While knowing how to work the beauty blender or hacking the neighbor’s Wi-Fi is a great skill, one should know the very basics of what adulting essentially is made up of – Taxes, Savings, Workouts, and healthy lifestyle choices. No, we are not kidding! Boys, and girls, it’s time we move over Dharma movies and know how to chip in our bit in understanding, recognizing, and learning basics of what our parents have been doing for ages, as a part of sustaining a great family life.
Indore HD has curated some very simple pointers that will help you understand how Income Tax works. If you’ve just finished your college, looking for a job, or are already in one and doing your taxes for the first time, here are some ways to understand the basics for you to know your taxes better. It won’t sound this hard while you reach the end, we promise!
First, let’s get you through some basic terms that are used with Income Tax.
Previous year or the financial year or your tax year is the 12 month period that begins on 1st April and ends on the 31st March of the next year. No matter when you start your job, your tax year closes on 31st March and a new tax year starts on 1st April. So, it is important to plan your taxes for each financial year accordingly.
Assessment year is the year in which you will file your return for the previous year.
The assessment year is 2019-20 for the previous year 2018-19.
For instance – if you start your job on 1st January 2019, your tax year closes on 31st March 2019. 2018-19 is your previous year and your assessment year is 2019-20. You will be filing your return in the assessment year 2019-20, for which the last date will be 31st July 2019.
The payroll or the HR department of the employer you are working for can be reached out to, for your Salary details/ Pay Slip / Tax Statement. The sheet you get will give you an idea of the major components of your salary and how much tax will be deducted from your salary based on them.
Most companies give House Rent Allowance or HRA, which in turn will help you save tax on that if you are living on rent.
Besides the salary income you receive, if you are earning an income from other sources – the Total Income is the sum total of any source of income – From Salary or House/property or Capital Gain or income from your business or profession, and income from other sources.
It’s as simple as this :-
Sum of All heads of Income = Gross Income Gross Income – Deductions = Taxable Income
The more you make use of the deductions allowed, the lower your tax shall be.
Section 80C can take off INR 1,50,000 from your Gross Income, which will in turn reduce your taxable income. Read the following ways of investment that come under Section 80 C.
One of the most popular deductions under 80C is deposits to Public Provident Fund or PPF. 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. The money you deposit to your PPF account compounds yearly. It is a safe way to keep your money growing.
FD or Fixed deposits assure a sizable interest income for investors. To get tax benefits under 80C, you need to stay invested for at least 5 years. It is safe, but the Interest Income from it is taxable.
Having the lowest lock-in period – that is, of 3 years, this is a popular Tax saver. This one of the only mutual fund schemes allowed under 80C, ELSS (Equity Linked Savings Scheme).
TDS is Tax Deducted at Source – it means that the tax is deducted by the person making payment. The payer has to deduct an amount of tax based on the rules prescribed by the income tax department. For instance, An employer will estimate the total annual income of an employee and deduct tax on his Income if his Taxable Income exceeds INR 2,50,000. Tax is deducted based on which tax slab you belong to each year. Similarly, if you earn interest from a Fixed Deposit, the bank also deducts TDS. Since the bank does not know your tax slabs, they usually deduct TDS @ 10%, unless you haven’t mentioned your PAN (in that case a 20% TDS may be deducted).
On your Taxable Income, tax slabs or rates are applied and final tax payable is calculated. From this tax payable, you can reduce all the TDS that has already been deducted.
As per the Budget 2018, salaried employees are entitled to a standard deduction of Rs 40,000 from the gross salary. This standard deduction will replace the medical reimbursement amounting to INR 15,000 and transport allowance amounting to Rs. 19,200 in a financial year. Effectively, the taxpayer will get an additional income exemption of Rs 5,800.
The limit of Rs. 40,000 has been increased to Rs. 50,000 in the Interim Budget 2019. You can read more about what’s inside the Interim Budget, in this easy guide.
We hope you’ve come out a little more informed about the what’s what of the income Tax. Happy savings!