This article ensures that the reader gets a fair idea of the tax calculation intricacies and understands the liability attached to the amount of income achieved.
Income tax is a type of tax imposed by the government of any country on the income that any individual or business have earned during a particular financial year. This is one of the major sources of government revenue, which it spends to fund various public services, for infrastructural development across the country, undertake its defence and security-related expenditures, etc.
The constitution of India has made paying income tax a mandatory obligation and anybody failing to do so is liable to face legal and financial consequences. To avoid such harassment, the taxpayers are obliged to exactly know their tax obligations. They are also obliged to file their income tax return within a specified day announced by the government.
In India, individuals must file Income Tax Return, or ITR, by submitting details of their income during a particular financial year. The financial year in India starts from 1st April of the current year till 31st March of the following year.
Following the instructions given in the form, individuals themselves can fill up the income tax form and file their income tax. However, knowing precisely the different components of income and accordingly calculating income tax can become a complicated task for many.
Different Sources of Income
Any individual may have multiple sources of earnings. For example, if he is a salaried person, his salary is his income. In addition to his salaried job, if he owns a house and any other property from which he is earning rent, that will also be counted as income. Any other form of capital gain, even interest earning on deposits, windfall incomes like the lottery, etc, will also be calculated as income. Thus, he must declare income from all these respective sources while filing for income tax.
After understanding all the income components, one should proceed to calculate his income tax liability.
Income Tax Calculator
Using an Income tax calculator makes the job of income tax filing much faster, easier, and more transparent. However, it is essential to know the steps to get a proper amount of tax liability. There are many free income tax calculators available online.
The consecutive steps to be followed include:
- Step 1: Select the assessment year for which you want to calculate your income tax;
- Step 2: After choosing your gender from the dropdown, check the age options. If you are a senior citizen or a super-senior citizen, select the option accordingly;
- Step 3: Click on the “Income” dropdown;
- Step 4: Enter the amount in the fields designated under “Income”;
- Step 5: Choose the “Deductions” field;
- Step 6: Enter the figures required in the fields under “Deductions”;
- Step 7: Click on “HRA Exemptions”;
- Step 8: Enter the required details;
- Step 9: Click on the “Calculate” button.
Important Terms and Definitions in Tax Calculation
While filing for income tax, it is essential to know the meaning of the exact terms used in the form. Inadequate understanding can lead to a faulty declaration, further leading to unnecessary harassment.
- Assessment Year: When your income for a certain financial year is assessed, that particular year is referred to as an assessment year.
- Financial Year: The period between the current year’s April 1st and the following year’s March 31st is known as the financial year. While filing for income tax, you need to consider this time period and declare your earnings during this entire period of time. It is important to collate all the information from all sources of income and declare it for ITR filing. You need to submit the proof of income and also proof of investment during that particular financial year while filing ITR.
- Previous Year: The financial year preceding the assessment year is referred to as the previous year during ITR filing. It is important to note that, for income tax calculation income for the current year is assessed in the next year. Thus, in the year 2021-22, you need to file the ITR based on the income that you have already earned during the financial year 2020-21.
- Deduction: It is a reduction in the total taxable income based on Section 80 and Chapter VI-A. Specific kinds of spending such as investment in life insurance policies and payment of children’s tuition fees help you to avail a tax deduction.
- Exemption: It is a specific amount of income that is not included as a part of gross total income. Thus, this amount is deduced before the actual calculation of tax. Such exemptions are listed under Sections 10 and 54. For example, interests received from tax-free bonds and salary components like Leave Travel Allowance are exempted from gross income while calculating income tax.
Are Salaried Individuals Entitled to Get an Exemption?
Since most of the individuals earning in the society contribute through paying taxes, the total amount contributed is significant to drive the economy. Income tax deductions offer a gamut of opportunities for saving tax for the salaried class. With the help of these deductions and exemptions, one could reduce his/her tax substantially.
In this article, we have also tried to list some of the major deductions and allowances, available to the salaried persons, using which one can reduce their income tax liability
Exemption of Allowances
- House Rent Allowance
A salaried individual is entitled to a house rent allowance. This could be totally or partially exempted from income tax. However, if you aren’t living in any rented accommodation and still continue to receive HRA, it will be taxable.
- Standard Deduction
The Indian Finance Ministry during the year had declared certain standard deductions. For instance, while a salaried employee can enjoy medical reimbursements, such amounts are never taxable. So is the fact in relation to transport allowances
The blog reflects well on the liability associated with the income levels and the intricacies related to the calculation of income tax. Standard deductions are applicable in special cases although the clauses associated need to be known by the taxpayers.