Some investors aren’t aware of the use of income tax, and it is essential if you want a basic understanding of the taxation system.
This guide helps you in understanding the basic concepts of income tax in simple ways:
What is Income tax?
The income tax is a tax which the government imposes on an individual's income in every financial year.
Every income source like salary, rent, and everything is considered.
The non- residents and residents, including every citizen in the country, need to pay the tax to the government if they are earning in India.
The government needs to bear a lot of expenses like paying pension to the government employees, building the infrastructure and roads, and much more, and for all of this, the government needs money, and income tax is the only way for them to earn money.
The income tax money helps in running the government and nation.
So, with the help of this money, a lot of things are developed like roads, parks and much more.
Every citizen who is earning in India and earning more than Rs 2,50,000 has to pay the taxes to the income tax
department.
How to calculate income tax?
There are two factors when it comes to calculating income tax which is as follows:
● Taxable income
● Age slab
What is taxable income?
The income tax is paid on the taxable income and not the whole income that a particular person has.
The exemptions and deductions are reduced from the total income, which gives you the taxable income.
The formula to calculate taxable income is: Taxable income = Gross income – Exemptions – deductions
What is Gross income?
The gross income is the total earning that a person earns.
The gross income is the total amount without any deductions or exemptions.
The gross income is not just the salary amount but the total earnings that a person has.
Here are five various sources of income:
● Income from salary: If you are the salaried employee, then the whole year's salary will be added, which is the taxable amount.
It doesn't matter if you are a government employee or work in the private sector.
● Income from house property: The income from house property means the rent you get from your own properties.
● Income from profit or gains from business: If you have your own business, then all the advantages in the business are considered under this head.
● Income from Capital gains: Capital assets are the properties that you own like stocks, mutual funds, gold, and much more. The profit that you will gain after the sale of these assets is known as capital gains.
● Income from other sources: Everything else other than all the things mentioned above come under the other sources of income.
What are deductions and exemptions?
Tax exemptions:
Tax exemptions are known as some of the defined benefits that can be deducted from the income.
Here are some exemptions which are allowed:
● HRA (House rent allowance)
● The standard deduction for Rs 50,000 ever year
● Hostel allowance + Children Education Allowance
● Leave Travel Allowance (LTA)
Exemption #1: House rent allowance:
If you are getting house rent allowance as part of your salary and if you pay any residential accommodation, then you can claim house rent allowance.
Exemption #2: Standard deduction of Rs 50,000:
One can easily deduct the Rs 50,000 and bring the income down by that margin.
One can easily get benefitted from the deduction of this amount.
Exemption #3: Children Education Allowance + Hostel allowance:
If you receive the children's education or hostel allowance from the employer, they can claim the exemption on that amount under the income tax act.
Exemption #4: Leave Travel Allowance:
There are a lot of employers who give an allowance to the employees for traveling on leave dates.
The employee can travel with the family during these leave holidays and can incur some expenses related to that.
The allowance is only given on producing some bills and traveling during the leaves.
Tax deductions:
There are plenty of deductions that are available under this section and the income tax act.
The deductions are against the amount that you have probably invested in some products like insurance, ELSS, and much more.
Some expenses which you incurred during the financial year also come under this, which are the loans, donations, and much more.
All of these expenses come under the tax deductions.
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