The understanding of income tax is one of the essential financial knowledge that every one of us should be familiar with, but people start taking a step towards knowing income tax only when it is necessary for them and some of you might as well have landed here for the same reason. In this article let us try to simplify the concept of income tax and make it easier for you to understand.
What is Income tax?
Simply put, income tax is nothing but the tax that is imposed by the government on the income of an individual in a financial year. The financial year is the 12 month period that begins on the 1st of April of the present year and ends on the 31st of March of the next year.
Every citizen of the country, including the non-residential individual, has to pay this tax if he has any source of income in the country that exceeds the limit issued by the government. This income includes all the sources like salary, rent, dividends, any business income, etc.
The collected tax is further utilised for the welfare of the country such as building roads and infrastructure, fund various schemes for the well-being of the citizens etc.
While paying the income tax, you don’t have to pay the tax for your total income, you have to pay tax to the amount that remains after eliminating the exemptions and deductions from your total income.
The simple formula for calculating your taxable income can be:
Taxable income = Gross income – Exemptions – Deductions
Gross income is the total income that you receive from all the income sources you have, combined.
The defined benefits that can be deducted from the gross income or your total income are called “Exemptions”. These are some of the necessities that people spend which are considered as the basic living expenses and thus exempted from the tax.
Some of the exemptions are listed below:
- House Rent Allowance (HRA)
- Standard Deduction
- Children Education Allowance + Hostel Allowance
- Leave travel allowance (LTA)
Various tax deductions are available under different sections of the income tax act. These are the deductions that are provided considering various financial burdens a taxpayer has to bear to ensure his family’s future, take care of medical, educational expenses, etc. These ductions also include the amount you have invested in products like Insurance, ELSS, or ULIP. Even the Principal repayment of loans and donations are also considered for the tax deductions.
Some of the deductions that are enlisted under Section 80 of the Income Tax Act (Section 80C to 80U) include:
- Section 80C: Deductions on investments up to Rs.1.5 lakh.
- Section 80CCC: Deduction on insurance premium paid towards servicing an annuity.
- Section 80CCD: Deduction on the contribution made towards pension.
- Section 80TTA: Deduction on interest on savings account
- Section 80GG: deduction on house rent paid when HRA is not provided
- Section 80E, 80EE: Deduction on interest paid on education loan and home loan.
- Section 80CCG: Deduction on investments in Rajiv Gandhi Equity Saving Scheme (RGESS)
- Section 80D,80DD, 80DDB: Deduction on medical insurance, medical expenses, rehabilitation of differently-abled persons
- Section 80 G- Deduction on donations made to eligible organizations, political parties and
- Section 80TTB- Deductions on interest income
- Section 80RRB- Deductions on royalty on a patent
This is a brief introduction to the fundamentals of income tax and we hope this has given you an idea about income tax and its calculations.