For most of us, earning our first salary is an important milestone in our lives. But with this milestone comes the responsibility that every citizen should fulfil—paying the income tax that is due on our earnings. Filing taxes for the first time can feel overwhelming for some people. And justifiably so, because of the complex rules, forms, and deadlines that are involved in the process.

Everyone has been there at some point in their life. If you are new to the world of income tax, this guide will help you know the basics of income tax and give you some practical tips to make the process less daunting.

• Understand key terms like Financial Year, Assessment Year, and tax filing basics.
• Salary components and other income sources determine your taxable income.
• Utilise deductions under Sections 80C and 87A and claim the standard deduction.
• Ensure timely filing of tax returns to avoid penalties and missed deductions.

The first thing to know about income tax is the years for which it is calculated and when it is filed. You need to know two terms: Financial Year and Assessment Year.

What is a Financial Year

The financial year, also called tax year, is the 12-month period for which your income will be calculated for tax purposes. In India, the financial year starts on April 1 and ends on March 31 of the next year. Regardless of when you start earning, all income tax is calculated for one-year windows, known as the financial year.

For example, if you start your job in September 2024, the income you earn between September 2024 and March 2025 will fall within the financial year of 2024-2025.

What is meant by Assessment Year

The assessment year is the year immediately following the financial year for which the taxes are being computed. This is the year in which you file your income tax return for the income earned in the preceding financial year. For instance, if your financial year is 2024-2025, the assessment year would be 2025-2026, during which you will pay taxes on the income earned in the preceding year.

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:

1. House property: If you rent out a property you own, the rental income will be taxable.
2. Capital gains: If you earn profits on investments like shares or mutual funds, they will be taxable.
3. Business or profession: If you run a business or do freelance work, the income earned from it is taxable.
4. 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:

1. 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.

2. Senior citizens between 60 and 80 years of age: People in this group get higher exemption limits.

3. Super senior citizens above 80 years of age: This group gets even greater tax benefits with bigger exemptions.

4. 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.

First-time taxpayers must learn the ways in which they can reduce their tax liability through exemptions and deductions. Here are some simple tips:

Use Section 80C

Section 80C allows you to reduce your taxable income by up to Rs. 1.5 lakh by investing in some financial instruments. Popular options include:

• Life insurance premiums
• Public Provident Fund
• Employee Provident Fund
• Tax saving FDs
• Equity-linked savings schemes

Take advantage of Section 87A

Section 87A provides a rebate for individuals whose total income does not exceed Rs. 7 lakh. If you fall under this bracket, you can claim a rebate of up to Rs. 25,000, which could significantly reduce your tax liability (new tax regime).

Claim standard deduction

A standard deduction of Rs. 75,000 is available to salaried people (in the new tax regime), enabling them to reduce taxable income by this amount without needing to provide any specific proof of expenses.

This deduction is especially beneficial because it is available to all salaried individuals, regardless of the amount they spend on transport or medical expenses.

Paying income tax is a responsibility that comes with earning an income. But it doesn't have to be overwhelming. With a clear understanding of the basic concepts and thoughtful planning, you can go through the process with confidence.

As you become more familiar with the basics of income tax, tax planning can even become an opportunity to make sound financial decisions that benefit you in the long term.

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