Income tax in India is a complicated thing and one cannot file Income Tax Return (ITR) without taking all the necessary income, expenditure and investment sources they have in consideration. You need to have sufficient knowledge about the IT laws along with proper planning to do it successfully. People, who are not well-aware about tax laws, usually end up paying more taxes that could have been avoided by opting for a well-planned approach.
How to Calculate Income Tax?
College pass-out and individuals joining their first job are often worried about income tax. Instead of worrying, they need to equip themselves with a few income tax basics that will help them to calculate and manage their income tax better.
- The Previous Year or Tax Year: Your previous year/tax year is the financial year for which the tax is calculated on your income. The financial year begins from 1st April and ends on 31st March of the next year. It is completely your responsibility to plan and manage your incomes and expenses according to this period.
- Assessment Year: This is a popular term but most people confuse it with the previous financial year. On the contrary, an assessment year begins just after the previous year. It is the period in which your tax for the previous year is assessed. Simply said, this is the year in which you file your return for the previous year. For instance, Ram starts his job on 1st January 2017. Since the financial year will end on 31st March 2017, in this case, his previous year is 2016-17 and the assessment year is 2017-18. The last date for filing his ITR will be 31st July 2017.
- Break up Your Salary: This should be your first step towards calculating your income tax. As soon as you join the company, go to your HR and ask for salary details. It can be your salary slip or a detailed salary statement. By taking a close look at it, you will understand the major components of your salary. Some other information such as the tax deduction from salary, House Rent Allowance (HRA), conveyance allowance and Dearness Allowance (DA) are quite helpful while calculating your income tax.
- Taxable Income: Your next step should be to calculate your total taxable income. This includes all your sources of income apart from your salary. A brief explanation of taxable income is given here.
| Sources of Income | Description |
| Income from Salary | Salary, allowances, leaves encashment and all the gains you receive from your job/employment agreement. |
| Income from House/Property | Income from house/land. It
may be self-occupied or rented. |
| Income from Gains | Income from selling a capital asset. |
| Income from Business/Profession | Income from a part-time business or profession. |
| Other Sources | This also considered as the residual income. It comes from savings, fixed deposits, family pension, or gifts. |
Deductions and Tax Saving: Income tax is not only about you paying money to the government, it is also about saving your money through certain deductions. These deductions reduce your taxable income and provide a huge relief from income tax. It is quite simple to understand,
Grand total of all your incomes = Gross Income
Gross Income – Deductions = Taxable income.
Having said that, you should have complete information about Section 80 of the Income tax act. This section is the best friend of taxpayers. It includes all types of deductions such as interest on savings, investments in health and life insurance policies, on mutual fund returns, on various types of earned interests and many more. As per the new tax regime, your deductions can go up to a maximum of Rs. 2.5 lakh per year which is quite a big relief for most taxpayers. Certain traditional tax deduction measures such as PPF, NSC, Mutual Funds, Life insurance, Health Insurance, and several Systematic Investment Plans can help you to save a significant portion of your income. The government also offers income tax deduction on home loans as well. Plan your investments carefully and you can save the larger part of your annual income.
- TDS: This is Tax Deducted at Source. This means the income tax is deducted directly from your income. However, you do not have to worry about it as you can claim a refund on it. Most employers use this system to keep the tax filing process hassle-free and smooth at the end of the year. Banks also practice this phenomenon when they pay you interest. However, this is not something which can cause you severe financial harm as you can claim a refund if you can show proper documents about your investments and other deductions. You can either claim a refund or show the documents in advance to avoid TDS.
- Calculating the Payable Tax: After excluding all the applicable deductions and TDS, you can calculate your taxable income. If your taxable income is equal or less than the limit of Rs. 2.5 lakh per year, you do not have to pay any income tax. If not, you are liable to pay taxes on the income exceeding beyond this limit.
How to Save on Income Tax in India:
Everyone wants to increase their income and save on income tax. There are some ways that can help you save money for the future along with saving you from having to pay income tax. Tax saving instruments that are also good investment plans are your best bet for saving a significant amount of your overall income. Some of the most popular and effective tax-saving instruments are explained here.
- ELSS: Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds with distinctive features. First, they qualify for exemption under Section 80C up to Rs. 1.5 lakh and second, they have a lock-in period of 3 years. Almost every mutual fund company offers ELSS. The returns on ELSS are not sure as they are affected by the market changes. More than 75% of the investments are made in equity markets by the companies as they also want to make profits. The returns from ELSS are also completely tax-free. This makes it a preferred choice for many.
- PPF: Public Provident Fund (PPF) is another popular mode of investment. This has been a preferred choice for many since its launch and it is still a favourite of millions of salaried individuals. Being a government backed scheme, it offers guaranteed returns at the current interest rate of 7.9% which is quite decent. The maximum limit on investment in PPF is Rs. 1.5 lakh in one financial year whereas the minimum limit is Rs. 500. It has a lock-in period of 15 years that can be extended in a block of 5 years. PPF is best suited for individuals who do not want volatility in their investment at all.
ULIP: Unit Linked Insurance Plan (ULIP) is a hybrid of insurance plan and market-linked investments. It offers both saving and protection and has a minimum lock-in period of 5 years. The lock-in period can be extended up to 15 to 20 years as well depending on the investor. ULIP offers 5 to 9 fund options and the investor can switch between the funds anytime he/she wants. The returns on maturity are completely exempted from tax. Individuals already holding an ELSS does not require a ULIP as a pure insurance plan would be better for them.