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Whether you're a recent graduate entering the workforce or someone looking to gain a deeper understanding of personal finance, grasping the basic concepts of income tax is a crucial step towards a financial journey.

In this blog, we'll give you a brief understanding of everything you need to know about paying tax. So, let's start with the basics of

What is Income Tax?

Income tax is a tax you need to pay on the income you earn each financial year, whether you're an individual, a firm, a company or any other person within the scope of the Income Tax Act.

In India, the rules for calculating, assessing, and collecting income tax are outlined in the Income Tax Act, 1961 and in the Income-tax Rules, 1962. Every person whose income exceeds the basic exemption limit is required to submit an Income Tax Return (ITR) each year by the specified deadlines. Irrespective of basic exemption limit, certain category of people are required to file their return of income.

Return is a way by which a person informs the government about the gross income earned from different sources, taxable income, taxes paid and tax payable or refundable . You are required to submit your income tax return within the due dates prescribed for different categories of people There are ways to reduce the amount of tax you pay by taking advantage of deductions and exemptions provided under the Income-tax Act.

Who is Required to Pay Income Tax?

Filing your Income Tax Return (ITR) is a must if your taxable total income exceeds Rs. 3,00,000 in a year under the New Tax Regime. Under the old tax regime, ITR is required to be filed, if the total income exceeds Rs 2,50,000/- before claiming exemptions and deductions, however, if you're a senior citizen, the limit is Rs. 3,00,000, and for super senior citizens, it's Rs. 5,00,000 under the old tax regime.

Tax Deductions

When it comes to your income tax, deductions play a crucial role in reducing the amount of money on which you are taxed. These deductions are calculated in accordance with the relevant provisions of the Income-tax Act, based on the eligibility of such deductions, taking into consideration components of your total income for a financial year, including your salary and investments. If you're a salaried individual, you start with a standard deduction of ₹50,000 on your salary.

Certain deductions are allowed from the gross total income, such as on certain expenses or investments under section 80C, Medical and Health Insurance Expenses under section-80D, Interest on higher education loan under section 80E, Donations under section 80G, etc

Understanding and using these deductions can significantly impact your taxable income, ensuring you make the most of the available benefits. So, as you navigate the income tax landscape, keep these deduction opportunities in mind to optimise your tax liabilities.

Understanding the Difference between Financial Year and Assessment Year

Now that we've clarified what income tax is, let's figure out when you're supposed to pay it. A crucial aspect of income tax filing involves paying taxes for the money you earned in the previous year, which is called the Financial Year (FY). The year following the FY is known as the Assessment Year (AY). The government reviews and taxes your income during the AY. It's important to note that both FY and AY span from 1st April to 31st March.

When the AY comes around, you'll need to fill out the Income Tax Return (ITR) in the prescribed form and manner . This helps the government assess and manage the taxes you owe based on your income during that period.

Understanding the Basics of Income Tax Filing

When it comes to filing your Income Tax Returns (ITR), it's essential to know the basics of the process. In India, there are seven types of ITR forms tailored to different sources of income, amounts earned, and various factors. The following are the forms applicable to individuals-

• ITR-1: For resident individuals with total income up to ₹50 lakhs from salary, pension, one house property, and other sources.
• ITR-2: Applicable for individuals or HUFs with total income over ₹50 lakhs, including sources under ITR-1, capital gains, more than one house property, and foreign income.
• ITR-3: Includes ITR-2 plus income from business or profession, partnership, and total income over ₹50 lakhs.
• ITR-4: For resident individuals, HUFs, and partnership firms with presumptive income and total income up to ₹50 lakhs.

E-filing of Income Tax Returns:

Opting for income tax e-filing makes the entire process convenient. Visit the Income Tax Portal, register using your PAN, choose the relevant ITR form, and fill in the required sections. Submit and file your taxes online, hassle-free.

Taxation for Salaried Employees vs. Freelancers:

• Salaried Individuals: Your employer deducts taxes from your salary based on your investment and rent declarations. The amount you receive in your bank account is after these deductions.
• Freelancers: Clients deduct Tax Deducted at Source (TDS) from your income before payment, submitting it to the government on your behalf. However, freelancers still need to submit ITR by declaring their total income, the tax owed, and the tax already paid.

If you've overpaid, you can request a refund, and if you've paid less, you must settle the remaining amount. Understanding these basics is crucial for managing your taxes effectively.

Conclusion

Income tax basics are important for anyone starting out on their financial journey. Learning about income tax gives you the power to make smart financial decisions that will help you have a more secure financial future.

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[Disclaimer- The article is only for educational purposes and should not be construed as tax advice. The relevant provisions of the Income-tax Act and relevant rules may be referred to for complete understanding.]