Now that you know these terms, it is time to look at some of the basics of income tax.
What are salary components
Your salary is more than just the number that gets credited to your bank account every month. A salary structure will typically include the following parts:
- Basic salary: This is the core component of your income. It is a fixed amount.
- House rent allowance: This is the portion of your salary that is for covering rental expenses.
- Special allowance: This is an additional allowance given to cover mixed expenses.
- Provident fund: This is the part that is set aside for long-term savings. It is managed by your employer.
Understanding these components is important because these parts of your salary are taxed differently. For example, HRA is partly exempt from tax, but your basic salary is fully taxable.
On what income do you need to pay income tax
The income on which tax is paid includes not just your salary but also other streams of income like:
- House property: If you rent out a property you own, the rental income will be taxable.
- Capital gains: If you earn profits on investments like shares or mutual funds, they will be taxable.
- Business or profession: If you run a business or do freelance work, the income earned from it is taxable.
- Other sources: Interest from savings accounts, fixed deposits, and gifts exceeding a certain amount are also taxable.
What are the various categories of taxpayers in India
Taxpayers in India are classified based on their age and residency status. Main categories are:
Resident individuals of less than 60 years of age: These are people who reside in India for at least 182 days during a financial year.
Senior citizens between 60 and 80 years of age: People in this group get higher exemption limits.
Super senior citizens above 80 years of age: This group gets even greater tax benefits with bigger exemptions.
Non-resident individuals: Those who do not meet the residency criteria but earn income in India fall in this category.
What is TDS
Tax Deducted at Source (TDS) is a system by which the government collects tax directly from your employers or other income sources. For this, employers and other financial institutions deduct a percentage of your income and deposit it to the government. TDS ensures that taxes are collected regularly instead of all at once at the end of a financial year.
For example, if you earn interest on a fixed deposit, the bank will deduct TDS from the interest earned and pay it to the government for you.
What are exemptions and what are deductions
Exemptions and tax deductions are important ways in which you can reduce your taxable income:
- Exemptions: These are portions of your income that are excluded from tax. For instance, House Rent Allowance (HRA) is partially exempt from tax, which reduces the amount of salary that is subject to tax.
- Deductions: These are specific expenses or investments that can be deducted from your gross income, thereby lowering your taxable income. Deductions are provisioned within different sections of the ITA, like Section 80D, 80C, and 80E, which cover investments in public provident funds, health insurance, and education loans, respectively.
What documents are required to file income tax?
To file your income tax return, you will need certain documents to verify your income and deductions. These include:
- Form 16, which is issued by your employer, summarises your salary and TDS details.
- Form 26AS, a consolidated tax statement that shows the TDS deducted.
- Salary slips, which show the breakdown of your salary components.
- Investment proofs include PPF passbooks, insurance premium receipts, and other proof of investments made under 80C.
- Rent receipts, which are needed as proof if you claim for HRA.
