How the Income Tax system works? Criteria or income-slabs to be eligible for tax deductions. Tax benefits/exemptions one can avail under various sections e.g. 10A, 10AA, 10B, Health/Life insurance, etc. (Tips to save tax) What is ITR?
Income Tax is a tax imposed by the Government of India on anybody who earns income in India. This tax is levied on the strength of an Act calledIncome Tax Act which was passed by the Parliament of India. Details is hereThe Income-tax Act, 1961.
• How the Income Tax System works? You must have heard your colleagues/parents/friends reminding each other about filing returns. If you had noticed, even newspapers and media have been urging tax payers to file their returns. So, what is all the fuss about and why is it so important to pay tax and file returns? Income Tax is a tax imposed by the Government of India on anybody who earns income in India. This tax is levied on the strength of an Act calledIncome Tax Act which was passed by the Parliament of India. Details is hereThe Income-tax Act, 1961.
Hie Anju, The Income Tax System in India is a complex, opaque, monster that changes the moment you think you have a hang of it. This is a tedious answer but it'll really benefit you to stick out till the end. **Assumptions:** I have kept this answer customized to your age bracket i.e. 20s so I have excluded things like tax slabs and benefits for senior citizens and the tax structure of non Individual business entities. Also, I presume that you won't receive things like marginal surcharge benefit and your annual income won't be more than 1 crore i.e. you are not a HNI. **Anyway. Here are a few basics you should know about taxation.** **Q. What is Income Tax?** Tax levied by the Government of India on the income of every person - whether from salary, house property, business, profession, or other means. For example if I am a Doctor having my own practice as well as earning a salary from a hospital , giving out my second house on rent, carrying on a business with my wife as co partner and earning dividend on these shares. All of these will be taxable and the tax treatment and caveats with each of these will change. **Tax Slabs:** If you earn upwards 0f 2.5 but not more than 5 lakhs - pay 10% of amount by which the taxable income exceeds Rs. 2,50,000/-. Less ( in case of Resident Individuals only ) : Tax Credit u/s 87A (introduced in 2013 budget)- 10% of taxable income upto a maximum of Rs. 2000/-. So, If you earn 30,000 per month. Your tax liability would be 10% of (360,000-250,000) = 11,000 less: 10% of 3.6 lakh = 3600 (but subject to max of 2000) so, the total tax you are supposed to pay is Rs. 9000. Similarly, India Income tax slabs 2015-2016 for General tax payers and including women: 0 to 2,50,000 - No tax 2,50,001 to 5,00,000 - 10% 5,00,001 to 10,00,000 - 20% Above 10,00,000 - 30% You will have to pay an Education surcharge of 3% (1% is SHEC - Senior and Higher Education Cess) on this taxable amount. **2. Time Period:** Income-tax will be levied on the annual income of a person. Income-tax Law classifies the year as (1) Previous year, and (2) Assessment year. Income earned during the period of 1st April, 2014 to 31st March, 2015 is treated as income of the previous year 2014-15. Income of the previous year 2014-15 will be charged to tax in the next year, i.e., in the assessment year 2015-16. **3. Filing Income Tax Returns -** The Government will collect your tax via: a) voluntary payment by taxpayers into various designated Banks. For example, Advance Tax and Self Assessment Tax paid by the taxpayers, b) Taxes deducted at source [TDS] from the income of the receiver (such as from your FD) **4. Exempt Income -** You need not pay tax on all your income. Agricultural income is exempt from tax and so is dividend earned from Indian company (dividend from a foreign company is taxable). Even though, Agricultural income is not taxable but it is used while calculating tax on non-agricultural income to determine what slab you'll fall into. You also receive exemption on the following with defined limits for amount exempt: Transport / Conveyance Allowance Child education allowance Leave travel allowance (LTA) Medical Allowance Uniform / Dress allowance Gift from relatives Agricultural income House Rent income House Rent Allowance Minimum of – 1. Actual HRA 2. Rent Paid – 10% of Basic 3. 40a% of Basic (Non-Metros) or 50% of Basic (Metros) Transport Allowance Rs 800 / Month (1600 Per Month from A.Y. 2016-17) Leave Travel Allowance Two trips in a block of 4 Yrs Amount not exceeding Air Economy or Rail AC I Fare shall be for shortest distance and for a single destination **5. Deductions -** Section 80C allows a maximum limit of Rs 1.50 lakh across investments ranging from provident fund, PPF, infrastructure bonds, fixed deposits (5 years or more), NSC, insurance/pension plans, unit linked insurance, equity linked savings scheme etc. It also includes tuition fees of your children and the repayment of principal on your housing loan. Medical premium upto a maximum of Rs 15,000 (Rs. 20000/- wef A.Y. 2016-17) qualifies for deduction, with an additional Rs 15,000 for parents. Individuals paying interest on education loan should obtain the interest payment certificate under section 80E of the Act. If you live in your parents’ house - You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction Charitable contributions are deductible up to 10% of your income under Section 80G **Additionally,** You can download return forms from - http://www.incometaxindia.gov.in (choose from the ITR i..e Income Tax Return Form based on your soruce of Income) The NSDL website [http://www.tin-nsdl.com] provides online services called as Challan Status Enquiry which will help you know if the governement has received your money. You should maintain copies of all your documents, declarations, and filings in a separate folder. Try out this calculator to determine your tax liability. I use this tool frequently for tax planning: Income Tax Calculator Refer to this calculator for an idea on what tax filing to do when: Full Year Calendar View