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Income Tax for Beginners

Firstly, are you supposed to pay Income Tax?

The answer depends on the year. For your income for the year 2011-12 (1st April, 2011 to 31st March, 2012), you will have to pay tax if

  • you are a resident man with a taxable income of more than Rs. 1,80,00
  • you are a resident woman with a taxable income of more than Rs. 1,90,000
  • you are a resident senior citizen (age 60+) with a taxable income of more than Rs. 2,50,00
  • you are a resident very senior citizen (age 80+) with a taxable income of more than Rs. 5,00,000

How much tax am I supposed to pay?

You must have heard of 'Income Tax Slabs'. For a resident male, the slabs for the year 2011-12 are

Income Slab – 0 to 1,80,000
Rate – 0%

Income Slab – 1,80,001 to 5,00,000
Rate – 10%

Income Slab – 5,00,001 to 8,00,000
Rate – 20%

Income Slab – above 8,00,000
Rate – 30%

This means that if your income is less than 1,80,000 you don't have to pay tax.

If your income is, say, Rs. 2,30,000, you have to pay at 10% on the amount by which it exceeds Rs. 1,80,000. In this case your tax liability would be (2,30,000 – 1,80,000) * .10

And if your income is, say, Rs. 6,00,000, you have to pay tax on Rs. 3,20,000 (5,00,000 – 1,80,000) at 10%, and on Rs. 1,00,000 (6,00,000 – 5,00,000) at 20%.

So, that means every year I have to go to the Income Tax Department and pay it?

Most probably, no. To make things simple on your end, the Department makes your employer do the same. Your employer will deduct it from your salary and pay it for you. This is called TDS – Tax Deducted at Source.

What is this Form 16?

How do you know if your employer is paying your tax on time? and what is the amount?

Your employer will give you a Form 16 at the end of a year. This form 16 has details about the salary he has paid to you, the tax he has deducted on it, and paid to the Income Tax Department.

What is Advance Tax / Self-Assessment Tax?

Your employer will deduct tax on your salary income and pay it to the Income Tax Department, but what if you have income from other sources as well?

Say, you sold a piece of land and made a decent profit on it. You now have to pay tax on this profit. Unfortunately, your employer won't pay it. You will have to do it.

Take another case. Your employer did not deduct tax on your salary. He will face penalties from the Income Tax Department, but what about you? You will now you have to pay it to the Income Tax Department directly. It's a rare case.

This is called Advance Tax / Self-Assessment Tax

Is there any difference between the above two?

Yes.

If you pay it during the year, ie, between 1st April, 2011 and 31st March, 2012 (for 2011-12) it is called Advance Tax.

If, while preparing your tax return, you realize that you still have to pay tax, and pay it so, it is called Self-Assessment Tax. Thus Self-Assessment Tax is paid after 31st March, 2012.

What are income tax deductions?

Deductions are certain tax benefits you might be allowed to avail. If your income is Rs. 4,00,000, and you are allowed to deductions of Rs. 1,00,000, you will only have to pay tax on Rs. 3,00,000 at the slab rates.

There are numerous deductions. Example:

  • Premium paid on a Life Insurance Policy
  • Housing Loan Repaid
  • Amount deposited in a PPF (Public Provident Fund) Account
  • Certain Mutual Funds purchased
  • ULIPs purchased

Ok, so my employer pays tax on my behalf. So, my job is done? I don't have to do anything, right?

Not really. You have to file an income tax return with the Income Tax Department. A return is nothing but a form that states the income you have earned throughout the year, the tax you were supposed to pay on, that tax you actually paid, the benefits you availed, etc …

You can approach an accountant to help with your return, or better still, do it yourself using a private online income tax efiling portal.

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