Income tax is a portion of your income that you pay to the government to fund the country’s welfare and development. When it comes to income tax, we often come across concepts that have unclear meaning. We are never really sure of what the exact tax slabs are or what revisions have been made. So here is a ready reckoner of income tax basics for you to know about the essential concepts of income tax you are likely to come across often while paying your taxes.
What is ‘Income’?
Starting with income tax basics, the most important term to understand is what is defined as income. Income, as per the Income Tax Act is set in five categories that anyone who has a source of earning is liable to pay.
- Salary Income
Payment received from your employer is part of this category including basic pay, annuity, advances, allowance, transport conveyance, perquisites and retirement benefits, among others. The total of all these makes up your gross salary, post exemptions. Form 16, column 6 provides all the details about your Income from Salary.
- Rental income
Income in the form of rent received from residential or commercial property that you own is taxable under law as Income From House Property.
- Income from Business And Profession
If you are a business owner or salaried professional, or freelancer, then your income in the form of payment or profits will be taxed under this category. The taxable income here will be calculated minus your expenses.
- Capital Gains Income
Gain from the transfer of a capital asset which is held in the form of investment including real estate, jewellery, shares of companies, bonds, etc. are termed as income under this category. Assets that have been received as gifts, e.g. inheritance, are not accounted or in this category unless they are sold.
- Income from Other Sources
Any income received that is not included in the four categories above falls under income from other sources. They can be recurring like interest (earned from post office savings, bank deposits, savings bank deposits, recurring deposits), and non-recurring income is income earned once by way of lottery, game show or gambling.
What is Tax-Free Income?
Our understanding of income tax basics is incomplete without knowing if there are incomes that are not taxable.
Income which is not liable for taxation like agricultural income, receipts from HUF, interest earned by NRIs on bonds notified by Central Government, gratuities, commutation of pension, proceeds from insurance received after the death of the insured person, Provident Fund receipts, among others.
Who is an Assessee?
An assessee is a person or entity who is entitled to pay the taxes. It could be an individual, an HUF or Hindu Undivided Family, partnership firm, company, Body of Individuals or AOP (association of persons).
What is a Financial Year and Assessment Year?
The year in which income is earned and advance tax paid is the financial year. Assessment year is the year following the financial year when the income tax department assesses the income tax returns filed by the taxpayer. So for the Financial Year 2020-21, the assessment year is going to be FY2012-22.
Given the financial burden, a taxpayer has to bear to ensure his family’s future, take care of medical, educational expenses, and provide for the family; the tax laws allow deductions that can be reduced from the gross income. So your gross income minus deductions give you the net taxable income. These deductions are enlisted under Section 80 of the Income Tax Act (Section 80C to 80U). Some of these deductions include:
Section 80C: Deductions on investments up to Rs.1.5 lakh. In other words, you can reduce this amount of deduction from your gross income to arrive at the net taxable income.
Section 80CCC: Deduction on insurance premium paid towards servicing an annuity.
Section 80CCD: Deduction on the contribution made towards pension. This cannot exceed 10% of your salary or 20% of your gross income.
Section 80TTA: Deduction on interest on savings account
Section 80GG: deduction on house rent paid when HRA is not provided
Section 80E, 80EE: Deduction on interest paid on education loan and home loan.
Section 80CCG: Deduction on investments in Rajiv Gandhi Equity Saving Scheme (RGESS)
Section 80D,80DD, 80DDB: Deduction on medical insurance, medical expenses, rehabilitation of differently-abled persons
Section 80 G- Deduction on donations made to eligible organizations, political parties and
Section 80TTB- Deductions on interest income
Section 80RRB- Deductions on royalty on a patent
What is a Standard Deduction?
A standard deduction is a blanket deduction of Rs. 50,000 for salaried taxpayers irrespective of how much he/she earns or invests. Also, 30 percent of house rent income can be claimed under the standard deduction. This deduction is instead of medical reimbursement and transport allowance which was eligible for standard deduction before FY18-19.
Income Tax Slab Rates for FY 20-21 and Assessment Year 21-22
India has a progressive tax structure, where tax is calculated on an incremental basis. The rate at which income will be taxed for each slab rises as the income rise. The cumulative tax amount from each tax slab applicable to your income becomes your net tax outgo after reducing the deductions.
The Finance Ministry in its Union Budget for FY2021 introduced a new tax regime as an option to the existing tax slab rates. According to the new tax rules, the taxpayers who go for the new tax regime would have to let go of certain tax exemptions and deductions including:
Leave Travel Allowance
House Rent Allowance
Daily expenses in the course of employment
Children education allowance
Special benefits under Section 10(14)
Interest on housing loan (Section 24)
Deduction (80C,80D, 80E and so on)
Also, if an investor wants to switch to the new regime, it must be done before filing returns for AY 2021-22. Taxpayers with business income can change back to the pre-existing tax regime only once.
The tax slab rate under the new regime versus the old regime is given below:
|Income Tax Slab||Tax rate in the new regime||Tax rate in the earlier regime|
|Up to Rs 2.5 lakh||NIL||Nil|
|Rs 2.5 lakh to Rs 5 lakh||5% (For net taxable income up to Rs. 5 lakh, a tax rebate of Rs 12,500 is available under section 87A)||5% of total income exceeding Rs. 2.5 lakh|
|Rs 5 lakh to Rs 7.5 lakh||10%||12,500 + 20% of total income exceeding ₹5,00,000|
|Rs 7.5 lakh to Rs 10 lakh||15%|
|Rs 10 lakh to Rs 12.5 lakh||20%||Rs. 1,12,500+30% of total income exceeding Rs. 10 lakh|
|Rs 12.5 lakh to Rs 15 lakh||25%|
|Rs 15 lakh and above||30%|
In the older regime, the minimum taxable income for senior citizens and super senior citizens is Rs. 3 lakh and Rs. 5 lakh respectively.
You also need to pay a tax for health and education cess of 4%.
Knowing these basic concepts, applicable deductions and tax slab rates will now make it simple for you to file taxes instead of a nightmare that it used to be.