What is an Income Tax?
Income tax is a tax levied directly on the income of an individual/organization/business by the government for the purpose of financing its various operations.
There are two types of income tax – direct tax and the newly launched Goods and Services Tax (GST) which subsumed all other indirect taxes such as VAT, service
tax, excise, etc.
Income tax collected by the government is not only used for various government schemes but also acts as a fiscal stabilizer that aid in distributing wealth evenly among the population.
Why do you have to file Income Tax Returns?
Irrespective of whether you live in India currently or not, filing an income tax return is compulsory if your total Indian income exceeds Rs.2,50,000.
Even if you don’t meet the Rs.2,50,000 threshold, it’s a good practice to file or e-file
your income tax return. An income tax return is an important document that you must produce at the time of availing of a home loan, as it reflects your financial prosperity. An income tax return as proof of income shows your capacity to repay a loan.
If you are planning to go abroad for higher studies or are about to take up a job outside of
India, you’ll need at least three years’ filed income tax returns to show as proof of income. People processing your visa application may request for this financial information to evaluate your financial health, which in return shows that you can support yourself on your own in their country.
What is Income from Other Sources?
Income from other sources is a residual category used to classify income that is not classified taxed under any other head of income. Income from other sources must be calculated by the taxpayer based on the mercantile system used by the taxpayer, i.e cash basis or accrual basis. In this article, we look at income from other
sources in detail along with a list of allowed deductions.
Save Income Tax
While the government expects you to pay income tax, it also allows you to legally save on income tax. You don’t have to pay income tax if you earn less than Rs.2.5 lakh in a year. Income more than that is taxed as per different slabs, with the tax rates going up with the increase in income. No matter how much taxable income you earn, there are certain exemptions and deductions available to all individual and HUF taxpayers that
can be used to pay less income tax.
Tax saving options in India
The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act. Section 80C includes various investments and expenses that can be used to claim deductions. The Section 80C limit is Rs.1.5 lakh in a financial year, which means that you can use this entire amount to reduce your taxable income.
Saving tax beyond Section 80C
Apart from the deductions available under Section 80C, there are various other Section 80 deductions that can also be claimed to save on income tax. These deductions include health insurance premiums, tax benefits on home loans, Another way to save tax is by creating a Hindu Undivided Family (HUF). An HUF can be created by married Hindu individuals. An HUF would include the creator, who is called Karta, and his or her family members. The advantage of an HUF is that you can split your income between two entities–yourself as an individual taxpayer and the HUF. This way, you can avail the same tax-saving deductions twice.
How to plan your tax-saving investments for the year
The best time to start planning your tax-saving investments is at the beginning of the financial year. Most taxpayers procrastinate till the last quarter of the year and end up taking hurried decisions. Instead, if you plan at the start of the year, you can make investments that can also help you fulfill your long-term goals. Tax-saving investments should be used to build wealth as well, not only to just save tax.