When you first deal with taxes yourself, it’s one of those moments that makes you realise, “Wow, I’m a real grown up now!” But all that excitement starts to slowly fade away when you sit down to file your returns, and you find out taxes are actually quite complex and involve a lot more than just filling out a form or two. Well, the good news is that most of us feel that way when we have our first tussle with taxes.
And what’s even better is that with a bit of learning about the basics of income tax, handling it becomes much easier. So here’s your beginner guide to income tax basic concepts, which will turn your confusion into confidence. Let’s begin!
Importance of Understanding Income Tax
The taxes we pay build our nation. The government uses these funds to develop and maintain infrastructure, such as roads and public transport, and also to fund services like healthcare, education, and defence. As citizens, it is our duty to pay our fair share of taxes and contribute to the growth of our society. Every responsible citizen must have at least some basic knowledge of tax not only to fulfil their civic duty but also to make better financial decisions.
By learning about some income tax basic concepts, you can minimise your tax liabilities, take maximum advantage of the deductions and exemptions offered by the government, avoid trouble with the Income Tax Department, and plan your finances more efficiently.
Overview of Income Tax Basics for Beginners
Before we go any deeper, it’s important for you to understand some absolute basics of income tax. Here’s a small list of basic tax concepts to get you started:
Income
This refers to the money you’ve earned from different sources, generally within a financial year.
Taxable Income
This is the income you get after all deductions and exemptions have been subtracted from your gross total income. All tax calculations are done on this amount.
Taxpayer
The taxpayer is anyone who earns an income high enough to pay taxes. Taxpayers can be individuals, Hindu Undivided Families (HUFs), companies, firms, associations, Bodies of Individuals (BOIs), local authorities, and other residual categories.
The Income Tax Act of 1961
This act contains the rules and regulations governing the taxation of income in India.
The Five Heads of Income Tax
According to the Income Tax Act, income can be categorised under 5 heads: Income from salary, house property, business or profession, capital gains, and other sources. Each category has different rules for calculation and taxation.
Tax Slabs
These are used to categorise taxpayers by level of income. Each slab is a range of income (for example Rs. 5 lakh to Rs. 10 lakh) and is associated with a specific tax rate. As a taxpayer’s income increases, the associated tax rate increases as well.
Tax Regime
A tax regime is a system of tax rules and regulations. It is used to determine how income is taxed and what rates and deductions would be applicable. In India, there are two tax regimes: The old tax regime and the new tax regime (introduced in 2020).
Deductions
The government allows you to subtract some investments and expenses (like insurance premiums and loan interest repayments) from your gross total income. These are called deductions, and they can be used to significantly lower your tax liabilities. For example, Rs. 1.5 lakh 80C deductions.
Exemptions
The government offers you another way to also reduce your income through exemptions. They work differently from deductions. With deductions, you have to subtract certain investments and expenses from your income, whereas exemptions allow you to exclude specific types of income from being taxed altogether. An example of an exemption is the House Rent Allowance (HRA) exemption.
Surcharge
Those who earn very high incomes have to pay an additional tax, called a surcharge. For example, individuals earning over Rs. 50 lakh in a financial year have to pay a 10% surcharge on their total tax liability.
Cess
A cess is an extra tax levied by the government on top of the regular income tax. A 4% health and education cess is applied to your total income tax payable (not the taxable income).
Defining the ‘Previous Year’
A confusing part of income tax basics is the previous year, financial year, and assessment year. Well, the previous year is basically the financial year, which runs from 1st April to 31st March. Like, if you are filing taxes for the financial year 2024/25, this would be referred to as the ‘previous year’.
Assessment Year
On the other hand, the assessment year is the year that comes right after the previous or financial year. For example, if the financial year is 2024/25, the assessment year would be 2025/26. This is called the assessment year because the Income Tax Department assesses the income you earned during the previous financial year. Take another example – Raj starts a job on 1st April 2023. From this day till 31st March 2024, the period is referred to as financial year 2023/24.
He must pay his taxes on the income he earned during this period, and he will do so by filing sometime between April 2024 and 31st July 2024. When he files his ITR, he’ll select the assessment year 2024/25, as this is the year during which his income for the financial year 2023/24 is assessed.
Understanding Your Salary
In your salary slip, you’ll see the various components of your salary. Some components are fully taxable, some are partially taxed, and a few are fully exempt from tax. Broadly these are:
- Basic salary – This is the main part of your salary, and it is fully taxed.
- Allowances – Employers pay a fixed amount to employees to meet certain expenses above the basic salary. Here are some common allowances and their taxability:
- Dearness allowance, which is fully taxable.
- House Rent Allowance is taxed fully if you are not living on rent. For individuals who do live on rent, a part of the HRA can be exempt from tax (it depends on things like the rent paid, salary, and the city of residence)
- Transport allowance is exempt up to Rs. 1,600.
- Special allowances are exempt to the extent of the amount received or spent (whichever is less). These include travelling allowance, conveyance allowance, and daily allowance.
- Any other allowances not listed under the Income Tax Act are fully taxable.
- Incentives, Bonuses, and Commissions – These are all fully taxable.
- Perquisites – These are allowances paid by the employer which would have been payable by the employee and are either monetary or non-monetary, such as company car, rent-free accommodation, or amenities. Some perquisites are taxable and some are tax-free.
One way you can reduce your taxable income is by restructuring your salary. This means you can ask your employer to include more tax-exempt components in your salary package or ask them to reallocate money to exempt components.
Sources of Income
According to the Income Tax Act, there are five heads (sources) of income tax. We classify income under these heads to calculate taxable income. These 5 heads are:
- Income from salary.
- Income from house property.
- Income from capital gains.
- Income from profits and gains from business or profession.
- Income from other sources.
| Source of Income | Particulars |
| Income from Salary | Salary is defined under Section 17 (1) of the Income Tax Act. This section tells us about what constitutes salary for tax purposes. This includes wages, annuities, pensions, gratuities, and any fees, commissions, perquisites, or profits in lieu of salary from an employer. |
| Income from House Property | Individuals who own multiple properties or earn an income from renting properties out. |
| Income from Business or Profession | This head includes profits and gains made by doing business or through profession. |
| Income from Capital Gains | When you sell capital assets like shares, mutual funds, or real estate, you may earn a profit. Depending on how long you held the investment, your profit may be classified as short-term capital gain, or long-term capital gain, and taxed accordingly. |
| Income from Other Sources | If the type of income doesn’t fit in any of the above heads, it is included in this head. Examples of income classified as income from other sources are interest income, dividends, royalties, and winnings from lotteries. |
Income Tax Slabs
The income tax system in India is progressive. That means the higher one’s income, the more they are required to pay in taxes. This system divides income into different tax slabs, and each tax slab has a corresponding tax rate.
Earlier there used to be only one tax structure for all taxpayers. However, things changed in the Budget of 2020, when the government introduced an alternative structure, called the new tax regime. Now, taxpayers have the option to choose between the old tax regime and the new one each year when filing taxes. Let’s take a quick look into the major differences between the two regimes:
- The old tax regime allows for various deductions and exemptions, but the tax rates are higher.
- The new tax regime offers lower tax rates but taxpayers cannot take advantage of many exemptions and deductions.
- The new regime is now the default option for taxpayers. If you want to file your taxes under the old regime, you’ll have to specifically choose it when filing your return.
The tax liability you calculate will be different under both regimes, so it’s best to get an estimate under both regimes before finalising. The choice also gives you the benefit of selecting the regime that best aligns with your financial situation and tax planning strategy.
For example, if you can take advantage of the many deductions and exemptions allowed under the Income Tax Act, the old tax regime might be more suitable for you. If you don’t have many investments that offer deductions and are looking for a hassle-free way of filing taxes with low rates, you might prefer the new tax regime.
Here are the tax slabs under the new tax regime for the financial year 2024/25:
| Income Tax Slabs | Income Tax Rate |
| Rs. 0 to Rs. 3,00,000 | 0 |
| Rs. 3,00,000 to Rs. 7,00,000 | 5% |
| Rs. 7,00,000 to Rs. 10,00,000 | 10% |
| Rs. 10,00,000 to Rs. 12,00,000 | 15% |
| Rs. 12,00,000 to Rs. 15,00,000 | 20% |
| Above Rs. 15,00,000 | 30% |
There is no age benefit under the new tax regime, so all citizens have to follow this structure regardless of age. This is not the case in the old tax regime. The old structure gives age-based exemptions, which are beneficial for senior and super senior citizens:
Here’s what the old tax regime looks like for individuals under 60:
| Income Tax Slabs | Income Tax Rate |
| Rs. 0 to Rs. 2,50,000 | 0 |
| Rs. 2,50,000 to Rs. 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
So for individuals under 60, the basic exemption limit under the old tax regime is Rs. 2.5 lakh. This limit rises to Rs. 3 lakh for individuals between 60 to 80, also called senior citizens. Here are the income tax slabs for this age group:
| Income Tax Slabs | Income Tax Rate |
| Rs. 0 to Rs. 3,00,000 | 0 |
| Rs. 3,00,000 to Rs. 5,00,000 | 5% |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
The basic exemption limit rises even further to Rs. 5 lakh for individuals above 80. These taxpayers are called super senior citizens, and here’s what their tax slabs look like:
| Income Tax Slabs | Income Tax Rate |
| Rs. 0 to Rs. 5,00,000 | 0 |
| Rs. 5,00,000 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
Deductions
Deductions help taxpayers reduce their taxable income. For example, suppose a person earned an income of Rs. 12 lakh in the financial year and invested Rs. 1.5 lakh in the Public Provident Fund. Section 80C of the Income Tax Act allows this person to claim the amount he invested in PPF as a deduction. He can simply subtract Rs. 1.5 lakh from his gross total income, which means he’ll have to pay tax only on Rs. 10.5 lakh rather than Rs. 12 lakh.
That should give you a good idea about how important deductions are. The Income Tax Act allows you to claim many deductions under Chapter VI A, and doing so can significantly lower the amount of tax you owe. Let’s have a look at some important deductions:
1. Section 80C
This section is perhaps the most famous and popular way taxpayers reduce their tax liabilities. By investing in a variety of instruments, you can claim a maximum deduction of Rs. 1.5 lakh under this section. Here are some investments that are listed under Section 80C:
- Public Provident Fund
- Equity Linked Savings Scheme
- Unit Linked Insurance Plans
- National Pension Scheme
- Tax-Saving Fixed Deposits
- Senior Citizen Savings Scheme
- National Savings Certificate
- Sukanya Samriddhi Yojana
- Premiums paid for life insurance policies
If you invest Rs. 1 lakh in PPF and Rs. 1 lakh in ELSS, you will still only be able to claim a maximum deduction of Rs. 1.5 lakh under Section 80C, despite investing Rs. 2 lakh.
2. Section 80D
This section allows you to claim a deduction on health insurance premiums paid for yourself, your spouse, and children (maximum Rs. 25,000). If you insure your dependent parents the maximum amount you can claim rises to Rs. 50,000, and Rs. 75,000 if they are senior citizens. If you are a senior citizen too, the maximum amount that can be claimed as a deduction is Rs. 1 lakh.
3. Section 80E
This section deals with the deduction on interest paid on higher education loans. A big advantage for taxpayers under this section is that there is no upper limit on the amount of interest that they can claim as a deduction.
4. Section 80CCD (1B)
If you invest in the NPS, you can claim an extra deduction of Rs. 50,000 under this Section. This is in addition to the Rs. 1.5 lakh deduction on NPS contributions under Section 80C.
5. Section 80TTA
A deduction of up to Rs. 10,000 can be claimed on the interest earned from savings accounts with banks and post offices under this section.
Section 80DD – This section allows taxpayers with disabled dependents to claim deductions on their medical treatment. Rs. 75,000 can be claimed for the treatment of individuals with a normal disability, and Rs. 1,25,000 for dependents with a severe disability.
6. Section 80U
If the taxpayer is disabled, this section allows them to claim a deduction on medical treatment. The maximum amount that can be deducted is the same as under Section 80DD, that is, Rs. 75,000 for treatment of taxpayers with normal disability, and Rs. 1,25,000 for taxpayers with a severe disability.
7. Section 80G
If you make donations to certain eligible NGOs or other charitable organisations, you can claim a deduction on these donations which can be either 50% or 100% of the donated amount (It depends on the type of institution and the nature of the donation).
If you plan your taxes right, you can take maximum advantage of these deductions and minimise your tax burden! These are also just some ways one can reduce taxable income, but there are many other opportunities available. An experienced tax advisor can assess your financial situation and help you identify tax-saving opportunities. They can create a long-term strategy that helps you invest and save tax every year.
TDS or Tax Deducted
TDS stands for Tax Deducted at Source. As the name suggests, this is a system in which a certain amount or percentage is automatically deducted from your income at the source as tax. Here are some points regarding TDS:
- It can apply to different forms of income, like salary, fees, rent, and interest.
- The rules on TDS on salary are given under Section 192 of the Income Tax Act. There is no specific rate at which tax is deducted from salary. Instead, the TDS is calculated based on your annual income and applicable tax slab rates (after considering all the deductions and exemptions). Then, your employer deducts TDS each month to cover your total tax liability for the year.
- For income from interest, TDS rules are different. For example, bank fixed deposits are deducted at a fixed rate of 10% (There are some conditions like the total interest income exceeding a certain threshold). If you don’t provide your PAN, the TDS rate will increase to 20%.
- Similarly, Section 194 I deals with TDS on rent. If the rent paid for land, building, or furniture is more than Rs. 2.4 lakh per financial year, the tenant has to deduct TDS at a certain rate before making the payment to the landlord. This rate is 2% for the rent of plant, equipment and machinery, and 10% for land, building, or furniture.
Form 26AS is one of the most important TDS-related documents. It gives a consolidated annual statement that shows all the TDS, tax collected at source (TCS), and other tax payments made by you or on your behalf throughout the financial year. You should always check this form before filing your income tax return, as it helps you verify that the taxes deducted and paid on your behalf are correct.
Rebate for Resident Individuals [SECTION 87A]
Income tax rebate is another benefit that the government provides taxpayers which helps them reduce their tax burden. Section 87A deals with rebates, and it allows eligible taxpayers to lower their tax liability if their total income does not exceed a specified limit.
Limit under the old tax regime
If your income is Rs. 5,00,000 or lower, you get an income tax rebate of Rs. 12,500. Here’s how it works: According to the old regime tax slab, there is no tax liability on the first Rs. 2.5 lakh, and a 5% tax rate should be charged on the next Rs. 2.5 lakh. 5% of Rs. 2,50,000 = Rs. 12,500. The Government offers a rebate on this amount, so there is no income tax burden on the taxpayer.
Limit under the new tax regime
Section 87A offers a rebate of Rs. 25,000 under the new tax regime, which means there is no tax liability on individuals earning Rs. 7.5 lakh or less.
Income Tax Returns
Income tax return (ITR) filing is the process of submitting a detailed form of your income, deductions, and tax liabilities to the Income Tax Department. This form includes all your sources of income, such as salary, profits, interest, and investments, as well as all the deductions and exemptions you want to claim. There are seven forms taxpayers can choose from – ITR 1 to ITR 7, and each form is designed for specific types of taxpayers (individuals, HUFs, companies, and so on), income amounts, and income sources.
For example, the ITR 1 form is also called Sahaj and it’s for individuals with income from salary, pension, or one house property, and having a total income of up to Rs. 50 lakh. ITR 3 is used by individuals and Hindu Undivided Families earning income from business or profession.
ITR filing must be done every year before 31st July. Doing this accurately and on time is important, as otherwise you might be penalised or face delays when claiming income tax refunds.
Understanding Key Terms
Here are some words that you might see pop up when filing taxes. It’s important to know what they mean:
1. Form 16
This is a certificate issued by an employer to employees. It gives details of salary and the TDS deducted by the employer throughout the financial year. It’s a very important document for salaried individuals.
2. Advance Tax
Individuals whose tax burden is more than Rs. 10,000 in a financial year have to pay an advance tax. Generally, this tax is paid by individuals earning income from business or profession, and in four instalments.
3. TDS
TDS is Tax Deducted at Source. Deductors such as your employers, banks, and tenants can deduct a certain amount as tax before making the payment to you. They deposit this tax with the government on your behalf.
4. Refunds
If your tax liability is less than the TDS deposited with the government, you can claim an income tax refund by filing your ITR.
5. Notices
Notices are issued by the Income Tax Department. You can receive them for many reasons such as underreporting your income, not disclosing all sources of income, unpaid taxes, and other discrepancies in your ITR. These notices must be taken very seriously, and should you ever receive one, respond immediately.
6. Gross Total Income
This is your total income from all sources (heads) before applying any deductions.
Net Taxable Income – This is the income that you get after subtracting all deductions and exemptions from your gross total income. Your total tax liability is calculated on this income.
7. Tax Audit
An audit is another word for an official inspection. Under Section 44 AB of the Income Tax Act, a tax audit is mandatory for businesses and professionals whose turnover goes over a specific limit. It is a review of a taxpayer’s accounts to make sure they are compliant with tax laws.
Common Mistakes to Avoid
Tax filing can no doubt be a complex process, this is especially true for beginners. Making mistakes can lead to missed opportunities, confirmation or refund delays, and even penalties, that’s why it’s important to be careful. Here are some common mistakes people tend to make when filing ITR, and how you can avoid them:
1. Submitting the incorrect form
As you know, each of the seven forms is designed for a specific category of taxpayer and income. Check what each form means before filing your ITR.
2. Entering incorrect income
Consider every source of income when you’re filing your return. If you leave any out you might be penalised.
3. Entering incorrect personal and bank details
Your personal details should match with the information on your PAN. Bank details should also be correct, otherwise you might not receive your income tax refund on time.
4. Filing returns late
Generally, the last date to file taxes is 31st July. Filing taxes after that attracts penalties and even interest on the unpaid tax amount so make sure to always file ITR on time.
5. Not checking Form 26AS
This form provides information on TDS. It should be reconciled with your own records to make sure that all TDS amounts deducted and reported by employers, banks, and others match what is already in your Form 26AS.
6. Failing to e-verify
E-verification is the last step of ITR filing, so many people miss it. Your ITR must be verified within 30 days of filing. Verification can also be done offline.
7. Not keeping proof of investments
If you want to claim deductions, it’s compulsory to provide proof of investments, and premiums and interest paid.
8. Not claiming all deductions
You may be eligible for more deductions than you are aware. Assess your financial situation thoroughly and take help from a tax advisor to claim all possible deductions and minimise your tax liability.
Conclusion
It’s vital to learn about the income tax basic concepts, as they help you become more aware of how you can save money and make sure that you stay compliant with the law. Since tax filing is an annual process, it’s best to get started with tax planning as early as possible to save more money in the long term.
A tax advisor can be an invaluable partner in this process. These professionals have years of experience dealing with taxes, are well-versed in all the rules, and stay updated on the frequent changes in tax laws. They know the various ways one can save more taxes and can analyse your financial situation to give personalised advice.
They recommend suitable investment options, in line with your time horizon and risk tolerance, that help you not only reduce your tax liability but also achieve your financial goals. They also make sure that your taxes are filed accurately and on time, so you don’t have to deal with the hassle of dealing with tax authorities. Consult a tax advisor today, and stay ahead of your tax planning!
