Learn Income Tax Basic Concepts as a Beginner

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 the concept of basic Income Tax.

Also understanding the basic income tax formula is essential for calculating your tax liability accurately.

This quick read should help you understand Income Tax.

What is Income Tax?

Let's first understand the concept of income tax.

Income Tax: It's 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?

Income tax slabs are the categories of taxpayers based on their income levels and the applicable tax rates. In India, the income tax slabs are different under the old and the new tax regimes.

The income tax slabs as per the New Tax Regime, along with their tax rates, look like this -

Points to Remember for Income Tax Slabs:

• The new tax regime has five income tax slabs, starting from Rs 0 to Rs 3 lakh, and going up to above Rs 15 lakh.
• The income tax basic exemption limit has been increased from Rs 2.5 lakh to Rs 3 lakh under the new tax regime.
• The rebate under section 87A has been increased from Rs 5 lakh to Rs 7 lakh, which means that individuals with taxable income up to Rs 7 lakh will pay zero tax under the new tax regime.
• The new tax regime has reduced the highest surcharge rate from 37% to 25%.
• The new tax regime introduced a standard deduction of Rs 50,000 for salaried individuals and pensioners.

Income Tax Exemptions and Deductions

The latest regime was introduced in the Budget 2023 and offers lower tax rates than the old regime, but with fewer exemptions and deductions.

The exemptions and deductions that are not available under the latest regime include:

• Section 80C
• Section 80CCD (1b)
• Section 80D
• Leave travel allowance (LTA)
• House rent allowance (HRA)
• Deduction for interest on housing loan
• Deduction under section 80TTA/80TTB, etc.

The exemptions and deductions that are available under the latest regime include:

• Standard deduction of Rs 50,000 for salaried individuals and pensioners
• Standard deduction of Rs 15,000 or 1/3rd of pension for family pensioners
• Deduction under section 80CCD (2) for employer’s contribution to NPS
• Interest on home loan for let-out property
• Contributions to Agniveer Corpus Fund

17 Key Terminologies & Definitions in Income Tax

1. Assessment Year (AY): The year when your income is assessed for tax, following the financial year. For instance, income earned in 2022-2023 is assessed in AY 2023-2024.
2. Previous Year (PY): The financial year in which you earn taxable income. In the example, it's 2022-2023.
3. Tax Deducted at Source (TDS): Money withheld from your income by payers like employers or banks, remitted to the government as advance tax. Applies to income sources like salary, interest, rent, etc.
4. Permanent Account Number (PAN): A unique ID by the Income Tax Department for tracking financial transactions and filing tax returns.
5. Income Tax Return (ITR): A document to report income and tax liability, mandatory for taxpayers with taxable income.
6. Gross Total Income (GTI): Total income before deductions and exemptions, including salary, business income, and capital gains.
7. Taxable Income: Income subject to tax after deductions and exemptions.
8. Tax Exemption: Certain incomes or investments not taxed, e.g., HRA, agricultural income, allowances.
9. Advance Tax: Payments made throughout the year as you earn income, avoiding a lump-sum payment at year-end.
10. Tax Credit: A deduction for taxes already paid, such as TDS or advance tax, reducing overall tax liability.
11. Form 26AS: A tax statement summarizing your TDS, TCS, and other tax payments.
12. Form 16: An employer-issued certificate detailing your salary and TDS deductions.
13. Advance Tax: Periodic tax payments throughout the year, avoiding a lump sum payment.
14. Section 80C: A tax section offering deductions for specified investments and expenses.
15. Section 80D: A tax section providing deductions for health insurance premiums.
16. Section 80EE: A tax section offering deductions on home loan interest for first-time homebuyers.
17. Refund: Money returned by the government if you've overpaid your income tax.

Wrapping-Up

As a beginner, learning basic income tax concepts can help you understand your tax liability, plan your taxes, and file your returns correctly. Some basic concepts you should know are the previous year, assessment year, taxable income, tax rates, deductions, exemptions, TDS, income tax slabs, and income tax return. By knowing these concepts, you can save tax legally, avoid penalties and interest, and comply with income tax laws. You can also use online tools and resources to learn more about income tax and get expert guidance.

Frequently Asked Questions

1. What is basic tax in income tax?

Basic tax in income tax is the amount of tax that is calculated on the taxable income of a person at the slab rates prescribed by the relevant Finance Act. For example, for FY 2022-23, the basic tax for a person with a taxable income of Rs 6 lakh is Rs 12,500 (5% of Rs 2.5 lakh) under the old regime and Rs 37,500 (10% of Rs 2.5 lakh + 15% of Rs 2.5 lakh) under the new regime.

2. What are the 4 types of income taxes?

The four types of income taxes are:

1. Income tax, which is levied on the total income of a person from various sources such as salary, house property, capital gains, business or profession, and other sources.
2. Surcharge, which is an additional tax levied on the basic tax of a person if their taxable income exceeds certain thresholds.
3. Education cess, which is a charge levied on the sum of basic tax and surcharge at the rate of 4%. It is meant for funding education and health schemes of the government.
4. Health and education cess is a charge levied on the sum of basic tax and surcharge at the rate of 4%. It is meant for funding education and health schemes of the government.

3. What is TDS in income tax?

TDS or Tax Deducted at Source is a way of collecting tax from the source of income before it reaches the person. The payer deducts a percentage of tax from the payment and deposits it with the government on behalf of the payee. This helps ensure timely payment of taxes and reduces tax evasion. For instance, an employer deducts TDS from an employee's salary and pays it to the government.

4. Is basic salary tax free?

Basic salary is not tax free. It is one of the components of salary income that is taxable under the head Income from Salary. However, people can claim deductions from their gross salary to reduce their taxable income.

5. What is total TDS on salary?

Total TDS on salary is the tax amount that employers deduct from employees' income and pay to the government on their behalf. It's calculated using the applicable slab rates for the employee's estimated annual income after deductions and exemptions.