It's a tough realization that the job you always desired comes along with the complexities of tax returns. For a majority of the population in India, calculating their tax is still quite a complex exercise, and because of other various adversities, there persists a lack of viable alternative solutions that can provide help in terms of tax calculations. In accordance with that, we have come to realize that not only is it beneficial but also necessary to provide a guide to calculate tax returns to help any average internet user.
The following article will try to explain all the steps required to calculate tax returns and the basics of income tax.
Before we proceed any further, it's quite necessary to develop an understanding of some frequently used terms while filing for the tax return:
A financial year starts on the 1st of April and ends on the 31st of March. Regardless of the time, one has joined their job, their financial year would end on the 31st of March. If one has joined a job on 15 February of 2020, at the time of calculating their tax, their previous year will be 2019-2020 and their financial year will close on 31st of March.
The year in which one is supposed to fill for their tax return is their assessment year. In the assessment year, the tax is calculated on the earned wealth during the previous year. Based on the previous example, the assessment year of the previous year 2019-2020 will be 2020-2021.
One can easily file for their tax return till the 31st of August.
Tax Deducted at Source or TDS forms a major part of the direct taxation mechanism applicable to various heads of income to collect taxes at the very source, i.e., at the time of payout. The taxpayer has to deduct an amount of tax based on the rules prescribed by the income tax department. As TDS is deducted right at the source, it helps check tax evasion and also relieves the taxpayer from the burden of paying taxes as a lump sum at the end of the financial year (FY). If a person, working in a firm/organization, gets a salary over Rs. 2,50,000 annually then their employer is expected to deduct TDS over the amount of salary which falls over the previously described limit.
At the time of paying income tax, the taxpayer can deduct the amount of tax they have paid by TDS in the previous year. Hence, the TDS mechanism allows both a steady inflow of revenue to the government and reduced financial strain for taxpayers.
Tax is deducted based on which tax slab (tax rate) you belong to each year.
This is peculiar to salaried employees only. As per the Budget 2018, a salaried employee is entitled to deduct an amount of Rs. 40,000 from their gross salary as reimbursement to replace the medical allowance amounting to Rs. 15,000 and traveling expenses amounting to Rs. 19,200 in a financial year. Effectively, the taxpayer will get an additional income exemption of Rs 5,800. After the Budget of 2019, this limit of standard deduction has been increased from Rs. 40,000 to Rs. 50,000.
Now that we established an understanding of the frequently used terms, it is time that we should understand from the basics as to how one must proceed while filling in for their tax return:
Salary is an amount of money that is collected by the employee at the end of the month after providing the firm/organization with specific services. In all understanding salary is the baseline for one to file for tax return. So it becomes fairly necessary to understand it. It is advisable to always ask for a payslip/salary details/tax assessment while collecting the salary. Here, you will get an idea of the major components of your salary and how much tax will be deducted from your salary based on them.
• Income from salary
- Leave encashment basically all the money you have received while rendering your job as a result of your employment in a firm/organization.
• Income from house property
- Income from house or building, through rent or self-occupation
• Income from capital gain
- It is applicable to the gained or lost value over a capital asset after it's sold.
• Income from business or profession
- Income/loss that came as a result of being involved in a business or a profession.
• Income from other sources
- All other sources of income such as saving bank accounts, fixed deposits, gifts received, etc, fall under this.
This step is extremely important to keep in mind. At the time of calculating one's tax, they must keep track of all the possible deductions they can make while submitting the actual tax. These deductions are the amount of money that can be deducted by the taxpayer at the time of filing for a tax return, as per the tax department.
Section 80C is the most important way of saving taxes. It allows taxpayers to reduce their taxable income by making investments and some expenses and thus save on taxes they pay. Presently this section allows a deduction of upto Rs. 1.5 Lakhs annually on the gross total income. However, it is applicable to certain expenses and eligible investments, which are discussed below.
Section 80C recognizes the Public Provident Fund or PPF. Under this clause, When one opens a PPF account, they need to deposit a minimum of Rs. 500 and a maximum of Rs. 1,50,000 in a year. Money deposited in a PPF account compounds, as you deposit more money in the subsequent financial years to claim deductions. It is one of the most widely used practices and is easily accessible as every bank allows to open a public provident fund account.
Fixed deposits are a wise way to ensure capital protection as well as a sizable interest income for investors. However, to get tax benefits under 80C, one needs to stay invested in the account for at least 5 years. Albeit it is safe, the income from interest is taxable.
ELSS or Equity Linked Saving Scheme allows an individual a deduction from the total income of up to Rs. 1.5 lacs under Sec 80C. According to it, if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing their tax burden. It is a mutual fund scheme, because of which it has become one of the most popular methods of deduction. Another perk of ELSS is that it has the lowest lock-in period of 3 years.
After deducting the possible amount out of one's gross total income, tax slabs are applied on the amount left to calculate the payable tax. Tax slab, as discussed earlier, are tax rates that are applied to different kinds of incomes. These tax rates change yearly.
Filing for a tax return can get a bit complex without a proper understanding of possible ways of deduction. However, after getting familiar with the procedure, it can help save a lot of money. Hard-earned money shall be spent wisely and filing for a tax return smartly is the founding stone of managing your expenses sagaciously.
Tags :income tax