In a financial year, starting from 1st April and ending on 31st March, any income that you earn is subject to income tax as per the provisions stated in the Income Tax Act, 1961 (the Act), if your annual income exceeds Rs.2.5 lakhs. Every year, you are required to file your income tax returns with the income tax department. However, income tax aspects and its filing are a little technical in nature. If you don’t understand the technicalities, you might end up making errors in your returns that might cost you dearly.
So, here’s a basic beginner’s guide to understanding the common income tax concepts.
The concept of slab rates
In India, the annual income is taxed in a progressive manner. The tax rates keep increasing with increasing income. There are different slabs for different income levels. This is called slab rates. Depending on which slab your income falls in, your income would be taxed.
The slab rates for the financial year 2022-23¹ (if opted under old regime) for taxpayers below 60 years of age and Hindu Undivided Families (HUFs) are as follows –
| Income level | Slab rates |
|---|---|
| Up to Rs.250,000 | Nil. No tax is levied on incomes up to Rs.2.5 lakhs |
| Rs.250,001 to Rs.500,000 | 5% of income exceeding Rs.250,000 |
| Rs.500,001 to Rs.10,00,000 | Rs.12,500 + 20% of income exceeding Rs.500,000 |
| Rs.10,00,001 and above | Rs.112,500 + 30% of income exceeding Rs.10,00,000 |
New regime tax slab, pre-Budget 20238
| Income level | Tax rate |
|---|---|
| Up to Rs.2,50,000 | Nil |
| Rs.2,50,001 to Rs.5,00,000 | 5% |
| Rs.5,00,001 to Rs.7,50,000 | 10% |
| Rs.7,50,001 to Rs.10,00,000 | 15% |
| Rs.10,00,001 to Rs.12,50,000 | 20% |
| Rs.12,50,001 to Rs.15,00,000 | 25% |
| Rs.15,00,001 and above | 30% |
However, in the Union Budget 2023$, the tax slab has been changed and is as follows –
New regime tax slab, post-Budget 20238
| Income | Tax rate |
|---|---|
| Up to Rs.3,00,000 | Nil |
| Rs.3,00,001 to Rs.6,00,000 | 5% |
| Rs.9,00,001 to Rs.12,00,000 | 15% |
| Rs.12,00,01 to Rs.15,00,000 | 20% |
| Rs.15,00,001 and above | 30% |
Deductions under the Income Tax Act, 1961²
The Income Tax Act, 1961 offers different types of deductions that help in reducing your taxable income. Most of these deductions are contained in Chapter VI A of the Act.
Some of the popular deductions are as follows –
| Deduction section | Deduction details |
|---|---|
| Section 80C | Allowed against eligible tax saving investments and expenses like ELSS, life insurance premium, PPF, 5-year fixed deposits, children tuition fees, home loan principal repayment, among others. The maximum limit is Rs.1.5 lakhs for all tax saving investments and expenses combined. |
| Section 80D | Allowed for health insurance premiums for your family. The maximum limit is Rs.25,000 if you are below 60 years. If you or your spouse is above 60 years, maximum deduction available is Rs. 50,000. Further Additional deduction is available if health insurance premium paid for parents. The limit is Rs.25,000 if parents are below 60 else Rs.50,000. In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1,00,000. |
| Section 80E | Allowed for the interest paid on education loan |
| Section 80TTA | Allowed for savings account interest earned. The exemption limit is up to Rs.10,000 |
| Section 80TTB | Allowed for interest earned by senior citizens on their deposits. The exemption limit is up to Rs.50,000 |
| Section 80G | Allowed for donations specified u/s 80G of Income Tax Act 1961. Donations made in cash above Rs. 2,000 shall not be allowed as exemption. |
Exemptions under the Income Tax Act, 1961
Just like deductions, tax exemptions also give you a tax benefit on your income and expenses. Some of the popular exemptions include the following –
| Exemption section | Exemption detail |
|---|---|
| Section 24(b)3 | Exemption for the interest paid on a home loan. The limit is Rs.2 lakhs |
| Section 10(10A)5 | Exemption for the commuted amount of pension. |
| Section 10(10D)4 | Exemption for any benefit received from a life insurance policy provided that the premium is up to 10% of the sum assured and policy is issued after 31 March 2012. In the case of ULIPs, the aggregate annual premium should be up to Rs.2.5 lakhs for policies taken on or after 1st February 2021. |
| Section 10(13A)6 | Exemption for the House Rent Allowance (HRA) that you receive from your employer. This deduction is available only if you are paying house rent. |
| Section 10(5)7 | Exemption for the Leave Travel Allowance (LTA) that you receive from your employer. This deduction is available for 2 years out of block of 4 calendar years. |
The basic exemption limit for tax filing
If your income is within Rs.2.5 lakhs in a financial year, you are not required to file your ITR because Rs.2.5 lakh is the basic exemption limit for tax filing.
Moreover, if your income is more than Rs.2.5 lakhs but less than Rs.5 lakhs, you get a tax rebate under Section 87A. The rebate is up to Rs. 12,500 or your tax liability in an assessment year, whichever is lower, before adding cess. Through the rebate, your tax liability becomes nil.
Gross income v/s taxable income – the meaning and difference
When filing your tax returns, you would come across two terms – gross income and taxable income. Both these terms have different meanings. Let’s understand –
1. Gross income
Gross income means your aggregate income during the financial year. It the amount before considering any deductions or exemptions that you might be eligible for. The gross income is the overall summation of all sources of income that you might have earned in a financial year.
2. Taxable income
The eligible deductions and exemptions are deducted from the gross income to find your taxable income. The taxable income is the income on which the slab rates apply and tax is computed.
The gross income can be higher or equal to the taxable income. However, the taxable income cannot be higher than the gross income.
The bottom line
These are some of the basics of income tax that you, as a taxpayer, need to know about. So, understand these tax aspects and use them when calculating your tax liability. Also, use deductions and exemptions during your tax planning to be tax efficient and save more. Income tax calculators help you calculate your estimated tax liability. One may use these income tax calculators to make the job of filing the returns easier. Also, file your ITR on time to avoid penalties.
Ref:
1. https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1
2. https://cleartax.in/s/80c-80-deductions
3. https://cleartax.in/s/deductions-under-section24-income-from-house-property
4. https://incometaxindia.gov.in/communications/circular/circular-2-2022.pdf
5. https://incometaxindia.gov.in/Tutorials/11.Tax%20free%20incomes%20final.pdf
6. https://incometaxindia.gov.in/rules/income-tax%20rules/103120000000006868.htm
7. https://incometaxindia.gov.in/rules/income-tax%20rules/103120000000006903.htm
8. https://cleartax.in/s/income-tax-slabs
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