A first job is a memorable moment not only for you but for the Income Tax department too. As you get the first pay cheque you enter the income tax club and become a taxpayer. Earning income more than the threshold or exemption limit requires an individual to pay income tax and file an income tax return.
Income tax is a levy on your taxable income which is charged and collected by the central government. Some of the rules of calculation of income tax are changed every year by the government through the annual Union Budget. The rules are changed to plug some loopholes, to provide some benefits to the taxpayers, or to adjust the provision as per changed circumstances. Therefore, the tax is calculated with the relevant provision as it existed in the relevant Assessment Year.
An individual is taxed progressively as per the slabs rates which means an individual earning more has to pay a higher share of tax.
The minimum tax rate for an individual earning above Rs 2,50,000 is 5 percent. The tax rate can go up to 34.50 percent for high net worth individuals who earn more than Rs 1 crore in a year.
The government enforces a ‘pay as you earn’ mechanism to ensure timely collection of income tax. It means taxes due on salary income are collected by the government on monthly basis from the employer. This concept is called tax deduction at source or TDS. At the time of payment of salary, the employer withholds some amount towards the TDS liability and deposits it with the government on your behalf before the prescribed due date. An employee gets the credit of such TDS against his annual tax liability. You can reconcile the amount of TDS as shown in your salary slips with the amount appearing in your personal tax passbook ‘Form 26AS’.
Unlike a self-employed professional or a businessman, a salaried employee cannot claim deductions of all expenditure he incurs in the course of employment from his taxable income.
A Guide To Last-Minute Tax Saving
The Income Tax Act prescribes a few deductions which an employee can claim against his salary income. These deductions are allowed from various allowances given by the employer or when an employee makes some investment in tax saving schemes. A salaried individual is allowed to claim a standard deduction of Rs 40,000 which is in addition to other tax deductions. This deduction is allowed to an employee without submitting any proof of investment.
The detailed break-up given in your monthly salary slip may appear like a complex mathematical equation to you. A lot of tax saving can be planned if you understand your salary slip. To name a few avenues, house rent allowances are exempt if you pay rent for the accommodation. If you go for vacations, leave travel concession will help you to reduce the tax burden.
Besides this, if you develop investment habits you can substantially reduce your tax bill. Investment in insurance policies, mutual funds, repayment of housing loan, repayment of education loan, medical insurance policies, so on and so forth not only reduces your income-tax liability but also gives you financial stability in future.
As mentioned earlier, in case of the salaried class taxpayer, the entire responsibility to deduct tax is upon the employer. Therefore, it is important for you to plan in advance and submit a declaration to the employer of all your investment plans which the employer will consider while calculating your annual tax liability.
If you declare investments, less tax shall be deducted from your monthly salary which means you get more of your salary in-hand.
In the last quarter of the financial year, your employer will ask you to submit the proof of investment. These proofs shall be compared by the employer with the declaration you make at the beginning of the year and any deficiency in the two figures shall result in a higher tax deduction from the salary in last 3 months. So plan well, execute well.
After the financial year ends, your tax worry is not over. You need to give the details of your taxable income to the government by filing an income tax return. To file the return you need to obtain a ‘Form 16’ from the employer and create an account with incometaxindiaefiling.gov.in.
Getting a better idea of India's tax laws will help you in planning your tax affairs.
Naveen Wadhwa is Deputy General Manager at Taxmann.com
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.