What is Income?

Income is simply the money that comes into your hands through various sources. It could be your salary, business profits, rental income, interest earned from savings, or any other financial gains.

For example, if you’re a salaried employee earning ₹6 lakhs per year, that is your total income. If you rent out a flat and earn ₹2 lakhs from that, your income will be ₹8 lakhs in total.

What is Taxable Income?

Not all of your income is taxed. Taxable income is the portion of your total income after you subtract eligible deductions and exemptions.

For instance, let’s say your total income is ₹8 lakhs, but you invest ₹1.5 lakhs in tax-saving instruments like PPF (Public Provident Fund) and claim health insurance deductions. In that case, your taxable income might drop to ₹6.5 lakhs, and tax will be calculated on that.

Income Tax Act, 1961

India’s income tax laws are governed by the Income Tax Act of 1961. It sets the rules for how tax is calculated, collected, and managed by the government. While this law is comprehensive, you don’t need to dive into legal jargon. The basics we discuss here will help you understand what you need to know.

Different Income Tax Slabs

What Are Income Tax Slabs?

Income tax slabs are bands that define the rate of tax applicable to different income levels. The government uses a progressive taxation system, which means the more you earn, the more tax you’ll need to pay.

Think of it like climbing a ladder—the higher you go, the more tax you pay.

Current Income Tax Slabs (FY 2023-24)

For Individuals Below 60 Years of Age:

• • 0% tax on income up to ₹2.5 lakhs
  • 5% tax on income between ₹2.5 lakhs to ₹5 lakhs
  • 10% tax on income between ₹5 lakhs to ₹7.5 lakhs
  • 15% tax on income between ₹7.5 lakhs to ₹10 lakhs
  • 20% tax on income between ₹10 lakhs to ₹12.5 lakhs
  • 25% tax on income between ₹12.5 lakhs to ₹15 lakhs
  • 30% tax on income above ₹15 lakhs

For Senior Citizens (60 to 80 Years of Age):

• • 0% tax on income up to ₹3 lakhs
  • The rest of the slabs follow the same pattern as individuals below 60 years.

For Super Senior Citizens (Above 80 Years of Age):

• • 0% tax on income up to ₹5 lakhs
  • The rest of the slabs follow the same pattern as for other individuals.

Example of Tax Calculation:

Let’s say you earn ₹8 lakhs per year. Here’s how your tax will be calculated under the new slab system:

• • Income up to ₹2.5 lakhs: No tax
  • Income between ₹2.5 lakhs to ₹5 lakhs: 5% of ₹2.5 lakhs = ₹12,500
  • Income between ₹5 lakhs to ₹7.5 lakhs: 10% of ₹2.5 lakhs = ₹25,000
  • Income above ₹7.5 lakhs (up to ₹8 lakhs): 15% of ₹50,000 = ₹7,500

So, total tax = ₹12,500 + ₹25,000 + ₹7,500 = ₹45,000 (excluding cess and any rebates)

Old Regime vs New Regime

Introduction to the Two Tax Regimes

In 2020, the government introduced a new tax regime that offers lower tax rates but does not allow most exemptions and deductions. The old regime allows several deductions but has higher tax rates.

Key Differences:

• • Old Regime: Higher tax rates but you can claim deductions like 80C, 80D, HRA, etc.
  • New Regime: Lower tax rates but minimal deductions.

Example:

Let’s assume you earn ₹10 lakhs per year.

• • Under the old regime, if you claim deductions worth ₹1.5 lakhs (like investments in PPF, insurance premiums), your taxable income becomes ₹8.5 lakhs, and you will pay tax according to the old slab.
  • Under the new regime, you pay tax on the full ₹10 lakhs, but the rates are lower.

Who Should Opt for Which Regime?

• • The new regime is better if you don’t claim many deductions or exemptions.
  • The old regime works better if you maximize deductions like 80C (investments) and 80D (health insurance).

Common Deductions and Exemptions in the Old Regime

What Are Deductions and Exemptions?

Deductions lower your taxable income, meaning less tax to pay. Exemptions are certain incomes that don’t get taxed at all, like house rent allowance or leave travel allowance.

Section 80C: The Most Popular Deduction

Under Section 80C, you can claim up to ₹1.5 lakhs of deductions if you invest in specified instruments such as:

• • PPF (Public Provident Fund)
  • EPF (Employees’ Provident Fund)
  • ELSS (Equity Linked Saving Scheme)
  • NSC (National Savings Certificate)

Other Deductions:

• • Section 80D: You can claim up to ₹25,000 for health insurance premiums (₹50,000 for senior citizens).
  • HRA (House Rent Allowance): If you pay rent, a portion of it can be tax-exempt.
  • Standard Deduction: Salaried employees automatically get a ₹50,000 deduction without needing to show any investments.

Maximizing Deductions:

• • Plan your investments at the start of the year.
  • Use health insurance for your family to save tax under 80D.
  • Pay rent? Make sure you get an HRA exemption.

Filing Income Tax Returns (ITR)

Why File ITR?

Filing your income tax return (ITR) is not only a legal requirement but also has several benefits:

• • Proof of income
  • Easier loan approvals
  • Eligibility for tax refunds

Who Needs to File ITR?

• • Individuals earning over ₹2.5 lakhs annually
  • Business owners and professionals
  • Senior citizens with income over ₹3 lakhs

How to File ITR Easily:

You can file your ITR through the Income Tax Department website or use trusted portals like ClearTax or TaxBuddy. If you find it difficult, consider hiring a tax consultant.

Penalties for Not Filing or Incorrect Filing

Late Filing Penalties:

If you miss the deadline to file your ITR, you could be penalized up to ₹10,000 under Section 234F.

Consequences of Incorrect Filing:

Mistakes in your ITR can lead to scrutiny, and the tax department may send you notices. Be accurate while filing.

How to Avoid Penalties:

• • Always file your ITR on time, even if your income is below the taxable limit (you might still need to file for refunds).
  • Double-check your entries or hire a tax expert.

Refunds and How to Claim Them

What is an Income Tax Refund?

If you’ve paid more tax than you owe, you are entitled to a refund. For instance, if your employer deducted more tax than necessary, the extra amount will be refunded to you.

How to Claim Refund:

You can claim your refund while filing your ITR. If there’s excess tax paid, it will reflect in your form, and you’ll get it back directly into your bank account.

Tax Planning Tips for Beginners

• • Start Early: Begin planning your taxes at the start of the financial year.
  • Maximize Deductions: Use deductions like 80C and 80D to reduce your taxable income.
  • Avoid Tax Evasion: Pay your taxes honestly. Tax evasion can result in severe penalties.

Conclusion

Understanding income tax is essential for better financial planning. By being aware of the slabs, choosing the right tax regime, and making the most of deductions, you can significantly reduce your tax burden. 

Filing taxes on time and correctly ensures peace of mind and compliance with the law. If you find it complex, don’t hesitate to seek professional help, but never ignore your taxes.