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Income Tax Return Basic Understanding: A Complete Comprehensive Guide for Beginners

income tax return- beginners guide

Every financial year, an individual or business is required by law to file an income tax return. The source of the income could be a salary, a business’s profits, capital gains, an interest, or something else.

ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7 are the seven varieties of ITR forms that have been announced by the tax department for use in submitting returns.

A significant moment in every citizen’s life is the first time they pay income taxes. For a novice, the procedure could appear overly difficult and time-consuming, and some of the terminology might fly right over your head. Not necessarily. Here is a list of the fundamentals of income tax for beginners to assist you in comprehending the tax implications of your income.

Basics of Income Tax for Beginners

Are you currently seeking employment after finishing college? Or perhaps you already have the job and will soon file your first income tax return? We can help you if the technicalities of income tax and investments are confusing. Our goal is to make your financial life easier by making income taxes simpler for you. In general, anybody with a source of income is required to file income tax forms. Today, we’re going to go over the fundamentals of income tax, which should enable you enter the workforce with confidence.

What is Income Tax Return – Basic Understanding

A form known as an income tax return is used to report all of your earnings from different sources and to pay taxes on those earnings.

Your ITR includes all of your information and any tax savings you made during a specific year.

Every financial year, an individual or business is required by law to file an income tax return. The source of the income could be a salary, a business’s profits, capital gains, an interest, or something else.

ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7 are the seven varieties of ITR forms that have been announced by the tax department for use in submitting returns.

What is ‘Previous Year’

The 12-month period that starts on April 1 and ends on March 31 of the following year is known as the previous year, the financial year, or your tax year. Regardless of when you begin your job, your tax year ends on March 31 and a new one begins on April 1. Planning your taxes for each fiscal year is crucial.

What is ‘Assessment Year’

It is a phrase that is frequently used in connection with tax filing. You will “assess” and submit your return for the prior year during the fiscal year that follows the prior one. Hence, the assessment year for the preceding year 2019–20 is 2020–21. The year that you file your return for the prior year is the assessment year. For instance, if you begin working on January 1, 2021, the end of your tax year is March 31, 2021. Your current year is 2021–22, while your prior year was 2020–21. The deadline to submit your return is July 31, 2021. (Extended to 31st December 2021)

Understanding Your Salary

When you start your employment – call out to your payroll or HR department and acquire your Salary details/ Pay Slip / Tax Statement. Here, you will get an understanding of the primary components of your compensation and how much tax will be withheld from your salary based on them.

Example: If you live in a rental unit, you can save tax on the HRA that the majority of employers provide.

Sources of Income

You can be receiving income from a number of sources in addition to your wage. The total of all the income categories listed below is your total income.

Income from SalarySalary, Allowances, leave encashment basically all the money you receive while rendering your job as a result of your employment agreement
Income from House PropertyIncome from house or building, this may be owned and self-occupied or may be rented
Income from Capital GainIncome from gain or loss when you sell a capital asset
Income from Business or ProfessionIncome/loss that arises as a result of carrying on a business or profession
Income from Other SourcesThis is the residual head – includes your income from savings bank accounts,fixed deposits, family pension or gifts received

What is e-filling of ITR

E-filing a return is the process of submitting a tax return electronically. Two methods exist for submitting your ITR:

  • The traditional method, or offline method, is one that we are all familiar with. Using a paper format and delivering it in person to the department
  • The second way is relatively simple, and most people use a portal to submit their returns online. The return must be submitted via an internet platform.

Who should file the Income Tax Return

According to income tax legislation, the resident individual’s gross annual income must be reported on the ITR. The fundamental exemption threshold set by the government for each person.

(i) Depositing a sum, or the total of all deposits, into more than one account.

(ii) Spent more than Rs 2 lakh, individually or collectively, on travel to a foreign nation for you or another person.

(iii) Spent money—individually or collectively—on power consumption that exceeded Rs. 1 lakh.

Overview of ITR Forms

The following tax return types have been made available by the government for FY 2020–21 that apply to individuals:

ITR FORM NO Applicable ThresholdRemarks
ITR 1ROR IndividualsTotal Income Up to INR 50 LakhEarning Income from salary, income from other sources (agricultural income limits to 5000)
Not Applicable to an individual who is either a director in a company
ITR 2All IndividualsTotal Income More Than INR 50 Lakh for RORIndividual earning income from capital gains, more than one house property, claiming foreign tax relief, ROR having foreign assets
ITR 3All IndividualsNo Limit has been prescribedProfessionals and Business owners’ individual speculative business
ITR 4NOR & RORTotal income up to Rs 50 LakhIncome from business and profession computed under specified presumptive tax provisions

Deductions

Your gross income is reduced by deductions. These are the dollar amounts that the Income Tax Department permits you to deduct from your income to lower your tax obligation.

Sum of All heads of Income = Gross Income – Deductions = Taxable Income

Your tax will be reduced the more you utilise the permitted deductions. Section 80 of the Income Tax Act permits deductions (Section 80C to 80U).

Your Best Fried Should be Section 80C

Your gross income may be reduced by INR 1,50,000 under Section 80C. Some of the most popular investment products within this heading are listed below.

PPF

Deposits to the Public Provident Fund, or PPF, are among the most common deductions allowed under section 80C. A minimum of INR 500 and a maximum of INR 1,50,000 must be deposited to start a PPF account. PPF account deposits grow over time when you make further deposits for tax deductions in succeeding fiscal years. PPF is a time-honoured and secure way to save your hard-earned money. It is simple to open a PPF account with a bank.

Tax Saving Mutual Funds or ELSS

Due to its historically better performance in recent years, ELSS (Equity Linked Savings Scheme), one of the only mutual fund schemes permitted under 80C, is becoming more well-liked by the general public. The fact that ELSS has the shortest lock-in time at 3 years is another benefit.

Tax Saving FDs

Fixed deposits provide investors with both substantial interest income and capital protection. You must continue investing for at least 5 years to qualify for tax benefits under section 80C. Although it is secure, the interest it generates is taxed.

Apart from these deductions under 80C, there are several other deductions like Insurance Premium, Investments, House Rent, Education Loan, Home Loans are also available under section 80.

What is Standard Deduction

According to the 2018 Budget, salaried workers are entitled to a basic deduction from their gross pay of Rs 40,000. The medical reimbursement of INR 15,000 and the transportation allowance of INR 19,200 per fiscal year will be replaced by this standard deduction. The taxpayer will really receive an additional Rs 5,800 in income exemption. In the Interim Budget for 2019, the ceiling of Rs. 40,000 was raised to Rs. 50,000 starting in FY 2019–20.

In the recent FY 2022-23 budget Finance Minister has extended the standard deduction of Rs 50000 for person having earning of 15.5 Lakhs.

What is TDS or Tax Deducted at Source

Tax is taken out of payments at the source, or TDS, which stands for Tax Deducted at Source. Based on the guidelines established by the income tax department, the payer is required to deduct a certain amount of tax. For instance, if an employee’s taxable income exceeds INR 2,50,000, the employer will estimate the employee’s annual income and deduct tax from it. Depending on the tax bracket you fall under each year, tax is subtracted. Similar to this, the bank likewise deducts TDS when you get interest on a fixed deposit. The bank typically deducts TDS @ 10% because they are unaware of your tax slabs, unless you haven’t supplied your PAN in which case a 20% TDS may be deducted.

How to Register Yourself to the Income Tax Portal for e-filing ITR?

Your ITR can be electronically filed with ease. The procedure is simple, quick, and it may be finished at home or at the office. The following steps will help you file your return:

Step 1: Visit the official website

Step 2: Register yourself

Step 3: Click on Taxpayer and your details like PAN Number to verify your identity

Step 4: Fill in all your basic details if you are a new user

Step 5: Provide your email address and mobile number

Step 6: Once you are done click ‘Continue’

Step 7: Verify with OTP sent to your mobile number and email address

Step 8: Once you are done with OTP verify your details, if something seems incorrect change it

Step 9: Setup your password and secure with a login message

Step 10: Your successful registration will be done.

We hope this guide will help you to understand the basics of Income Tax Filing in India. We have covered many more articles related to income tax which you find at our website under Taxation section.

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