Paying your income tax for the first time is a milestone in any citizen’s life. Income tax is the most popular form of direct tax levied and collected in India. For individuals, the taxes are levied progressively, i.e., the tax rate increases as the income increases. Slab rates are fixed for individuals, under old regime and new regime.
There are various tax benefits available, using which the person can minimize the final tax liability. Taxes for a particular financial year is usually paid in next year - which is called assessment year. The concern person should choose appropriate ITR form, which is most suitable, considering various factors.
This article provides more clarity on the basic concepts of Income Tax, considering the needs of beginners.
A Business or Profession newly set up on September- In such a case, the previous year shall be the period beginning on the date of setting up of the business or profession and ending with 31st March of the following calendar year.
Example: Most companies give House Rent Allowance or HRA, and you can save tax on that if you are living on rent.
Besides the salary income you receive, you may be earning an income from several other sources. Your Total Income is the sum total of all heads of income below.
Sources of Income | Particulars |
Income from Salary | Salary, Allowances, Leave encashment, Gratuity, Pension, basically all the money you receive while rendering your job as a result of your employment agreement |
Income from House Property | Income from house or building, this may be owned and self-occupied or may be rented |
Income from Business or Profession | Income/loss that arises as a result of carrying on a business or profession |
Income from Capital Gain | Income from gain or loss when you sell a capital asset |
Income from Other Sources | This is the residual head – includes your income from savings bank accounts, fixed deposits, family pension or gifts received |
Income Slabs | Income Tax Rates |
Up to Rs. 2.5 lakh | NIL |
Rs. 2.5 lakh - Rs. 5 lakh | 5% |
Rs. 5 lakh - Rs. 10 lakh | 20% |
Above Rs. 10 lakh | 30% |
Income Slabs | Income Tax Rates |
Up to Rs. 3 lakh | NIL |
Rs. 3 lakh - Rs. 5 lakh | 5% |
Rs. 5 lakh - Rs. 10 lakh | 20% |
Above Rs. 10 lakh | 30% |
Income Slabs | Income Tax Rates |
Up to Rs. 5 lakh | NIL |
Rs. 5 lakh - Rs. 10 lakh | 20% |
Above Rs. 10 lakh | 30% |
Income Tax Slab | Income Tax Rate |
Up to 3,00,000 | Nill |
3,00,000 to 7,00,000 | 5% |
7,00,000 to 10,00,000 | 10% |
10,00,000 to 12,00,000 | 15% |
12,00,000 to 15,00,000 | 20% |
15,00,000 and Above | 30% |
Income Tax Slabs | Income Tax Rates |
Up to Rs. 4 lakh | NIL |
Rs. 4 lakh - Rs.8 lakh | 5% |
Rs. 8 lakh - Rs.12 lakh | 10% |
Rs.12 lakh - Rs.16 lakh | 15% |
Rs.16 lakh - Rs. 20 lakh | 20% |
Rs. 20 lakh - Rs. 24 lakh | 25% |
Above Rs. 24 lakh | 30% |
Note: Age relaxation is available only in the Old Tax Regime, it's not available in the New Tax Regime.
Deductions reduce your Gross Income. These are the amounts Income Tax Department allows you to reduce your Income, bringing down your tax liability.
Sum of All heads of Income = Gross Income
Gross Income – Deductions = Taxable Income
The more you make use of the deductions allowed, the lower your tax shall be. Deductions are allowed under Section 80 of the Income Tax Act (Section 80C to 80U).
There are two tax regimes in India; the old and the new . The percentage of income tax that you pay on your total income differs under the old and the new tax regime.
Under the old tax regime, all deductions are allowed under Sections 80C to 80U, subject to conditions. However, under the new tax regime, only the deduction on let-out property under Section 24B and the deduction on the employer's contribution to NPS are allowed.
Section 80C can take off ₹. 1.5 lakhs from your Gross Income. Given below are some of the widely-used investment vehicles under this section.
One of the most popular deductions under 80C is deposits to Public Provident Fund or PPF. When you open a PPF account, you need to deposit a minimum of INR 500 and a maximum of INR 1.5 lakhs in a year. Money deposited in a PPF account compounds, as you deposit more money in the subsequent financial years to claim deductions. PPF is a traditional and safe saving avenue to park your hard earned money. A PPF account can be easily opened with a bank.
Fixed deposits assure capital protection as well as a sizable interest income for investors. To get tax benefits under 80C, you need to stay invested for at least 5 years. It is safe, but the Interest Income from it is taxable.
One of the only mutual fund scheme allowed under 80C, ELSS (Equity Linked Savings Scheme) is gaining popularity among people for its historically higher performance in the recent years. Another perk of ELSS is that it has the lowest lock-in period of 3 years.
For instance, An employer will estimate the total annual income of an employee and deduct tax on his Income if his Taxable Income exceeds INR 2.5 lakh under the old tax regime or INR 3 lakh under the new tax regime. Tax is deducted based on which tax slab you belong to each year.
Similarly, if you earn interest from a Fixed Deposit, the bank also deducts TDS. Since the bank does not know your tax slabs, they usually deduct TDS @ 10%, unless you haven’t mentioned your PAN (in that case a 20% TDS may be deducted).
Aditya is a 25-year-old software engineer living in Mumbai. This is his first job and he’s clueless about tax or savings. But it’s almost the end of January and Aditya heard his friends talking about Section 80C and how they pay zero tax thanks to Section 80C. Aditya earns Rs 7,68,000 annually. Here are his salary details.
Salary Components | Monthly | Annually |
Basic Salary | 35,000 | 4,20,000 |
House Rent Allowance | 17,000 | 2,04,000 |
Special Allowance | 12,000 | 1,44,000 |
Total | 7,68,000 |
Aditya looked up his pay slip and found out that his employer has been deducting a TDS on his salary of Rs. 4,568 each month. This shall work out to Rs.54,816 for the whole year. While Aditya has been busy enjoying his new life he has no clue how much tax he needs to pay and whether he can save any tax! Let’s help him!
Aditya should first find out his total income from all sources. Besides salary income, Aditya has earned
Aditya’s HRA exemption
Particulars | Amount (Rs) | Amount (Rs) |
HRA actually received | 17,000 | |
HRA Exemption is the least of the following: | 8,500 | |
HRA received | 17,000 | |
50% of the basic salary | 17,500 | |
Rent Pai - 10% of the Basic Salary (12,000 – 10% of 35,000) | 8,500 | |
Taxable HRA | 8,500 |
Now let us see Aditya’s Tax Calculation ( Under the Old Tax Regime)
Aditya’s Tax Calculation | ||
Particulars | Amount (Rs) | Amount (Rs) |
Income from Salary | 6,16,000 | |
Basic Salary | 4,20,000 | |
HRA Taxable (8,500×12) | 1,02,000 | |
Special Allowance | 1,44,000 | |
Less: Standard Deduction U/S 16 | -50,000 | |
Income From Other Sources- IFOS (3,000+4,000) | 7,000 | |
Gross Total Income | 6,23,000 | |
Deductions: | 1,53,000 | |
Under Section 80C | 1,50,000 | |
Under Section 80TTA | 3,000 | |
Total Income | 4,70,000 | |
Tax Payable | 11,000 | |
Less; Rebate under section 87A upto 5Lakh under the Old Tax Regime | 11,000 | |
Tax Liability | Nil |
Did you notice? If Aditya can manage to claim Rs 1.5 lakhs under section 80C – no tax shall be payable by him on account of rebate claimed under section 87A. With this deduction, his taxable income is less than Rs 5 lakh which is eligible for rebate under section 87A. Whereas in case of new tax regime, the rebate u/s 87A upto Rs. 25,000 is available up to an income of Rs.7lakhs.
However, Aditya has to file an income tax return because his gross total income is above the basic exemption limit of Rs 2.5 lakh. Also, Aditya can claim a refund of the TDS of Rs 45,680 that has been deducted from his income. Aditya claims Rs 1.5 lakhs under section 80C. Deduction on Section 80C is available for PF @ 12% of Basic Salary; it's Rs 43,200 for him. Since this is already deducted from his salary, he simply needs to consider this amount—no additional payout is required.
Aditya wants to try his hands in equities and finds the market returns promising so he invests Rs 50,000 in ELSS. He opens a PPF account and deposits Rs 57,580 – all of these add up to Rs 1,50,780. The amount of deduction eligible under section 80C is limited to Rs 1.5 lakhs. Accordingly, Aditya claims a deduction of Rs 1.5 lakhs under section 80C.
Deduction under section 80C available to Aditya
Particulars | Amount (Rs) |
EPF contribution @ 12% of basic salary | 43,200 |
Subscription to ELSS | 50,000 |
Contribution to PPF | 57,580 |
Total Contribution | 1,50,780 |
Deduction Eligible | 1,50,000 |
Section 87A provides a rebate from the tax payable by an assessee who is an individual resident in India to provide tax relief to individual taxpayers.
Rebate to resident individual paying tax under New tax regime
If total income of such individual does not exceed Rs.7 lakh, the rebate shall be equal to the amount of income-tax payable on his total income for any assessment year or an amount of Rs.25,000, whichever is less.
However budget 2025 has prescribed that the rebate shall be increased up to Rs.60,000 for the income of Rs.12 lakhs which will be applicable from FY 2025-26.
Rebate to a resident individual paying tax under Old tax regime
If total income of such individual does not exceed Rs. 5 lakhs, the rebate shall be equal to the amount of income-tax payable on his total income for any assessment year or an amount of Rs.12,500, whichever is less.
On your Taxable Income, tax slabs or rates are applied and tax payable is calculated. From this tax payable, you can reduce all the TDS that has already been deducted.
You can always use our Tax Calculator
ITR Form | Persons required to file |
ITR-1 (Sahaj) | For resident individuals with income within ₹50 lakh from
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ITR-2 |
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ITR-3 | For individuals and HUFs with income from business or profession, including those opting out of presumptive taxation. |
ITR-4 (Sugam) | For individuals, HUFs, and firms (other than LLPs) opting for presumptive taxation. |
Many documents are required to be kept ready before filing the Income Tax Return (ITR). These documents vary according to the source of income, as stated below:
Form 16: Form 16 is a certificate issued by employers to employees detailing the salary paid and TDS deducted during the financial year. It is essential for salaried individuals while filing their income tax returns.
Advance Tax: If your tax liability exceeds INR 10,000 in a financial year, you need to pay advance tax in four installments.
TDS (Tax Deducted at Source): Employers and other entities deduct tax at source on salaries, interest, rent, and other payments, which is then deposited with the government.
Refunds: If you have paid more tax than your actual liability, you can claim a refund while filing your return.
Notices: The Income Tax Department may issue notices for various reasons, such as discrepancies in returns, under-reporting of income, or random scrutiny. Respond promptly to avoid penalties.
Gross Total Income: The sum of all heads of income before deductions.
Net Taxable Income: The income after claiming all eligible deductions and exemptions.
Tax Audit is an examination of a taxpayer's accounts by a chartered accountant to ensure the accuracy of income and deductions claimed. It is mandatory for businesses and professionals if their turnover exceeds specified limits.