Are you just out of college or will soon be. Do Income Taxes worry you? Our aim at ClearTax is to simplify Income Taxes for you! We want to make your financial lives easy and hope that taxes are not complex for our customers.
Today we bring to you basics of Income Tax you’ll need to equip yourself with and this should help you take a confident first step into your job.
What’s your Tax Year or the ‘Previous Year’?
Previous year or financial year or your tax year is the 12 month period that begins on 1st April and ends on the 31st March of the next year. No matter when you start your job, your tax year closes on 31st March and a new tax year starts on 1st April. Plan your taxes for each financial year.
It is a term you’ll often hear, it is the financial year after the previous year. So assessment year is 2015-16 for the current previous year 2014-15. Assessment year is the year in which you will file your return for the previous year. For example – if you start your job on 1st January 2015, your tax year closes on 31st March 2015. 2014-15 is your previous year and your assessment year is 2015-16. You will be filing your return in assessment year 2015-16, for which the last date will be 31st July 2015.
Understanding your Salary
When you start your job – reach out to your payroll or HR department and get your Salary details/ Pay Slip or Tax Statement. Here you will get an idea of the major components of your salary and how much tax will be deducted from your salary. Most companies give HRA and you can save tax on that if you are living on rent.
What is the Income on which I pay Tax?
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
What are Deductions?
Deductions reduce your Gross Income. These are the amounts Income Tax allows you to reduce from your Income, thus you pay lower tax.
Sum of All heads of Income = Gross Income
Gross Income Less 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).
Make Section 80C your best friend
Section 80C can take off Rs 1,50,000 from your Gross Income. One of the most popular deductions under 80C is deposits to PPF. When you open a PPF account, you need to deposit a minimum of Rs 500 and you can deposit a maximum of Rs 1,50,000 in a year. Money deposited in a PPF account grows while each year you can deposit amounts and can claim deductions for the deposit. PPF is a very traditional form of saving, our parents love it, but it is still considered to be a safe home for your hard earned money. A PPF account can be easily opened with a bank. Interest on Savings account forms part of your Income from Other Sources, Rs 10,000 of which is exempt from tax under section 80TTA. There are a host of other tax deductions under section 80 you should maximize to reduce your tax outgo.
What is TDS?
TDS is Tax Deducted at Source. Your employer will estimate your total annual income and deduct tax on your Income, if your Taxable Income exceeds Rs 2,50,000. Your tax is deducted basis tax slabs for each year. When 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).
Calculating Tax Payable
On your Taxable Income, tax slabs or rates are applied and final tax payable is calculated. From this tax payable, you can reduce all the TDS that has already been deducted.
Tax Payable on Total Taxable Income Less TDS already Deducted = Final Tax Payable
You can always use our Tax Calculator!
Your Medical Expenses
Most companies allow a medical reimbursement of Rs 15,000 towards medical expenses of consultation with a doctor, medicines, medical tests etc. Find out if your company does. Make sure you keep all your bills safely and claim the deduction fully. This is only available once you submit your bills against the expense you have incurred. Also available for medical expenses of your dependants. If you claim this fully, in a way, you have reduced your income by Rs 15,000 and do not pay tax on it. The Rs 15,000 is for each tax year that starts on 1st April to 31st March of next year.