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The Basics of Income Tax Structure

Feb 05, 2020 | 5 months ago | Read Time: 4 minutes | By iKnowledge Team

Are you feeling nervous about paying your taxes for the first time? You might have heard experienced people telling you about how filing taxes is a huge challenge at the end of every financial year. However, when you get your basics right, you will be surprised to know that the Indian Income Tax structure is not as complicated as it is made out to be.  As a first-time taxpayer, you must understand some fundamental tax concepts to get rid of your nervousness in a jiffy.

Tax types

There are two types of taxes in India – direct and indirect. Direct taxes are further classified as income tax that salaried people like yourself, self-employed people and a HUF (Hindu Undivided Family) pay and corporate taxes that companies pay to the Government.

Tax payment date

Every year, the period between 1st Aril and 31st March is known as the financial year. You need to make your tax payment by the 31st July every year. By the end of the financial year, you need to have finalized your investments so that they qualify for tax-saving that year. All investments that are eligible for deductions under Section 80C of the Income Tax Act 1961 need to be finalized by 31st March. You can claim a maximum of Rs.1.5 lakhs as tax-deductions on them, so you choose them wisely. The investments that qualify for deduction under Section 80C are the following:

  • Public Provident Fund and Employee Provident Fund
  • National Savings Certificate
  • Equity Linked Savings Scheme
  • Unit-Linked Insurance Plan
  • Senior Citizens Savings Scheme
  • Bank Fixed Deposits
  • Post Office Time Deposits
  • Senior Citizens Savings Scheme
  • Sukanya Samriddhi Scheme

What type of income is taxable?

You would already know that your salary is a taxable income. What are the sources of income that you must pay taxes for? Income from pension (if you are retired), Income from house property, income from other income (includes your interest earned from your bank deposits), income from capital gains (amount that you get from the sale of your house or an asset) and income from other business/profession are the incomes that are classified as taxable income.

What is the current income-tax slab rate in India?

The Indian Government has mentioned a slab rate which is classified based on your annual income level. There are differential tax rates applicable to each slab. These rates are subject to change every year, as per the announcement of the Finance Minister during the presentation of the Annual Budget.

In her budget 2020 speech, the Finance Minister Nirmala Sitharaman introduced a new system of taxation with modified tax slabs and reduced tax rates. Instead of replacing the current tax regime, this new system will coexist alongside it, giving taxpayers the freedom to choose between the two.

From financial year 2020–2021 onward, existing tax deductions and exemptions can be claimed only if you opt for the old tax regime. If you choose to opt for the new tax regime, many of the deductions and exemptions currently available in the Income Tax Act cannot be claimed to reduce your taxable income. However, the silver lining is that you get to enjoy reduced tax rates.

The income slabs and rates of tax as per the new regime are: 

  • Annual Income up to Rs. 5 lakhs – No tax is applicable
  • Annual Income between Rs. 5 lakhs and Rs. 7.5 lakhs – You will be taxed at a rate of 10%
  • Annual Income between Rs. 7.5 lakhs and Rs. 10 lakhs – You will be taxed at the rate of 15%
  • Annual Income between Rs. 10 lakhs and Rs. 12.5 lakhs –You will be taxed at the rate of 20%
  • Annual Income between Rs. 12.5 lakhs and Rs. 15 lakhs – You will be taxed at the rate of 25%
  • Annual Income above Rs. 15 lakhs – You will be taxed at the rate of 30%

For the financial year ending 31st March 2020, the slabs and tax rates are:

  • Annual Income up to Rs. 2.5 lakhs – No tax is applicable
  • Annual Income between Rs. 2.5 lakhs and Rs. 5 lakhs – 5% of your taxable income above Rs. 2.5 lakhs needs to be paid as taxes
  • Annual Income between Rs. 5 lakhs and Rs. 10 lakhs – You need to pay Rs. 12,500 plus 20% of your taxable income above Rs. 5 lakhs as taxes
  • Annual Income above Rs. 10 lakhs – You need to pay Rs. 1,12,500 plus 30% of your taxable income above Rs. 10 lakhs as taxes

Be aware of the deductions

Apart from the 80C deductions that we mentioned above, there are other tax deductions that you should be aware of, to save a lot of taxes. For example, the health insurance policy that you have for yourself and your parents qualifies for sizeable deductions under this Section 80D, based on your and your parent’s age. If you have any long-term savings in investments such as the National Pension Scheme, you are eligible for deductions under Section 80CCD. This is only the tip of the iceberg. To know the entire list of deductions and how you can save tax, you can talk to your tax-planner right away and choose investments wisely.

As a first-time taxpayer, it is natural to feel confused about the various terms used in the Income Tax Forms, and you may find it difficult to report your income and savings correctly. Nevertheless, if you have a clear idea about your taxable income and the deductions that you are eligible for, you can compute your tax correctly.

Choose tax-saving investments wisely. Choose plans wisely so that, you not only get assured financial protection for yourself and your family, but you also get to save taxes as well.

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