BASIC TAX CONCEPTS EVERY TAXPAYER MUST KNOW
- Shiridisha
- Feb 8, 2022
- 7 min read
Updated: Nov 5, 2022
The moment we hear the word Tax, we either get scared or don't bother at all. The reason behind for the above reactions is only one thing "OUR UNAWARENESS". We aren't aware of Tax and its concepts. So the moment we hear the term "Tax" we panic and we just nod our heads to whatever that tax consultant or CA says. Isn't it?
We don't understand what the tax consultants are saying, but act as if we understood and nod our heads.. right? haha..
But today I want you to understand that Tax isn't as difficult as it seems. If we focus carefully, we can easily understand.
Today I wanna share with you some of the basic concepts that every one of us should know. Come, let's learn the basic concepts of tax in a simple way.
First, let's know the terms and where they are used, and how they are used and calculated.
Here are some of the common terms we see on a daily basis, mostly everywhere, especially on our income tax returns.
1. ITR - Income Tax Return:
ITR is the tax form in which the assessee/taxpayer declares information about the income earned and the tax applicable with the income tax department.
ITR filing is mandatory for every individual whose total income exceeds the basic exemption limit.
Whether you are a salaried individual or self-employed, HUFs, Firms, and companies, you must file ITR.
2. FORM 16:
Form 16 is an important document required to file Income Tax Return.
Form 16 is issued for tax deducted at source on salary by the employers to their employees. It acts as a proof that the employer has deducted tax from your salary and deposited it with the government.
Form 16 has two parts in it. Part A & Part B.
If you have worked with more than one employer during the financial year, then you will have more than one form 16.
3. PAN:
PAN stands for Permanent Account Number. It's a 10-digit unique alphanumeric number issued by the Income-tax Department as identification for us.
The first 5 digits will always be alphabetic, the next four digits will be numeric and the last digit is alphabetic again.
It's the most important document and it's a must to file an Income tax return.
4. TAN:
TAN stands for Tax Deduction Account Number. It is a 10-digit alphanumeric number. Every person deducting/collecting tax at source is required to obtain TAN.
TAN is allotted to those who are liable to deduct TDS by the Income Tax Department.
The first four digits are alphabetic, the next five digits are numeric and the last digit is alphabetic.
5. FY - Financial Year:
FY is the accounting year in which you earn income. Financial year is also known as Previous Year and Fiscal Year.
Example: For the Financial year 2020-2021, the assessment year will be 2021-22.
6. AY - Assessment Year:
Assessment Year is the year that comes after the financial year, in which you have to evaluate the previous year's income and pay taxes on it.
As the income earned in a financial year cannot be taxed before it is earned, hence it is taxed in the following year.
For example, Mr. A who earned income during the financial year 2021-2022 has to file his return in the assessment year 2022-2023.
7. PY - Previous Year:
Previous Year is also known as Financial Year or Fiscal Year. This is the year in which you earn income.
*Accounting year or Tax year starts on 1st April and Ends on 31st March.
*Taxpayers have to select AY while filing their Income tax returns.8. Tax Payer:
As per the Income Tax Act, a taxpayer is an individual or business entity that is obligated to pay tax on his/her earned income to the government.
Taxpayers can be an Individual, HUF, Partnership firms, Company, AOP, Body of Individuals (BOI), Trust.
In simple words, a person who pays taxes to the government is called a taxpayer. In short, it's "us"
9. SLAB RATES:
Age and Income are the two important factors that define Income tax slab rates.
Indian Income Tax Act divides taxpayers into different groups based on their taxable income and levy income tax at different rates. These groupings are called Income tax slabs. The slabs keep changing from year to year.
The tax rates keep increasing with an increase in the income of the taxpayer. So the higher your income, the higher are your taxes.
10. GROSS SALARY:
Gross salary is the total amount an employee earns in the whole year for working in the employer's company.
Gross salary is derived after adding all the allowances and benefits but before any deductions.
Some of the components included in the gross salary are Basic salary, HRA, LTA, Special allowance, Conveyance allowance etc.
11. Net Salary:
Net salary also known as "Take home salary" is the amount the salaried employee earns after deducting income tax, PF and such other deductions from gross salary.
Net Salary = Gross Salary - Income taxes - PF - such other deductions
In simple words, Gross salary is what a company pays o an employer before deducting taxes and net salary is what an employee receives after deductions.
12. Taxable Income:
Taxable income is the amount on which you have to pay tax.
13. Cess:
A Cess is a form of Tax levied by the government for specific purposes. It is an additional tax besides the existing tax.
A Cess is usually imposed by the government when it needs funds for a specific purpose and is discontinued once the purpose is fulfilled.
Common types of cess are Education Cess, Health and education cess, crude oil cess, swachh Bharath, cess, Krishi Kalyan Cess, etc.
However, if a person's income is below the non-taxable slab, then he/she is not required to pay any cess amount.
14. Surcharge:
A Surcharge is an additional tax charged when the income earned is above the specific limit.
It is calculated on the tax payable amount, but not on the total income earned.
For instance a surcharge of 10% on an existing tax rate of 30% amount to a total tax rate of 33%.
Government can use this surcharge for any purpose and states even get a part of it.
15. Professional Tax:
Professional tax is a direct tax that is deducted from your gross salary by your employer and is deposited to the state governments.
Yes, Professional tax is not levied by the Central government, but by state governments. Hence it differs from state to state.
But the maximum limit you can be charged is Rs. 2500.
However, this tax doesn't mean that it is levied only on Professionals such as doctors, lawyers, and teachers. It is levied on salaried employees, self-employed businesses, freelancers, etc subject to income exceeding the monetary threshold if any.
16. DEDUCTIONS:
Govt. of India encourages its taxpayers to make use of the various income tax deductions, allowances and tax rebate which help them in reducing their taxes legally.
Deductions are a kind of tax benefit that helps you in saving your tax. So by claiming deductions you can reduce your taxable income.
However, the amount of tax you can save depends upon the type of deduction you claim.
There are different types of deductions available for taxpayers. Here are some: FD, PPF, Life Insurance Premiums, NSC, Rent, Home loans, Mutual funds, medical insurance, treatment of disabled parents, donations, interest on education loans, etc.
17. EXEMPTED ALLOWANCES:
Allowances are the financial benefits offered by employers to employees on top of their salary for a specific purpose and they should be used only for it.
Tax-exempted or non-taxable allowance means you don't have to pay tax for that particular income.
Here are some of the common allowances: Dearness allowance, conveyance allowance, house rent allowance, special allowance, medical allowance, leave travel allowance, overtime allowance, etc.
18. TDS:
TDS stands for Tax Deducted at Source.
Tax is deducted at source by the payer while making payment to the payee at a prescribed rate. Then the payee can claim this TDS amount by adjusting it with the final tax liability.
The most common TDS deduction we see is the employer deducting TDS and paying it to the government while paying the salary to his employee. Of course, TDS is applicable only if the payment exceeds a certain limit.
TDS deduction is applicable even in other scenarios such as Rent, Professional fee, etc.
19. TCS:
TCS stands for Tax Collected at Source. TCS is collected by sellers while selling certain specific goods to buyers.
20. Refund:
The concept of Refund arises when an individual ends up paying more tax than they are actually required to pay. In that case, government refunds the extra amount paid to the taxpayer.
Income tax refund = Total tax paid for the year - total tax payable for the year.21. Rebate:
Rebate u/s 87A provides resident individual taxpayers a benefit on their tax liability by allowing them to claim a tax rebate up to Rs.12,500.
This is applicable only if the total income after deductions doesn't exceed the basic exemption limit of Rs.5,00,000.
22. Form 26AS:
Form 26AS is a consolidated statement that contains all the tax-related information of a taxpayer such as TDS, TCS, advance tax, etc.
23. Advance Tax:
Advance tax is the amount of income tax paid in advance during the financial year instead of paying it at the end.
It should be paid in installments as per the due dates provided by the Income tax department.
Advance Tax is also known as "Pay as you earn" tax as it is paid in installments during the financial year.
24. Tax Evasion
Tax evasion is nothing but using illegal means to avoid paying taxes.
It is a serious offense and comes under criminal charges and penalties.
Some examples of Tax evasion are an individual or a firm or a company underreporting their income, offshore accounts, failing to file the returns, inaccurate financial statements, etc.
These are some of the important tax concepts that we come across in our day-to-day life.
Hope this article helped you in gaining a bit of knowledge on TAX.
To know more about Tax concepts read the below article. It helps you in filing your Income Tax Return easily.
If you found this article helpful, please share it with your Friends & Family.!!
Comments