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Basics of Income Tax for Individuals


 I wanted to start my first post with a joke, but it was cut short, just like my salary. Anyway, here's one: What do the Government, a mugger, and your kids have in common? Ans: They all take your money.

There are basically two types of taxes that are applicable to most of us -

  1. Income Tax, otherwise known as Direct Tax. This is called direct tax because it is directly dependent on your income. Tax is collected as a percentage of your income. And if your income is below the limit then no tax is collected.
  2. Goods and Service Tax (GST), otherwise known as Indirect Tax. This is called indirect tax because the tax collected doesn't depend on your income. Anyone who is buying something is paying a tax called GST.

Let us talk about Income Tax today, specifically Income Tax for salaried individuals. The Income Tax Act calls taxable units "Person". A "Person" consists of:

  1. Individual
  2. Hindu Undivided Family
  3. Company
  4. Firm
  5. Association of Persons or Body of Individuals
  6. Local Authority
  7. Artificial Judicial Person

But who is an "Individual"? Any natural human being is considered an individual. Even if you have a business running a sole proprietorship (i.e. not registered as a Company, LLP, Trust, Partnership Firm, HUF, etc.) then the income from the business is taxed as per the rates applicable to individuals.

The majority of us are Salaried individuals. We have seen the Income Tax part deducted from our salaries. It is called "Tax deducted at Source" (TDS). TDS is a scheme by the Government made to ensure that no one escapes from paying taxes. So, your employer deducts tax from your salary every month based on your package and the investment details you have provided.


To understand refund better (let's face it, this is why we are here), suppose you have Rs. 1,200 salary per year.

  1. You estimate that you will invest Rs. 120 in the year. So, the employer will now calculate tax on Rs. 1,080 (1,200-120) at 10%, which comes to Rs. 108.
  2. Now, he will deduct Rs. 9 (108/12) every month from your salary.
  3. At the end of the year there are two possibilities:
    • You invested Rs. 180. The employer will not deduct the tax for the last month.
    • You invested Rs. 60. The employer sees that for the 11 months he has deducted Rs. 99 based on the assumption that you will invest Rs. 120 for the year. But since you have invested only Rs. 60, he will recalculate your tax liability to Rs. 114 (1,200-60). This means he will deduct Rs. 15 (114-99), the remaining tax amount, instead of the usual Rs. 9.
  4. Now, assuming you have invested Rs. 120 in the year, and the employer has deducted Rs. 108 as TDS from your salary, after the end of the year, you file your income tax return. You calculate your total tax liability to be Rs. 100. So, now you will get a refund of Rs. 8 + interest for that period on Rs. 8.

Now, how exactly did that Rs. 108 tax become Rs. 100? Well, that's basically our job. Contact me for more information. And what are "Investments" mentioned here? I will make a separate post for that.

Hope you got the gist! Do reach out to me for any queries. And if you found this to be informative, share this with your friends. Thank you!

Now you can listen to this post!

https://anchor.fm/s/c4d7c7b4/podcast/rss

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