional or use an online tax calculator to accurately calculate income tax in India. Additionally, individuals and businesses are required to file an income tax return by the due date to report their income and tax liability to the government.
5 heads of income under the Income Tax Act in India:
- Income from Salaries: This head includes income received from an employer as salary or wages, bonuses, allowances, and perquisites. It also includes pension received by retired employees.
- Income from House Property: This head includes income earned from a house or property that is owned and is rented out or leased. It can also include the deemed rental income from a self-occupied property.
- Profits and Gains from Business or Profession: This head includes income earned from a business or profession, such as profits from a partnership firm, income from a sole proprietorship, or fees received for professional services rendered.
- Income from Capital Gains: This head includes income earned from the sale or transfer of capital assets, such as stocks, real estate, or mutual funds. It is the difference between the sale price and the cost of acquisition of the asset.
- Income from Other Sources: This head includes income that does not fall under any of the above heads, such as interest income from bank deposits, income from lotteries, or gifts received.
Each of these heads of income has its own rules for calculation and tax treatment, and taxpayers are required to report their income under the appropriate head while filing their income tax returns.
Tax Exemptions under income tax act India
The Income Tax Act in India provides for various tax exemptions and deductions, which can help individuals and businesses reduce their tax liability. Some of the common tax exemptions under the Income Tax Act in India are:
- Standard Deduction: A standard deduction of Rs. 50,000 is available to salaried individuals to reduce their taxable income.
- House Rent Allowance (HRA): HRA is exempt from tax to the extent of the least of actual HRA received, 50% of salary for individuals living in metro cities, or 40% of salary for those living in non-metro cities.
- Leave Travel Allowance (LTA): LTA received by an employee for travel within India is exempt from tax twice in a block of four years.
- Medical Allowance: Medical allowance up to Rs. 15,000 per annum is exempt from tax.
- Education Allowance: Education allowance up to Rs. 100 per month per child up to a maximum of two children is exempt from tax.
- Gratuity: Gratuity received by an employee on retirement or termination is exempt from tax up to a certain limit.
These are just a few of the tax exemptions available under the Income Tax Act in India. It is important to note that the rules for tax exemptions can change from time to time, and taxpayers should consult with a tax professional or refer to the latest tax laws and regulations for accurate information.
Also Read: Tax-saving Options Under Various Sections Of The Income Tax Act
Tax-saving: Things to keep in mind
Tax deduction under income tax act India
The Income Tax Act in India provides for various deductions that can be claimed by individuals and businesses to reduce their taxable income. Here are some of the common tax deductions under the Income Tax Act in India:
Section 80C: Deduction of up to Rs. 1.5 lakh can be claimed under Section 80C for various investments and expenses, such as life insurance premium, public provident fund (PPF), National Savings Certificate (NSC), equity-linked savings scheme (ELSS), tuition fees paid for children, etc.
Section 80D: Deduction of up to Rs. 25,000 can be claimed for payment of health insurance premium for self, spouse, and dependent children. An additional deduction of up to Rs. 25,000 can be claimed for payment of health insurance premium for parents. Senior citizens can claim a higher deduction of up to Rs. 50,000.
Section 80E: Deduction of the entire interest paid on an education loan taken for higher studies can be claimed under Section 80E.
Section 80G: Deduction of up to 50% or 100% of the donation amount made to charitable organizations or institutions approved by the government can be claimed under Section 80G.
Section 80TTA: Deduction of up to Rs. 10,000 can be claimed on interest earned from a savings account held with a bank, post office, or cooperative society.
Section 80GGB and 80GGC: Deduction of up to 100% of the amount contributed to a political party or electoral trust can be claimed under these sections.
Section 80DDB: Deduction of up to Rs. 40,000 or Rs. 1 lakh (for senior citizens) can be claimed for expenses incurred on treatment of specified diseases.
Section 80U: Deduction of up to Rs. 75,000 or Rs. 1.25 lakh (for severe disability) can be claimed by a resident individual with a disability.
These are just a few of the tax deductions available under the Income Tax Act in India. It is important to note that the rules for tax deductions can change from time to time, and taxpayers should consult with a tax professional or refer to the latest tax laws and regulations for accurate information.
TDS (Tax Deducted At Source):
TDS or Tax Deducted at Source is a mechanism in India through which the government collects tax revenue from various sources of income such as salaries, interest, commission, rent, etc. In TDS, the person making the payment deducts a certain percentage of tax from the payment and deposits it with the government on behalf of the recipient of the payment.
For example, if an employer pays a salary of Rs. 50,000 to an employee, the employer will deduct a certain percentage of tax (as per the income tax rates applicable for that financial year) from the salary payment and deposit it with the government. The balance amount will then be paid to the employee.
The TDS system helps the government to ensure regular and timely collection of taxes throughout the year, rather than waiting for individuals to pay taxes at the end of the year. It also ensures that individuals who receive income from various sources do not evade taxes. TDS is applicable to a wide range of payments such as salaries, rent, interest, commission, professional fees, etc. The rates of TDS depend on the nature of payment, the amount paid, and the tax status of the recipient.
Individuals can claim credit for the TDS deducted from their income while filing their Income Tax Returns (ITR), which reduces their tax liability. It is important for individuals to ensure that the TDS details mentioned in their Form 16 match with their bank statements and other proofs, to avoid any discrepancy while filing their ITR.
Case Study For ITR Filing Of Individuals In India
Let's consider the case of Mr. A, a salaried individual who wants to file his Income Tax Return (ITR) for the assessment year 2022-23 in India. Mr. A's total income for the financial year 2021-22 is Rs. 8,50,000.
Here's how Mr. A can file his ITR:
Step 1: Gather all the necessary documents, such as Form 16, salary slips, bank statements, investment proofs, etc.
Step 2: Choose the appropriate ITR form based on his income and sources of income. In Mr. A's case, he is a salaried individual with no other sources of income, so he can file ITR 1.
Step 3: Fill in the personal and income details in the ITR form. Mr. A needs to enter his name, PAN, address, and bank details in the form. He also needs to enter his salary income, which is Rs. 8,50,000. He should also fill in the details of his employer and TDS deducted by them.
Step 4: Claim deductions under Section 80C. Mr. A has invested Rs. 1,50,000 in PPF, so he can claim a deduction of Rs. 1,50,000 under Section 80C.
Step 5: Claim deductions under other sections. Mr. A also paid Rs. 25,000 as health insurance premium for himself and his family, so he can claim a deduction of Rs. 25,000 under Section 80D.
Step 6: Calculate the taxable income. After claiming deductions under Section 80C and 80D, Mr. A's taxable income comes to Rs. 6,75,000.
Step 7: Calculate the tax liability. Mr. A can use the income tax calculator available on the Income Tax Department's website to calculate his tax liability. His tax liability comes to Rs. 42,500.
Step 8: Check TDS details. Mr. A should check the TDS details mentioned in Form 16 and cross-check them with his bank statements. If there is any discrepancy, he should contact his employer and get it rectified.
Step 9: Fill in the TDS details in the ITR form. Mr. A should enter the TDS details of his salary income in the ITR form.
Step 10: Pay the balance tax, if any. Mr. A needs to pay the balance tax, if any, after deducting the TDS from his tax liability. In this case, his TDS is Rs. 40,000, so he needs to pay a balance tax of Rs. 2,500.
Step 11: File the ITR. Mr. A should review the ITR form for accuracy and submit it online on the Income Tax Department's website. He should also verify the ITR using Aadhaar OTP, net banking, or by sending a signed copy to the CPC in Bengaluru.
In conclusion, filing an ITR can seem daunting, but it is a necessary step in complying with the Income Tax Act. By following the above steps and consulting a tax professional if needed, individuals can easily file their ITRs and stay on the right side of the law.
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