Income Tax Basic for Beginners

Every citizen residing in India or abroad must learn the income tax basics to file and save on taxes. An individual who falls under the category of a taxpayer must know how to file income tax return every financial year. Let us learn about the income tax basics for beginners in this article.

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Income Tax for Beginners

The provision of income tax is defined under the Income Tax Act of 1961. Since its inception, 25 amendments have been made to the income tax act. The act is vast and comprises 298 sections, 23 chapters, and 14 schedules. The income tax act is the 43rd Act of 1961 extending to the whole of India. The act came into force on 1st April 1962.

As the income tax filing process occurs each year, each individual must be aware of its basics. It not only helps the taxpayer file taxes properly but also save on it.

Basic Income Tax Knowledge

Section 2 of the Income Tax Act of 1961 comprises several terms that should be known to an individual as basic income tax knowledge.

Let us understand these terms.

  1. Person

    The term 'person' is defined under 2(31) of the Income Tax Act, 1961. Under this section, a person is regarded as an Association of Persons (AOP), Body of Individuals (BOI), Artificial Juridical Person, Local Authority, Firm, Individual, Hindu Undivided Family (HUF), and Company. 

  2. Assessee

    An assessee is regarded as a person by whom or to whom a sum of money is payable under the income tax act. 

    An assessee is a simple term under income tax basic which includes:

    • A person against whom a proceeding is taken place under the income tax act with regard to the assessment of his income

    • A person who sustained a loss in a business during a financial year

    • A person who is deemed to be an assessee

    • A person who is an assessee by default

    The income tax act classified the assessee into four categories:

    • Normal Assessee

    • Representative Assessee

    • Deemed Assessee

    • Assessee in Default

  3. Income

    Income is defined under section 2(24) of the Income Tax Act, 1961. It is money received by an individual for the work and services he discharges or investments he makes in the financial market. However, it has a different meaning for business purposes. 

    For businesses, income is the revenue generated by a company or firm by selling goods and services in the market. It is revenue earned by an organization via its operation. In addition, it is one of the crucial income tax basics that must be understood by every person who earns a salary or revenue.

  4. Previous Year

    There are two important concepts of income tax basics – previous year and assessment year. The previous year is a financial year which begins on 1st April and ends on 31st March. 

    For example, if an assessee files his income tax in 2023-24, then 2022-23 shall be the previous year. An individual pays his tax in the current year of the last financial year. The last financial year is known as the previous year. 

    Further, section 3 of the Income Tax Act, of 1961 defines the previous year as the immediately preceding year. 

  5. Assessment year

    The assessment year is next to the previous year. This year, an individual filed his income tax returns. 

    For example, if one starts his business in 2022, and files income tax for the same in March 2023, then 2023-24 shall be known as the assessment year. 

    It is essential to understand the concept of previous and assessment years to comprehend income tax basics.

Concepts of Income

There are two concepts of income in the income tax act. First is known as the application of income while the second is known as the diversion of income. It is a useful income tax basic. 

  1. Application of Income

    Application of income refers to the spending of income after it is earned by the assessee. The income shall not be excluded from the taxable income. Therefore, the income shall be taxable during the assessment year. 

    Let us understand it with an example. 

    Mr A asked his manager to distribute 10% of his income earned in a year to employees with disability. 

    It shall be the case of the application of income since first the income is generated and then distributed among the employees. 

  2. Diversion of Income

    While application of income is taxable, diversion of income is non-taxable since the income never accrues in favor of the assessee or taxpayer. In diversion of income, the income is diverted before transferring to the assessee and reaches a third party. 

    Here’s an example of a court case to understand this income tax basic. 

    In Commissioner of Income Tax v. Nariman B. Bharucha & Sons (1081) 130 ITR 863, Shri. Nariman Bharucha converted his proprietorship into a partnership with his two sons allocating 37.5% share to each of them. The balance of 25% remains with him. 

    The partnership deed says that on the demise of Shri. Nariman Bharucha, the 25% share shall be transferred to his widow or the mother of his two sons. On the demise of the father, the profit shares were transferred to his widow. 

    In this case, the income does not reach the partners but the wife of the deceased. It is known as a diversion of income and is excluded from taxable income.

Heads of Income

Heads of the income is an easy income tax basic essential for an employer, employee, or individual who files income tax. Heads are the sources of income of a taxpaying individual. 

There are five heads of income defined under the Income Tax Act. 

  1. Income from Salary

    This head applies to an individual solely or partially dependent on his salary as income for survival. Under this head, compensation is paid by the employer to his employee. Therefore, an income shall only consider under this head if it establishes a relationship between an employer and an employee. This income tax basic is crucial for every employee. 

  2. Income from House Property

    Income from house property is another key income tax basic. It is the income earned from a rental property. The tax under this head is estimated based on assumption. 

    Let us understand how the tax is calculated to proceed with income tax basic.

    • In the first step, the assessee must calculate the annual value of the income from the house property. 

    The annual value is calculated by taking into consideration the following:

    • Fair value (What should be fair according to the area)

    • Market value (Generally decided by builders)

    • Standard value (Decided by local government)

    • Actual value (Actual rent received by the assessee)

    One needs to calculate all four aforementioned values and choose one from two.

    • For example, the assessee first needs to choose between fair value and market value. The high value shall be taken into account.

    • Second, the assessee needs to choose between the high value and market value. The low value among the two shall be taken into account to proceed with income tax basic.

    • Later the assessee is required to select between the low value and the actual value. Whichever is high shall be taken into account. 

    In the next step:

    • From the high value, the unrealized income shall be deducted. Unrealized income refers to income not received during a financial year.

    • Later the municipal or house tax shall be deducted to determine the net annual value.

    • Under section 24 of the Income Tax Act of 1961, the government allows a standard deduction on assets. From the net annual value, the assessee may make the 30% standard deduction and estimate the annual value of the house property.

    • If the assessee has taken a loan on the house property, he may deduct the amount of 1/5th of the preconstruction period along with the interest of the previous year.

    Particulars Amount
    Annual value XXX
    (-) Unrealized income XXX
    (-) Municipal tax XXX
    (-) Standard deduction @ 30% XXX
    (-) Interest on loan XXX
  3. Income from Capital Gains

    Any income that arises from the sale of capital goods or investments shall come under income from the capital gains head. 

  4. Income from Profit and Gains of Business/Profession

    An income generated from a business or self-employees shall come under this head. 

  5. Income from Other Sources

    An earning that does not belong from any of the aforementioned heads shall be construed as income from other sources. 

    All aforementioned heads of income are income tax basics, which must be learnt by a taxpayer.

Categories of Taxpayers

There are three categories of taxpayers under the income tax basics:

  • Resident and non-resident (below 60 years)

  • Senior citizen (60 - 80 years)

  • Super senior citizen (Above 80 years)

Tax Rates

An individual must be acquainted with the tax rates under new and old tax regimes. The tax rates under income tax basic are:

  1. Old Tax Regime

    Slab Tax Rate
    Up to INR 2,50,000 Nil
    INR 2,50,000 to INR 5,00,000 5% on INR 2,50,000 (INR 12,500)
    INR 5,00,000 to INR 10,00,000 INR 12,500 + 20% on INR 5,00,000 (INR 1,00,000)
    More than INR 10,00,000 INR 1,25,000 + 30% on the amount more than INR 10,00,000
  2. New Tax Regime

    Slab Tax Rate
    Up to INR 3,00,000 Nil
    INR 3,00,000 to INR 6,00,000 5%
    INR 6,00,000 to INR 9,00,000 10%
    INR 9,00,000 to INR 12,00,000 15%
    INR 12,00,000 to INR 15,00,000 20%
    More than INR 15,00,000 30%

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For senior citizens aged between 60 to 80 years:

  1. Old Tax Regime

    Slab Tax Rate
    Up to INR 3,00,000 Nil
    INR 3,00,000 to INR 5,00,000 5%
    INR 5,00,000 to INR 10,00,000 INR 10,000 + 20% on INR 5,00,000
    More than INR 10,00,000 INR 1,10,000 + 30% on the amount more than INR 10,00,000
  2. New Tax Regime

    Slab Tax Rate
    Up to INR 3,00,000 Nil
    INR 3,00,000 to INR 6,00,000 5%
    INR 6,00,000 to INR 9,00,000 10%
    INR 9,00,000 to INR 12,00,000 15%
    INR 12,00,000 to INR 15,00,000 20%
    More than INR 15,00,000 30%

For super senior citizens over 80 years:

  1. Old Tax Regime

    Slab Tax Rate
    Up to INR 5,00,000 Nil
    INR 5,00,000 to INR 10,00,000 20% on the amount more than INR 5,00,000
    More than INR 10,00,000 INR 1,00,000 + 30% on the amount more than INR 10,00,000
  2. New Tax Regime

    Slab Tax Rate
    Up to INR 3,00,000 Nil
    INR 3,00,000 to INR 6,00,000 5%
    INR 6,00,000 to INR 9,00,000 10%
    INR 9,00,000 to INR 12,00,000 15%
    INR 12,00,000 to INR 15,00,000 20%
    More than INR 15,00,000 30%

Documents for Filing ITR

Income tax basic allows an individual to learn about the process of filing an ITR. 

An assessee should produce the following documents to file an ITR:

  • The individual should have his PAN and Aadhaar cards for filing ITR.

  • If the assessee wishes to claim a rebate on the taxable income, he must produce the documents of the loan.

  • The assessee must maintain the balance sheet of the financial year to show the liability, assets, income and expenditure of the business.

  • He must produce the record of the audit if applicable. 

  • He must show the certificate of tax deduction, such as TDS.

  • He must produce the challan copy of the tax he has paid in advance.

Standard Deduction

The standard deduction is crucial to understand to learn income tax basics. The government of India provides a standard deduction of INR 50,000 from the total or gross total income of an individual. 

An assessee may claim the standard deduction irrespective of the amount spent on holidays or medical allowances.

In Conclusion

Every individual should learn income tax basics to understand the Indian taxation regime. The income tax basic makes an individual understand types of income tax, tax rates, and ITR. It must be comprehended by every taxpayer in India and overseas.

FAQ's

  • In which month income tax is deducted from TDS?

    The TDS is deducted every month from the salary of an employee. 
  • What are the sources of income given under income tax basics?

    Following are the sources of income given as defined under income tax basics.
    • Income from salary
    • Rental income
    • Income from business and profession
    • Income from capital gains
    • Income from other sources
  • What are the tax authorities given under section 116 of the income tax act?

    The following are the tax authorities under the IT ACT:
    • The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963
    • Directors- General of Income-tax or Chief Commissioners of Income- tax
    • Inspector of Income Tax
    • Tax Recovery Officers
    • Income tax officers
    • Directors of Income-tax or, Commissioners of Income-tax or Commissioners of Income-tax (Appeals)
    • Assistant Directors of Income-tax or Assistant Commissioners of Income- tax
    • Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals)
    • Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of income- tax (Appeals)

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