Basic Concepts of Income Tax: Complete Guide

Basic Conecpts of Income Tax

Income tax is a tax that is charged on the income earned by individuals and businesses. It is an important part of everyone’s finances, and understanding the basic concepts of income tax is crucial to ensure that you comply with the tax laws and regulations and avoid any penalties or legal issues. Some of the basic concepts of income tax include taxable income, tax deductions, tax credits, tax brackets, and tax rates. By having a good understanding of these concepts, you can effectively manage your finances and plan your budget accordingly.

What is the Income Tax Law?

The current income tax law in India is governed by the Income Tax Act of 1961, which extends to the entire country. This law came into force on the 1st of April 1962. The Act has 298 sections and XIV schedules. It has provisions for the determination of taxable income, tax liability, appeals, prosecutions, penalties, assessments, and much more. 

The law can undergo changes (amendments) every year with added or deleted factors according to the Annual Finance Act passed by the parliament. For instance, the amount of income tax you pay each year could change according to the changes in the law. Therefore, it is best if you use an income tax calculator that is updated frequently before you make any payments. 

Who Needs to Pay Income Tax in India?

Just remember once again that income tax rules and regulations can change often, and this makes it important for everyone to find updated data. Currently, any individual who earns more than Rs. 2.5 lakhs in a year is required to pay income tax to the government of India. Mentioned below are the different kinds of taxpayers India has:

  • Individuals
  • Association of Persons
  • Firms
  • Companies
  • Hindu Undivided Family
  • Artificial Juridical Person

An individual needs to have any one of the following residential statuses:

  • Resident of India
  • Resident of India but not Ordinarily Resident of India.
  • Non-Resident Indian.

What are the Different Forms of Income Considered According to the Income Tax Act?

The income is classified under a few categories, and they are:

1. Income from Salary

 This includes basic pay, medical allowance, gratuity, dearness allowance, transport allowance, annuity, advance of salary, prerequisites in lieu of salary, advance salary, other allowances, commissions, and retirement benefits. 

2. Passive Income from Property

This includes any form of rental income from residential or commercial property that you own. If you have a home loan, then the interest of this loan will be known as the negative income from the house property you own. 

3. Income from a Business or a Profession

Income that is earned from a business or your profession will be taxed income. The income will be the net of all expenses. 

4. Income from Your Capital Gains

Any kind of profit from the transfer of a capital asset held as an investment, such as jewelry. The gains can be even on account of short-term or long-term gains. 

5. Income from Other Income Sources

This will include income that does not come under the categories mentioned above. These forms of income will be taxed under income from other sources. This means, that even if you win a lottery, it will be considered as a form of income and it will be taxed under the Income Tax Act. 

Understand income classifications through the table below:

Income from Salary: This is in regard to    the salary you earn. For instance, if you are working in a corporate company, it will mean the entire salary you earn from this corporate company, including basic salary, wages, salary advance, leave encashment, commission, and much more. 

Income from your Business: If you have a business of your own, the income earned through this income will also be taxed. This income, however, will not mean your entire income; it will mean your net income. This means it will exclude all your expenses, and finally, the amount that stands in your hand will be taxed. 

Income from Your Profession: If you have a profession, for instance, if you are a doctor and are running a clinic. The income you earn from this clinic will be taxed. However, the income that would be considered is the amount that is left after all the expenses are paid. 

Income from Capital Gains: Income earned from capital gains of any kind will be taxed. Whether it is capital gains earned from selling a property or selling a stock, they will be taxed according to the Income Tax Act. 

Income from Your House Property: Income that is earned from a property. In case you earn property, whether residential or not, when you earn income from the property, such as rent and deposits, the income is taxed according to the act. 

So, if everything is taxed, are there financial attributes that do not carry taxes? Of course. Keep reading to find out what taxes are exempt from in India.

What is Exempt from Taxes in India?

There are certain forms of income that are completely exempt from tax:

  • Agriculture Income. 
  • Certain Interest to Non-Residents. 
  • Interest to Non-Resident on Non-Resident Account. 
  • Leave Travel Concession. 
  • Tax on Perquisites paid by the employer. 
  • Payment from Statutory Provident Fund. 
  • Scholarships are given to meet education expenses. 
  • Income from one palace of a former ruler. 
  • Income of a local authority. 
  • Income of European Economic Community. 
  • Income of SAARC fund. 
  • Income of IRDA. 
  • Income of Secretariat of Asian Organisation of Supreme Audit Institutions. 
  • Income of the Prasar Bharati. 
  • Tax-free mutual funds. 
  • Exemption of income from the securitization trust. 
  • Income from international sporting events. 
  • Reverse mortgage. 
  • Income of National Financial Holdings Company.
  • Income received by any person for, or on behalf of, the New Pension System Trust. 

So, before you pay taxes on a form of income, just cross-check for these forms of exemptions. 

Conclusion

Income tax is an important element in managing your finances. When you know your income taxes well, it can go a long way in accomplishing your financial goals. This post has taken you through the basic elements of income tax that you need to know, and it can help you kick-start your understanding of income tax in the long run. 

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