Your starter pack to Taxes
What you need to know and how to get the ball rolling with taxes in India!
Ahoy! The buzz word for the week is the “Union Budget” that was released on 1st February, 2021 and everyone around you is talking about taxes and slab rates. Meh. All you can think about is how you’re going to budget and spend your January salary because you’re just dumbfounded by the tax systems and the working behind it. Tbh, it’s not your cup of tea.
Your go-to excuse is, ‘My family manages my taxes – I have absolutely no idea about it.’ But you’re feeling left out during such conversations and want to partake in them. Well, taxes are a teething issue and whether you like it or not is an important aspect of adulting. But tax is not a cup of tea. In fact, it is water and we all need to find a way to consume it. It’s imperative! .
Money is a big part of our lives and one of the most stressful times for many of us is during the tax filing season. It is after all your hard-earned money which you’re parting with.
So, here we break down the basics of personal tax. No, we’re not going to overwhelm you with tax jargons and tax slabs. In fact, this is just going to be a starter pack to the basics of tax terms, what you need to know and how to get the ball rolling.
But before we delve entirely into the article, we’re going to cover a few basic tax terms one needs to know while taking an interest in their taxes.
- Previous/Financial Year: A tax year is a 12 month period that begins on April 1st and ends on March 31st [of the next year]. No matter when you start earning an income, your tax for the year will be calculated during this period.
- Assessment Year: The most common term while filing your taxes will be the assessment year. An assessment year is the year when you file and pay for your taxes for the previous year.
2019-2020 is the previous year and 2020-21 is the assessment year. Aka, any income you earned in 19-20 will be paid in the year of 20-21.
Due to covid-19, the due dates for 2020 have been adjusted a few times.
- Income from various sources: While filing for taxes, sources of income can include:
Income from salary
Income from house property
Income from capital gains aka your investments
Income from business/profession and
Income from other sources aka lottery, gambling etc.
- Deductions: Deductions are your friends in taxes. They help reduce your Gross Income. The government has accepted some expenses as deductions. For example, Mediclaim premiums upto INR 25,000 per year is permissible as a deduction under Section 80D. This means that your total income to be taxed would be reduced by the amount you spent on the medical premiums upto a maximum of INR 25,000 per year.
- House Rent Allowance: House rent allowance is an allowance given by many Indian employers to salaried employees to help meet the cost of house rent.
- Rebate: A partial refund or return to someone who has paid too much tax, rent or utility. Any individual whose annual income is less than INR 5,00,000 is eligible for a rebate on the tax paid up to INR 2000. Read more on it here.
- 80C: AKA your best friend. You can claim deductions up to INR 1,50,000, annually, under Section 80C of the Income Tax Act by investing in several financial instruments. These instruments include Provident Fund, National Pension Scheme, Equity Linked Savings Scheme, etc. Interested and invested in 80C? Cleartax provides a concise list of instruments you can invest under 80C.
- Provident Fund: A Provident Fund [PF] is a government-managed retirement savings fund. In a PF, employees contribute a part of their salary which is equally matched by the employers.
We’ve just covered the surface of the terms one needs to know about taxes. But, if you wish to read further on tax terms, click on the link here.
This is a very important step that most people ignore. People remember their taxes once the due date to file the return approaches and by then, it’s too late to do anything. As youngsters are moving towards budgeting their year at the start, tax should also be considered at this stage.
‘Always plan ahead. It wasn’t raining when Noah built the Ark.’
You should estimate your income, plan your expenses and while seeing what sort of investments and savings you prefer, the tax implications should be evaluated. Whether certain expenses are eligible for tax relief, or whether you would like to start saving for retirement from now and invest in a Public Provident Fund, National Pension Scheme, etc. should all be considered
If you file your taxes late, expect to be hit with a penalty for delay in filing your return. Further, if there is tax due, additional interest would also be applied.
Before we dive into TDS - A tax-deductible at source is a kind of advance tax that a taxpayer is paying.
For eg., Saloni is a freelance graphic designer. In one of her contracts, she receives INR 50,000 per month. The company she is working for credits her money in her account after deducting TDS. For this type of income, the slab rate she falls under is 10%. Therefore, instead of receiving INR 50,000 in hand, Saloni then receives a credit of INR 45,000 and her taxes from this source of income have already been paid for.
Curious about TDS? Read more on it here.
1) Be aware of how the income will be taxed.
2) Be aware of any deductions you can claim – 80C, 80DD. Try to claim as many deductions as you can. Read more on deductions here.
3) Know whether tax will be deducted by the payer or if you need to pay advance tax.
4) If the taxes you file are straight forward, you can DIY via an e-filing portal.
5) File your taxes on time.
This completely depends from firm to firm. You can find smaller firms that might do it for INR 1,000 – INR 1,500 and larger professional firms that might charge you 10 times the amount! A realistic range would be INR 1,000 to INR 5,000 depending on complexities.
Bank Bazaar provides an extremely user-friendly calculator to calculate your taxes on an ad-hoc basis. Follow this link to know more about your tax status and tax payable.
Donations! Individuals tend to overlook this, but it is one of the places where you can do good and save on your money. Many NGOs or charities come under section 80G where a deduction can be claimed for the donation you’ve made, reducing your income payable. Take advantage of this situation and in case you’re unsure of how to budget your donations, read our article on it here.
Lastly, although our education system does not teach us much about taxes, it is a vital life skill, and everyone should know if. If not, find a CA friend who will help you out!
After all, where there’s a will, there’s an inheritance tax.