If you are new to the world of income tax, you might feel overwhelmed by the various terms and rules that govern this subject. However, income tax is not as complicated as it seems, and with some basic knowledge, you can easily file your returns and save tax. In this blog post, we will explain some of the income tax basics that every beginner should know.

What is Income Tax?

Income tax is a direct tax that is levied by the central government on the income earned by individuals and entities in a financial year. The income tax rates and rules are prescribed by the Income Tax Act, 1961 and the Finance Act of each year. The income tax department is responsible for administering and collecting income tax in India.

What is Income?

Income is broadly defined as any money or value received by an individual or entity from any source, such as salary, business, profession, capital gains, house property, interest, dividends, etc. However, not all income is taxable. Some income is exempt from tax under Section 10 of the Income Tax Act, such as agricultural income, dividends from Indian companies, long-term capital gains from equity shares and equity mutual funds, etc.

How is Income Tax Calculated?

Income tax is calculated on the total income of an individual or entity after deducting certain exemptions and deductions. The total income is classified into five heads of income:

• Income from salary: This includes the money received from an employer as salary, allowances, perquisites, gratuity, pension, etc.
• Income from house property: This includes the rent received from a house or building owned by the taxpayer, or the annual value of a self-occupied property.
• Income from capital gains: This includes the profit or loss arising from the sale of a capital asset, such as shares, property, gold, etc.
• Income from business or profession: This includes the income or loss arising from carrying on a business or profession by the taxpayer.
• Income from other sources: This includes any other income that does not fall under any of the above heads, such as interest, winnings from lottery, gifts, etc.

The income under each head is computed according to the provisions of the Income Tax Act and added together to get the gross total income. From this gross total income, certain deductions are allowed under Chapter VI-A of the Income Tax Act, such as Section 80C (investments in life insurance, provident fund, etc.), Section 80D (health insurance premium), Section 80E (interest on education loan), etc. The net total income after these deductions is the taxable income of the taxpayer.

The taxable income is then applied to the income tax slabs and rates prescribed by the government for each financial year. The income tax slabs and rates vary depending on the category of taxpayer (individuals are further classified into resident, non-resident, senior citizen, super senior citizen) and the residential status (resident or non-resident). The following table shows the income tax slabs and rates for individuals for FY 2022-23 (AY 2023-24):

Note: A surcharge of 10% is applicable on taxable income above Rs. 50 lakh but below Rs. 1 crore; a surcharge of 15% is applicable on taxable income above Rs. 1 crore but below Rs. 2 crore; a surcharge of 25% is applicable on taxable income above Rs. 2 crore but below Rs. 5 crore; and a surcharge of 37% is applicable on taxable income above Rs. 5 crore.

Additionally, a health and education cess of 4% is applicable on the total tax liability (including surcharge).

The government has also introduced an optional new tax regime for individuals from FY 2020-21 (AY 2021-22) onwards, which offers lower tax rates but does not allow most of the exemptions and deductions available under the old regime. The following table shows the income tax slabs and rates under the new regime for individuals for FY 2022-23 (AY 2023-24):

Note: The surcharge and cess rates are the same as the old regime.

The taxpayer can choose between the old and the new regime every year, depending on which one is more beneficial for him or her.

How to File Income Tax Returns?

Income tax returns (ITR) are the documents that a taxpayer has to file with the income tax department every year, declaring his or her income, tax liability, tax payments, and other details. Filing ITR is mandatory for every taxpayer whose gross total income exceeds the basic exemption limit (Rs. 2.5 lakh for individuals below 60 years of age, Rs. 3 lakh for senior citizens above 60 years of age, and Rs. 5 lakh for super senior citizens above 80 years of age).

The income tax department has prescribed different ITR forms for different categories and sources of income. The taxpayer has to choose the appropriate ITR form based on his or her income and status. The following table shows the ITR forms applicable for individuals for FY 2022-23 (AY 2023-24):

The taxpayer can file the ITR online through the e-filing portal of the income tax department (https://www.incometax.gov.in) or offline through paper mode (only for certain taxpayers). The due date for filing the ITR is generally July 31 of the assessment year, unless extended by the government.

The taxpayer has to verify the ITR after filing it, either electronically through Aadhaar OTP, net banking, EVC, etc., or physically by sending a signed copy of the ITR-V (acknowledgement) to the Centralized Processing Center (CPC) in Bengaluru within 120 days of filing.

The income tax department processes the ITR after verification and issues an intimation under Section 143(1) to the taxpayer, stating whether the tax liability and payments are matching or not. If there is any discrepancy or demand, the taxpayer has to rectify it or pay it within the specified time limit. If there is any refund due to the taxpayer, it will be credited to his or her bank account after processing.

What are the Documents Required for Filing ITR?

The taxpayer should keep the following documents handy while filing the ITR:

• PAN card
• Aadhaar card
• Bank account details
• Form 16/16A/16B (TDS certificates issued by deductors)
• Form 26AS (tax credit statement showing TDS, TCS, advance tax, self-assessment tax paid by the taxpayer)
• Salary slips
• Rent receipts
• Interest certificates from banks and post offices
• Investment proofs for deductions under Chapter VI-A
• Capital gains statements from brokers or mutual funds
• Business or profession income and expense statements
• Any other relevant documents

What are the Benefits of Filing ITR?

Filing ITR is not only a legal obligation but also a beneficial practice for every taxpayer. Some of the benefits of filing ITR are:

• It helps in claiming refunds of excess tax paid or deducted
• It helps in availing loans and credit cards from banks and financial institutions
• It helps in applying for visas and immigration to foreign countries
• It helps in carrying forward losses to set off against future income
• It helps in avoiding penalties and interest for late or non-filing of returns
• It helps in creating a financial record and proof of income for various purposes

Conclusion

Income tax is an important aspect of every taxpayer's financial life. By understanding the income tax basics, one can easily comply with the tax laws and save tax legally. Filing ITR is a simple and hassle-free process if done online and on time. One can also take the help of professional tax experts or online platforms to file their returns accurately and conveniently.

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