Dive Deep into the Ocean of Financial Independence.
Introduction
Income tax is a term we hear often, but many people—especially beginners—find it confusing. Whether you're a student earning from freelancing, a salaried employee, or someone planning to start a business, understanding income tax is essential. In this article, we'll explain the basics of income tax in India, in a simple, clear, and practical way.
What Is Income Tax?
Income Tax is a direct tax that individuals or entities pay to the government on the income they earn. It is governed by the Income Tax Act, 1961, and collected by the Income Tax Department of India.
If your income crosses a certain limit in a financial year (April to March), you are legally required to pay tax on that income to the government.
Who Needs to Pay Income Tax?
In India, income tax is paid by:
- Individuals
- Hindu Undivided Families (HUFs)
- Companies
- Firms
- Association of Persons (AOPs)
- Trusts and Societies
If your total income exceeds the basic exemption limit, you are required to pay tax and file an Income Tax Return (ITR).
Types of Taxable Incomes
The Income Tax Department divides income into five main categories:
1. Income from Salary
If you work for a company and get a salary every month, that’s taxable income. This includes:
- Basic salary
- House rent allowance (HRA)
- Special allowances
- Bonuses and commissions
2. Income from House Property
If you earn rent from a house or flat you own, it is considered income from house property.
3. Profits and Gains from Business or Profession
If you run a business or practice a profession like doctor, CA, lawyer, etc., your profit is taxable under this head.
4. Capital Gains
When you sell assets like property, gold, or shares and make a profit, it is called a capital gain. It is taxable.
5. Income from Other Sources
This includes:
- Interest from fixed deposits or savings accounts
- Lottery or betting income
- Gifts (in some cases)
Income Tax Slabs (FY 2024-25)
India follows a progressive tax system, where tax rates increase with income.
You can choose between two tax regimes:
🧾 Old Regime (with deductions):
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 2.5 lakh | NIL |
| 2.5 – 5 lakh | 5% |
| 5 – 10 lakh | 20% |
| Above 10 lakh | 30% |
You can claim deductions like:
- ₹1.5 lakh under Section 80C
- ₹50,000 under Section 80CCD(1B)
- HRA, LTA, medical, etc.
💼 New Regime (lower tax rates, fewer deductions):
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 3 lakh | NIL |
| 3 – 6 lakh | 5% |
| 6 – 9 lakh | 10% |
| 9 – 12 lakh | 15% |
| 12 – 15 lakh | 20% |
| Above 15 lakh | 30% |
Key Terms You Should Know
1. PAN (Permanent Account Number)
It is a 10-digit alphanumeric code issued by the Income Tax Department. PAN is mandatory for filing tax returns and making high-value transactions.
2. Financial Year (FY)
The year in which you earn income. In India, it runs from 1st April to 31st March.
3. Assessment Year (AY)
The year following the financial year, in which your income is assessed and taxed.
For example, for FY 2024-25, the AY will be 2025-26.
4. Form 16
A certificate issued by your employer showing how much salary you earned and how much tax was deducted (TDS).
5. TDS (Tax Deducted at Source)
A portion of your income (like salary or interest) is deducted and paid directly to the government as advance tax.
How to Calculate Taxable Income
Here’s a simple step-by-step example:
Suppose you're a salaried employee earning ₹7,50,000 per year.
Under Old Regime:
- Gross Income = ₹7,50,000
- Deduction under 80C = ₹1,50,000
- Deduction under 80D (insurance) = ₹25,000
- Net Taxable Income = ₹7,50,000 – ₹1,75,000 = ₹5,75,000
Tax Calculation:
- 0–2.5 lakh = NIL
- 2.5–5 lakh = 5% of ₹2.5 lakh = ₹12,500
- 5–5.75 lakh = 20% of ₹75,000 = ₹15,000
- Total Tax = ₹27,500 (excluding cess)
How to File an Income Tax Return (ITR)
Filing your income tax return is simple and now mostly online. Here's how:
Step 1: Gather Documents
- PAN card
- Aadhaar card
- Form 16
- Bank statements
- Investment proofs
- TDS certificates
Step 2: Visit the Official Portal
Go to https://www.incometax.gov.in
Step 3: Register or Log in
Use PAN as your user ID.
Step 4: Choose the Right ITR Form
Most salaried people use ITR-1 (Sahaj).
Step 5: Fill in Your Details
Enter your income, deductions, and TDS.
Step 6: Verify and Submit
Use Aadhaar OTP or e-verification to confirm submission.
What Happens If You Don’t Pay Tax?
If you don’t pay your tax or file your return:
- You may get notices from the Income Tax Department.
- You could face penalties up to ₹10,000.
- In serious cases, there could be legal action or prosecution.
- You may miss benefits like visa approval, bank loans, or refunds.
How to Save Tax Legally?
You can reduce your tax liability by using the right deductions:
✔️ Section 80C: Investments like:
- PPF
- ELSS mutual funds
- Tax-saving FDs
- Life insurance
✔️ Section 80D:
- Medical insurance for self and family
✔️ HRA:
- If you live in a rented house
✔️ Education Loan (80E):
- Deduction on interest paid
Tips for Beginners
- Start Early – Don’t wait till March. Plan your taxes in April.
- Keep Records – Save your bills, receipts, and investment proofs.
- Use Online Calculators – They help estimate tax easily.
- Choose Your Regime Wisely – Compare old vs new regimes.
- Don’t Ignore TDS – Always verify TDS in Form 26AS.
- File Returns on Time – Usually by 31st July of the assessment year.
- Consult a CA if Needed – For freelancers, businesses, or complex cases.
Final Words
Understanding income tax may seem hard at first, but once you get the basics, it becomes simple and powerful. Knowing how much you earn, how much you need to pay, and how to save legally helps you become a smart financial citizen.
Whether you're a student starting a side hustle, a salaried employee, or an entrepreneur—start tracking your income, use deductions, and file your return on time.
It’s not just about paying tax—it’s about being responsible, saving money, and securing your financial future.
FAQs
Q1. Is it compulsory to file ITR if I earn below ₹2.5 lakh?
No, unless you want to claim a refund or are covered under other specific conditions.
Q2. Can I file ITR without Form 16?
Yes. If you know your income and TDS, you can file ITR even without Form 16.
Q3. What if I miss the deadline to file ITR?
You can file a belated return with a small late fee, but it's best to file on time.
Q4. Is income from freelancing or YouTube taxable?
Yes, any income—whether from YouTube, blogging, freelancing, or gig work—is taxable in India.
