Basics of Income Tax for Beginners
Are you just out of college and looking for a job? Or have you already landed the job and are going to file your income tax returns for the first time? If nitty-gritty of income tax and investments confuse you, ClearTax is here to help. Our aim at ClearTax is to simplify Income Taxes for you and make your financial lives easier. Basically, anybody with an income is liable to file income tax returns. Today we bring to you the basics of Income Tax you’ll need to equip yourself with and this should help you take a confident first step into your job.
Defining the ‘Previous year’
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.
It is a term you’ll often hear in relation to tax filing. It is the financial year after the previous year in which you will ‘assess’ and file your return for the previous year. So, assessment year is 2019-20 for the previous year 2018-19. Assessment year is the year in which you will file your return for the previous year. For instance, if you start your job on 1 January 2021, your tax year closes on 31 March 2021. 2020-21 is your previous year and your AY is 2021-22. The last day to file your return is 31st July 2021 (extended to 31st December 2021).
Understanding your Salary
When you start your job – reach out to your payroll or HR department and get your Salary details/ Pay Slip / Tax Statement. Here, you will get an idea of the major components of your salary and how much tax will be deducted from your salary based on them.
Example: Most companies give House Rent Allowance or HRA, and you can save tax on that if you are living on rent.
Income on which you pay Tax
Besides the salary income you receive, you may be earning an income from several other sources. Your Total Income is the sum total of all heads of income below.
Sources of Income
|Income from Salary||Salary, Allowances, Leave encashment basically all the money you receive while rendering your job as a result of your employment agreement|
|Income from House Property||Income from house or building, this may be owned and self-occupied or may be rented|
|Income from Capital Gain||Income from gain or loss when you sell a capital asset|
|Income from Business or Profession||Income/loss that arises as a result of carrying on a business or profession|
|Income from Other Sources||This is the residual head – includes your income from savings bank accounts,fixed deposits,family pension or gifts received|
Deductions reduce your Gross Income. These are the amounts Income Tax Department allows you to reduce your Income, bringing down your tax liability.
Sum of All heads of Income = Gross IncomeGross Income – Deductions = Taxable Income
Make Section 80C your best friend
Section 80C can take off INR 1,50,000 from your Gross Income. Given below are some of the widely-used investment vehicles under this section.
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. Money deposited in a PPF account compounds, as you deposit more money in the subsequent financial years to claim deductions. PPF is a traditional and safe saving avenue to park your hard earned money. A PPF account can be easily opened with a bank.
Fixed deposits assure capital protection as well as 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.
Tax-saving mutual funds or ELSS
One of the only mutual fund scheme allowed under 80C, ELSS (Equity Linked Savings Scheme) is gaining popularity among people for its historically higher performance in the recent years. Another perk of ELSS is that it has the lowest lock-in period of 3 years.