Income Tax: A beginner’s guide

Income tax is a tax levied by the government on an individual’s or organization’s income. As a 25-year-old, you may be starting your professional career and earning a regular income, so it’s important to understand how income tax works in India.

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Here’s a basic overview:

1. Tax slab: The Indian government has set different tax slabs for varying levels of income. Based on your income, you’ll be placed in a particular tax slab and the corresponding tax rate will be applied to your taxable income.
2. Taxable income: Your taxable income is your total income minus any deductions you can claim. For example, you can claim deductions for investments in life insurance, public provident fund (PPF), and tax-saving mutual funds, among others.
3. Filing tax returns: If your taxable income exceeds the exempt limit, you are required to file an income tax return. This is a process where you declare your income, claim your deductions, and calculate the tax you owe.
4. Payment of tax: If you owe any tax, you’ll need to pay it by a certain date, which is usually July 31st of the assessment year.
5. PAN card: You must obtain a PAN (Permanent Account Number) card, which is a unique identification number for tax purposes. This must be quoted in all your financial transactions, including your tax returns.

The Indian government has set different tax slabs for different levels of income, which determine the tax rate that applies to your taxable income. Currently, there are three tax slabs for individuals, which are:

1. Tax slab for Individuals below 60 years of age:

• Up to INR 2.5 lakh: No tax
• INR 2.5 lakh to INR 5 lakh: 5% tax
• INR 5 lakh to INR 7.5 lakh: 10% tax
• INR 7.5 lakh to INR 10 lakh: 15% tax
• INR 10 lakh to INR 12.5 lakh: 20% tax
• INR 12.5 lakh to INR 15 lakh: 25% tax
• Above INR 15 lakh: 30% tax

1. Tax slab for Individuals between 60 and 80 years of age:

• Up to INR 3 lakh: No tax
• INR 3 lakh to INR 5 lakh: 5% tax
• INR 5 lakh to INR 10 lakh: 20% tax
• Above INR 10 lakh: 30% tax

1. Tax slab for Individuals above 80 years of age:

• Up to INR 5 lakh: No tax
• Above INR 5 lakh: 20% tax

It’s important to note that these tax slabs are subject to change from time to time, and the government can revise them in the annual budget. Additionally, the tax laws may be different for different types of income, such as business income, capital gains, and rental income, among others.

In India, individuals have the option to choose between two different tax regimes: the old regime and the new regime. The main difference between the two regimes is the deductions and exemptions that are available under each.

1. Old regime: Under the old regime, taxpayers can claim deductions and exemptions as per the provisions of the Income Tax Act, of 1961. This includes deductions for investments in life insurance, public provident fund (PPF), tax-saving mutual funds, and other eligible investments.
2. New regime: Under the new regime, taxpayers cannot claim deductions and exemptions as per the provisions of the Income Tax Act, of 1961. However, they are eligible for lower tax rates on their taxable income. The new regime has three tax slabs: 5%, 10%, and 15%.

It’s important to choose the tax regime that is most beneficial for your circumstances, taking into consideration your income, investments, and other tax-related factors. You can choose the tax regime at the time of filing your tax returns, and switch between the two regimes if needed.

Now let’s see how to know which tax regime is beneficial

To determine which tax regime is beneficial for you, you’ll need to compare the tax liability under both the old regime and the new regime. Here’s a basic example of how the tax calculation might look for an annual income of INR 9.5 lakhs:

Old regime:

Taxable income: INR 9.5 lakhs Tax rate: 20% (for taxable income between INR 10 lakhs and INR 12.5 lakhs) Tax liability: INR 9.5 lakhs x 20% = INR 1,90,000 Deductions: INR 2,00,000 (Education loan interest up to INR 2,00,000 is allowed as a deduction) Tax after deductions: INR 1,90,000 — INR 2,00,000 = INR -10,000 (i.e. no tax liability)

New regime:

Taxable income: INR 9.5 lakhs Tax rate: 15% (for taxable income of INR 9.5 lakhs) Tax liability: INR 9.5 lakhs x 15% = INR 1,42,500 Deductions: None (as per the new regime) Tax after deductions: INR 1,42,500

From this example, it’s clear that choosing the old regime is more beneficial for you, as it allows you to claim the education loan interest as a deduction, thereby reducing your tax liability to zero.

In terms of investment ideas to save tax, you can consider the following options:

1. Public Provident Fund (PPF): This is a long-term investment option that offers tax-free interest and is eligible for deduction under section 80C of the Income Tax Act.
2. Equity-Linked Saving Scheme (ELSS): This is a type of tax-saving mutual fund that invests primarily in equity shares. Investments in ELSS are eligible for deduction under section 80C of the Income Tax Act.
3. National Pension System (NPS): This is a government-sponsored pension scheme that allows you to invest a portion of your income towards your retirement. Contributions to NPS are eligible for deduction under section 80C and section 80CCD of the Income Tax Act.
4. National Savings Certificate (NSC): This is a fixed-income investment option that offers tax benefits. Investments in NSC are eligible for deduction under section 80C of the Income Tax Act.

It’s important to consult a financial advisor before making any investment decisions, to ensure that you choose the option that is most suitable for your individual financial goals and circumstances.

Here is a link to calculate taxes: https://incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx

It’s important to keep accurate records of your income and expenses and to file your tax returns on time. Non-compliance with income tax laws can result in penalties and fines. You can find more information on Indian income tax laws and regulations on the website of the Income Tax Department of India.