What is income tax?
Income tax is a tax levied on the income earned by an individual, company or organization. The income tax is one of the most important taxes in India and is levied on a citizen’s taxable income. Income tax is levied by the Indian government on individuals, companies, trusts and other entities who earn income in India. Income from all sources including salary, property, interest and dividends are taxed under the provisions of the Income Tax Act 1961.
The amount of income tax paid by an individual depends upon his total taxable income as per his personal tax slab. The total taxable income includes all his salary, business profits, rental income etc. Since this requires a bit of calculation it is not uncommon to see professionals using hra tax exemption calculator and other such calculators to simplify the process. If you are new to paying income taxes don’t worry we will demystify the process in this article.
What sources of income are taxable?
1. Salary from income
Salary is the most common source of income for most people. It is taxable under the head of the salary and in the case of a salaried person, it is deducted from his total income before calculating tax liability.
2. Income from house property
House property like houses, land, flats, car etc are also sources of income for you and your family. You can use this source to pay income tax and save money for property, education, marriage, etc. Income from house property is taxable under the head of income from other sources and in case of an individual or HUF, it is added to his total income before calculating tax liability.
3. Income from capital gain
Capital gain is an increase in the value of goods or assets brought about by purchase or sale. It is the difference between the cost base and the market value of an asset at the time of sale or purchase or an increase in its value during its period in existence.
4. Income from business or profession
Income from business or profession is a source of income that can be used to offset income tax. It includes income earned by the self-employed, part-time workers and those who are working for more than one employer. Income earned by an individual, who has been earning profits for at least one year and has paid at least one payment of tax on it, can also be added to the total income.
5. Income from other sources
Income from other sources includes certain types of business which do not require any special skills and expertise like taxi driving or car washing etc., as well as other incomes like interest on bank deposits etc.,
What is a financial year?
The financial year is a 12-month period of time used by businesses and governments to calculate their annual accounting period and report. Financial years are generally aligned with the calendar year and can end on a specific date such as 31 December. However many countries need to use financial years as their fiscal year begins on 1 April (1st April) or sometimes 1 January (1st January). In India, a financial year refers to the 12 months from April to March next year. It is also referred to as the previous year.
Financial years may be used by businesses and individuals to determine when they should pay income taxes or other taxes, prepare annual financial statements, make investments, manage capital and other economic resources, manage risk management and control expenses.
What is the assessment year?
The assessment year is the year that comes after the financial year or previous year. In the assessment year, people file returns of the prior year.
Hence the difference between a financial year and an assessment year is that in the financial year you earn the total income. In the assessment year, the income earned in the financial year is taxed. This is also the time when income tax refund pending is calculated. You can visit Khatabook to learn more about income tax refunds.