All about Income Tax

What Is Income Tax?

Daunting. It's the first word that comes to most of our minds when anyone mentions income tax. And that's okay. Many adults, who helm a 20-member team or cook a 4-course meal, don't quite get what income tax is all about. This quick read should help you understand income tax.

Income Tax is a direct tax levied on an individual's income. The central government collects it as a form of revenue. Any such income generated by the government is used towards nation-building — better infrastructure, improvements in healthcare, taking care of the less fortunate, more educational facilities, subsidies, etc.

Taxes are broadly categorised into two:

*Direct (examples: Income Tax, Capital Gains Tax)

*Indirect (examples: Customs Duty, GST)

What Are Income Tax Slabs?

Here's the TL;DR version: You are taxed depending on how much money you make. Someone who earns an 8-figure salary will not pay the same income tax amount as a newly appointed intern.

You will need to file an income tax return if your gross income exceeds ₹2,50,000 in a financial year. India follows a progressive tax structure — i.e. the percentage of tax levied will increase with increasing income. This tier-based income tax structure attempts to keep taxation fair to all.

There are two tax regimes in force. The New Tax Regime announced during the 2020 Union Budget, offered more tax slabs but eradicated the deductions and exemptions that came with the Old Tax Regime.

Remember the multiplication tables you learned in school? Think of this table below as just as essential to your adult existence. Knowing which slab you fall under will help you understand Income Tax better.

The income tax slabs as per the New Tax Regime and their tax rates look like this.

The Income Tax slabs for the Old Tax Regime, on the other hand, are as follows:

(i) For residents and non-residents 60 years old or less:

(ii) For resident or non-resident senior citizens (60-80 years)

(iii) For resident super senior citizens (80+ years)

Income Tax Exemptions and Deductions

Now that we’re done with the hard part, let’s see how this can get better for you. Just because you’re supposed to pay anywhere between 5% to 30% of your income as tax — doesn’t mean you have to. The government has ways of letting you not pay taxes as long as you’re contributing to the economy in other ways. Here’s a quick look at what that means.

Tax deductions are legal claims that allow you to reduce the amount subject to tax. Taxable income is the gross income earned minus deductions. A standard deduction of ₹50,000 applies to everyone, irrespective of the tax slab you fall in.

Following are some of the allowed deductions:

The Difference Between Financial Year and Assessment Year

Financial Year (FY): The year in which income is earned.

Assessment Year (AY): The year that follows an FY, a.k.a when the income tax return is filed.

1st April and 31st March mark the beginning and end of both FY and AY.

What Are Ways to Save on Tax?

A good chunk of your income can help you save on tax. So pay close attention.

The Income Tax Act of 1961 lays out various tools that allow you to save tax.

Investments you can make within this section include:

• Life insurance premiums
• Health insurance premiums
• ELSS mutual funds
• Contributions towards Employee Provident Fund Scheme (EPF)
• Contributions to the Public Provident Fund (PPF)
• ULIP contributions
• Subscription to Sukanya Samriddhi Account Scheme
• Term deposits with a 5-year lock-in period
• Subscription to National Savings Certificate
• Investment in bonds issued by NABARD
• Subscription to government bonds
• Deposits in Senior Citizen Savings Scheme Rules, 2004

Donations made in cash up to ₹2,000 in a financial year are allowed for deduction. You can claim 50% to 100% of the donation amount made via cheque. The following are a few places where donations are 100% deductible:

• Clean Ganga Fund
• National Children’s Fund
• Swachh Bharat Kosh
• Fund for Technology Development and Application
• PM’s National Relief Fund
• National Sports Fund
• National Cultural Fund
• Jawaharlal Nehru Memorial Fund
• The Rajiv Gandhi Foundation
• PM’s Drought Relief Fund

Some Mutual Funds that Save Tax

Now that we’ve covered the likes of insurance, here’s something else you can do to save tax. You can invest that money and earn returns — while also saving on tax.

Investing in equity-linked savings scheme (ELSS) mutual funds offers tax deductions under Section 80C and the prospect of wealth creation. ELSS mutual funds come with a 3-year lock-in period. Tax deductions up to ₹1,50,000 are allowed in a financial year, while there is no capping on the amount you can invest. The defining feature of an ELSS mutual fund is that the majority (65%) of your funds get allocated to equities or equity-linked securities.

Some of ELSS Mutual funds and their NAVs are given below:

*These figures were reported on 26 September 2023

Hope this quick primer helps you better understand income tax, the various income tax slabs, and ways in which you can legally reduce your income tax payments!

Summing Up

Income tax is a vast topic that needs dedicated effort and time to understand completely. However, with this comprehensive guide, you will have learnt all the major aspects of income tax, enough to help you understand the different income tax regimes, tax deductions, and ways in which you can save on your income tax.

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Frequently Asked Questions

1. What’s the difference between direct and indirect taxes?

Taxes are of two types, direct and indirect. Direct taxes include individual income tax, capital gains tax, etc., and indirect taxes include customs duty, GST, etc.

2. How will my income tax refund be calculated?

Your income tax refund will be automatically calculated by filling out the Income Tax Returns (ITR) form.

3. How much time does it take to process my ITR?

Refunds are issued by the Centralised Processing Centre (CPC) within 20-45 days after processing your ITR.

4. When is the due date to file my ITR?

The due date for filing ITR is July 31. Belated ITR can be filled by the 31st of December of each financial year.

5. Who is required to pay income tax?

All citizens whose taxable income is ₹2,50,000 or above are required to pay income tax.