Income tax is a levy imposed by the government on your total income. Whether you are employed, self-employed, or a business owner, you will have to pay income tax based on the category under which your income tax slab falls.
It can be a daunting subject, and it’s no surprise that many of us don’t know much about it. Calculating your tax is more complicated than it seems, and finding ways to reduce your taxes through tax saving schemes requires a lot of research – you can call it an art form.
This article breaks down the basics of the income tax slab and explains what it is and how it is calculated. It also enumerates the different categories of tax saving schemes under which taxes can be classified. So, make sure you read on.
What’s ‘Previous Year’ in Income Tax Jargon?
Your tax year lasts 12 months, starting on 1 April and ending on 31 March the year after. Whether you start your job in January or May, your tax year still closes on 31 March and a new one begins on 1 April. This means it’s important to plan your yearly tax outlay.
What is The Assessment Year?
Assessment Year is an expression often heard in relation to tax filing. It refers to the next year after a previous year in which you will ‘assess’ and file your return for the previous year. So, Assessment Year 2020-21 refers to the fiscal year 2019-20 (i.e., 1 April 2019 to 31 March 2020).
Tax Saving Schemes Under Section 80C
You can save up to INR 1.5 lakh under Section 80C. Here are some tax-saving schemes you could look into:
Public Provident Fund
One of the most popular tax saving scheme deductions claimed under Section 80C is deposits to a Public Provident Fund account. When you open a PPF account, you need to deposit a minimum of INR 500 and a maximum of INR 1,50,000 in a year. Money deposited in a PPF account compounds at an interest rate of 8% per annum, as you deposit more money in the subsequent financial years to claim deductions. A PPF account can be easily opened with the help of banks.
Tax-Saving Fixed Deposits
You can protect your capital and still receive a return by investing in fixed deposits. If the interest income is taxable, you will have to keep the money invested for at least 5 years to get tax benefits under section 80C of the income tax slab.
Equity Linked Saving Schemes
ELSS, one of the few mutual fund tax saving schemes allowed under Section 80C, has gained popularity among investors recently, as its historical performance has been higher than that of other available tax saving schemes. In addition to this, it also features a lock-in period of just 3 years, which makes it one of the most popular options for saving money on taxes.
Tax Deducted at Source (TDS) – What Does It Mean?
Tax Deducted at Source (TDS) is the amount of income tax that is deducted at the source of payment. The payer has to deduct an amount of tax based on the rules prescribed by the income tax slab department. If you earn interest from a Fixed Deposit, the bank also deducts a portion of your interest as taxes. Since the bank does not know your income tax slab, they usually deduct TDS @ 10%, unless you haven’t mentioned your PAN.
Income on Which You Need to Pay Tax
In addition to your salary, you’re also held liable as an individual to pay taxes on the income generated from your deposits and savings with banks or any other financial institutions. Here’s a comprehensive list of income sources on which you have to pay taxes:
- Salary Income – This includes income from sources like your job, allowance, leave encashment, or any other cash component that you receive for providing services to an organization.
- House Property Income – This involves the income generated from renting a property that you own.
- Income from Capital Gains – This includes all the income that’s generated through transactions that you do in capital assets like mutual funds or shares.
- Business or Profession Income – As the name suggests, if you’re conducting business processes in addition to your job, you’re required to pay taxes on the income generated through it.
- Income from Other Sources – This includes income from interest accumulated in savings accounts, bank deposits, gifts, and more.
What Are Income Tax Returns?
People who earn money are legally required to file an income tax return. Even if your income is below the range of taxes, you should file your return. Income tax returns are filled out with forms that tell the government how much money you made this year and how much was taken in taxes.
The income tax slab department in India has made paying taxes easier and more convenient for individuals and businesses. Individuals can pay their taxes online or file their tax returns, and businesses can track the history of their tax payments through several helpful websites nowadays.
By paying income tax, you are helping to fund the creation of important national infrastructure and improvements for the government. Your tax money supports many services, including public transportation, community infrastructure, and law enforcement.
While calculating your income tax at a first glance might seem like a daunting task, by understanding the different tax saving schemes, you can rest assured that your taxes are being properly calculated. This can help you avoid fines and penalties later on when you must file your taxes.
By following the steps above, in addition to noting any specific laws that apply to your own unique situation, you’ll be knowledgeable about how to calculate your taxes and how they relate to the law in India.
Overall, it’s important to remember that understanding the basics of income tax slabs will help you make wise financial decisions in the future.