But since income tax directly impacts your finances, understanding it is essential. In this comprehensive guide, we’ll explain what you need to know about income tax in detail.
A direct tax levied on people or organisations according to their earnings or income is known as income tax. It is computed by deducting a certain amount from the taxable income received within a fiscal year. The government then uses its collected revenue to pay for infrastructure and public services like security, healthcare, and education.
Income tax obligations are contingent upon one's "Residential Status." In general, this position can be divided into:
1. Indian resident
2. Residents But Not Normally Resident (RNOR) Non-Resident Indian (NRI)
Furthermore, in accordance with the fundamental principles of income taxation in India, the tax rates and slabs are subject to change based on the taxpayer's classification:
1. Individuals
2. Companies
3. Firms
4. Other Entities
5. Hindu Undivided Family (HUF)
Income tax is imposed on everybody who receives money in India, whether they are an Indian resident or not. The Income Tax Department categorises income into five primary headings for ease of understanding:
Head of Income | Nature of Income Covered |
Income from Other Sources | Taxable income includes interest from savings bank accounts, fixed deposits, and lottery winnings. These sources contribute to one's total taxable income. |
Income from House Property | Income derived from renting out a property is subject to taxation under this category. Whether it's a residential or commercial property, the rental income falls under this head. |
Income from Capital Gains | Profit from the sale of assets like mutual funds, shares, or property is taxable. Any surplus income resulting from the sale of such assets is considered under this head of income. |
Income from Business and Profession | Self-employed individuals, freelancers, contractors, and professionals such as insurance agents, chartered accountants, doctors, lawyers, and tuition teachers are obligated to report their profits under this head of income. |
Income from Salary | Earnings from employment, including salary and pension, are categorised under this head of income. It encompasses regular salary income and periodic pension payments received by individuals. |
Reduced tax rates and fewer deductions and exemptions for individuals and HUFs were features of the new tax system unveiled in the 2020 budget. Thus, a large number of taxpayers choose not to use the new tax system. But in Budget 2023, the income tax slabs under the new tax system for FY 2023–24 (AY 2024–25) are changed as follows to assist taxpayers in embracing the new tax regime:
Income Slab (?) | Tax Rate |
Up to 2,50,000 | Nil |
2,50,001 – 5,00,000 | 5% |
5,00,001 – 7,50,000 | 10% |
7,50,001 – 10,00,000 | 15% |
10,00,001 – 12,50,000 | 20% |
12,50,001 – 15,00,000 | 25% |
Above 15,00,000 | 30% |
In the event that taxpayers choose the New Tax system, the majority of deductions and exemptions are prohibited. Nonetheless, the following are the exclusions and deductions allowed under the new system:
1. Transportation reimbursements if an individual has a specific need.
2. A conveyance allowance was obtained to cover the cost of transportation incurred while working.
3. Anything paid to cover the expense of a tour or transfer while travelling.
4. Daily stipend obtained to cover the usual costs or expenses you spend due to his absence from his regular place of employment.
According to the Income Tax Department, seven different Income Tax Return (ITR) forms are available for filing taxes in India. In India, selecting the appropriate ITR form is contingent upon your income source and category.
1. ITR-1 (Sahaj): For residents who earn up to ?50 lakhs annually from interest-bearing sources, one residential property, and salary.
2. ITR-2: Covers salary, multiple properties, capital gains, and foreign income for individuals and HUFs without business or professional income.
3. ITR-3: For people and HUFs who make money through their profession or business, such as partners in companies that don't do business through the company.
4. ITR-4 (Sugam): For resident individuals, HUFs, and businesses with presumptive income under Sections 44AD, 44ADA, or 44AE and total income up to ?50 lakhs.
5. ITR-5: For businesses, associations of persons, firms, bodies of individuals, limited liability partnerships, and artificial juridical persons, individuals, HUFs, and corporations are not included.
6. ITR-6: Only for businesses that fail to disclose their exemption under Section 11, which covers revenue from assets held in trust for charitable or religious purposes.
7. ITR-7: For businesses or individuals, including trusts, political parties, and educational institutions, who are required to file taxes under sections 139(4A), 139(4B), 139(4C), and 139(4D).
Everybody's financial life includes income tax, which you should understand in order to make wise financial decisions. We hope that this comprehensive blog on income tax for beginners
has given you important new knowledge about basic of taxation and how it affects your finances. To guarantee compliance and optimise your savings, don't forget to keep abreast of any modifications to the tax code.
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