Income Tax Basics For Beginners

Aug 17, 2022

Paying their first income tax is a significant moment in every citizen’s life. The procedure can appear overly tricky and time-consuming for a novice, and some terminologies can fly right over your head. Here is a list of the fundamentals of income tax for beginners to assist you in comprehending the tax implications of your income (depending on your income source).

Basics of Income Tax for Beginners

Are you currently seeking employment after finishing college? Or perhaps you already have the job and will soon file your first income tax return? We can assist you if the specifics of income tax and investments are confusing. Our goal is to make your financial life easier by making income taxes simpler for you. In general, anyone with a source of income must file income tax returns.

Defining the ‘Previous year’

The 12-month period that starts on April 1 and ends on March 31 of the following year is the previous year or the financial year, or your tax year. Regardless of when you begin your job, your tax year ends on March 31, and a new one starts on April 1. Therefore, planning your taxes for each financial year is crucial.

Assessment Year

It is a term that you frequently use in connection with tax filing. The assessment year is the financial year following the previous year in which you ‘assess’ and file your IT return for the previous year. Therefore, the assessment year for the previous year, 2018–19, is 2019–20. The year when you file your return for your tax year is the assessment year. For instance, if you begin working on January 1, 2021, the end of your tax year is March 31, 2021. Your assessment year is 2021–22, while your previous year is 2020–21.

Understanding your Salary

Get your salary information/ pay slip/ tax statement from the payroll or HR department as soon as you start working. Here, you get a general understanding of the key elements of your salary and their tax implications as a result.

Example: If you live in a rental unit, you can save tax on the HRA that the majority of employers provide.

Standard Deduction

According to the 2018 Budget, salaried workers get a basic deduction from their gross salary of INR 40,000. In the Interim Budget for 2019, the limit grew to INR 50,000 from INR 40,000 starting from FY 2019–20.

Income on which you pay Tax

You may receive income from many sources in addition to your salary. The total of all the income categories listed below is your total income.

Sources of Income

Earnings from a salary: All the money you receive while performing your job as a result of your employment agreement, including salary, allowances, and leave encashment

Income from house property: Income from a house or other building that is either owned and self-occupied or rented out.

Capital gains income: Income from a capital asset sale’s gain

Income from a profession or business: Income or loss resulting from operating a business or carrying on a profession

Income from other sources: Your income from savings bank accounts, term deposits, family pensions, or gifts is  included under this heading

Knowing Section 80C

Section 80C can reduce your taxable income by INR 1,50,000. You can save tax by investing in some instruments. You can read about some of the most popular investment instruments under this heading below.

PPF

Deposits to the PPF are among the most common deductions allowed under section 80C. You must deposit a minimum of INR 500 and a maximum of INR 1,50,000 to start a PPF account. Money in the PPF account grows over time as you make further deposits for tax deductions in succeeding financial years. PPF is a secure way to save your hard-earned money. It is easy to open a PPF account with a bank.

Tax-saving Fixed Deposit

Fixed deposits provide investors with both substantial interest income and capital protection. You must remain invested for at least five years to qualify for tax benefits under section 80C. Although it is secure, the interest this instrument generates is taxable.

Tax-saving Mutual Funds or ELSS

Due to its historically better performance in recent years, ELSS (Equity Linked Savings Scheme), one of the only mutual fund schemes permitted under 80C, has been becoming more popular among people. In addition, ELSS has a short lock-in period of three years.

TDS or Tax Deducted at Source

TDS stands for Tax Deducted at Source. Based on the guidelines that the income tax department established, the payer must deduct a amount of tax. For instance, if an employee’s taxable income exceeds INR 2,50,000, the employer will estimate the employee’s annual income and deduct tax from it. The employer deducts tax depending on the tax slab you fall under each year. Similarly, the bank deducts TDS when you earn interest on a fixed deposit. The bank typically deducts TDS @ 10% because they are unaware of your tax slabs.

Tax on Returns Earned Through P2P Lending

In P2P lending, investors earn income in the form of interest on the amount they lend. P2P lending is one of the rapidly growing investment opportunities in India. The fixed maturity peer-to-peer investment plan from LenDenClub offers up to 10–12%* annual returns on your investment. Similar to the interest earned on any other instrument, such as a fixed deposit, the interest income in P2P lending is also taxable. Lenders’ interest income from peer-to-peer lending comes under “income from other sources” and is added to their taxable income.

Related post

Leave A Comment