Payment of taxes is among the major duties that accompany earning a living in India. For most, the process appears to be complex, particularly when calculating the precise sum payable. However, using a direct method, it becomes easy to compute tax on taxable income.
Understanding the correct steps, individuals can not only fulfil their duty but also plan more effectively for their fiscal future.
Understanding of Income Tax in India
Income tax is a direct tax levied by the government on earnings made between a financial year, i.e., 1 April to 31 March. They are important in financing public services, including healthcare, education, and infrastructure.
The tax regime of India is designed on an income tax slab system. This involves the classification of taxpayers into groups based on their income. Those who earn more contribute more, whereas those earning less are taxed proportionally less. Before beginning any calculations, it is essential to know which slab applies, as this is the foundation for determining liability.
Step 1: Identify All Income Sources
The initial step is to list all sources of income you have in a financial year. Most individuals pay attention only to their salary, but tax is levied on a wider assortment of income. Typical categories include:
- Salary from employment
- Profits from a business or profession
- Rental earnings from property
- Capital gains from selling shares, mutual funds, or real estate
- Interest from savings accounts, fixed deposits, or bonds
By adding all of these together, you arrive at your gross income. This stage is critical, as missing a source will make it impossible to correctly calculate tax on taxable income.
Step 2: Work Out Gross Total Income
Once you identify income sources, the next stage is to combine them to find your gross total income. At this juncture, allowances and exemptions applicable to salary or other income are brought into consideration. These may include:
- House Rent Allowance (HRA) for salaried employees in rented housing
- Leave Travel Allowance (LTA) for specified journeys
- Standard Deduction for salaried workers and pensioners
You must also choose between the old tax regime and the new tax regime. The old regime allows a wider set of deductions and exemptions, while the new regime provides lower slab rates but fewer exemptions. This decision has a direct impact on the income tax slab that applies.
Step 3: Apply Deductions and Exemptions
The third stage is to reduce your income through eligible deductions and exemptions. These bring down the taxable income, particularly under the old regime. Certain popular deductions are:
- Medical premium paid under Section 80D.
- Contribution towards National Pension Scheme under Section 80CCD(1B).
- Interest on house loan under Section 24(b).
- Donations for charity under Section 80G.
For instance, if your gross income is ₹10,00,000 and you have deductions of ₹1,50,000, then your taxable income is ₹8,50,000. This reduction might even move you into a lower tax band.
Deductions in the new regime are low, but the slab rates themselves are lower. Carefully comparing both regimes before making a choice is the wise thing to do.
Step 4: Find the Correct Tax Slab
After applying deductions, the next step is to check which income tax slab your income falls under. Below are the slab rates for the new regime:
| Annual Income (₹) | Tax Rate |
| Up to 3,00,000 | Nil |
| 3,00,001 – 6,00,000 | 5% |
| 6,00,001 – 9,00,000 | 10% |
| 9,00,001 – 12,00,000 | 15% |
| 12,00,001 – 15,00,000 | 20% |
| Above 15,00,000 | 30% |
The old regime has different rates but allows the use of deductions and exemptions. Being aware of where you are ensures you accurately determine tax on taxable income before proceeding to the last step.
Step 5: Calculate the Tax Liability
After identifying the slab, use the rates against your taxable income. For example, in case your taxable income under the new regime is ₹8,50,000, the calculation would be:
Up to ₹3,00,000 → Nil
₹3,00,001 to ₹6,00,000 → 5% = ₹15,000
₹6,00,001 to ₹8,50,000 → 10% = ₹25,000
Total = ₹40,000
On charging a 4% health and education cess, the total liability amounts to ₹41,600. This step-by-step approach reveals how easy the procedure is when taken one step at a time.
Step 6: Consider TDS and Advance Tax
Taxes are rarely paid in full at the end of the year. They are collected in instalments instead. The two primary methods are:
- Tax Deducted at Source (TDS): Employers, banks, and institutions deduct tax when payment is made.
- Advance Tax: Individuals whose yearly liability exceeds ₹10,000 must pay tax in instalments during the year.
When you finally file your return, all these payments are adjusted against your overall liability. You will either pay the balance or claim a refund if too much was deducted.
Step 7: File Your Income Tax Return (ITR)
The last step is submitting your ITR. This involves:
- Selecting the right ITR form based on your income.
- Enter your income details, deductions, and payments made.
- Fill out the form online on the government portal prior to the deadline.
Paying your return on time avoids penalties, enables you to get back refunds in time, and maintains a good financial history. It is also necessary while applying for loans, visas, or other official purposes.
Why Accuracy Is Important
Accurate calculation of taxes is not merely a matter of obeying the rules. It also makes you handle your own finances in a more efficient manner. A correct amount guarantees:
- You don’t unnecessarily overpay.
- You don’t pay penalties or interest on underpayment.
- You can make wise investments.
- You keep calm during tax filing season.
If people take the time to learn how the system actually works, they are better equipped to make good decisions for their future.
Conclusion
Income tax filing might appear daunting at the onset, but by having a well-delineated step-by-step procedure, it is much easier to achieve. Beginning with the determination of the source of income, passing through the choice of exemptions and the slab, and concluding with filing returns on the Internet, every stage is crucial. Adhering to this procedure ensures that one complies with the law and also facilitates proper financial planning.
