Personal Finance

Are you searching for ways to save on taxes? If so, you would have probably encountered the terms ‘tax deduction’ and ‘tax exemption.’ While they might seem similar at first glance, they’re quite distinct from each other, both stemming from the Income Tax Act of 1961 provisions. 

Many people find these terms confusing and opt to have their accountants, parents, or friends handle their tax filing. However, understanding these terms is crucial for maximizing the benefits of available schemes and policies. This article aims to clarify the difference between tax deductions and tax exemptions, their impact on taxes, and what investors can keep in mind.

What are Tax Deductions?

Tax deductions refer to specific investments and expenses that individuals can subtract from their taxable income, thereby reducing it. These deductions serve as incentives to promote retirement planning and foster long-term financial stability among taxpayers. Using a tax calculator also helps to find the deductions.

For example, if your total income is Rs. 10,00,000 and you’ve invested Rs. 1,50,000 in eligible instruments under Section 80C, then your taxable income would be reduced to Rs. 8,50,000.

Various sections of the Income Tax Act of 1961 offer avenues for tax deductions. Here’s a glimpse:

• Section 80C: Investments in schemes like the Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), home loan principal repayments, and more, up to Rs. 1.5 lakhs annually, are deductible from taxable income. This is in addition to the standard deduction of Rs. 50,000 available to all taxpayers.
• Section 80D: Premiums paid for health insurance, ranging from Rs. 25,000 to Rs. 1 lakh, are tax deductible, along with other deductions for specified treatments.
• Section 80E: Interest paid on education and housing loans for first-time buyers can be deducted from taxable income, encouraging education and domestic real estate investment.
• Section 80G: Contributions to social causes and political parties are eligible for tax deductions, supporting charitable initiatives and social welfare activities.
• Section 80TTA: Interest income from savings accounts, up to Rs. 10,000, can be deducted from taxable income.

What are Tax Exemptions?

Tax exemptions refer to tax-free portions of one’s income, requiring no additional spending or investment to qualify for the exemption. These exemptions play a crucial role in reducing the overall tax burden for individuals.

Here are some examples of tax exemptions:

• Long-Term Capital Gains: Equity mutual funds’ LTCG is exempt from taxation up to a limit of Rs. 1 lakh per annum.
• Housing Rent Allowance (HRA): Part of an employee’s salary, HRA is exempt from income tax if the employee lives in a rented house.
• Leave Travel Allowance (LTA): Some employers provide LTA, which can be used for traveling during leaves. This exemption can be availed of once in four years.
• Agricultural Income: All agricultural income in India is exempt from taxation. This exemption is crucial as agriculture is the primary source of income for a large part of rural India, and the country is heavily dependent on it for food security.
• Lowest Income Tax Slab: An income of Rs. 5 lakhs and below is completely exempt from income tax. For instance, if one has an income of Rs. 7 lakhs, only Rs. 2 lakhs is taxable.

A tax calculator can help individuals assess their tax liability more accurately by factoring in exemptions and deductions. Understanding these exemptions is essential for taxpayers to optimize their tax planning and minimize their tax burden legally and ethically.

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What is the Difference Between Exemptions vs. Deductions?

Here’s a table highlighting the key differences between exemptions and deductions in taxable income in India:

Aspect	Exemptions	Deductions
Definition	Portion of income not subject to tax.	Amount subtracted from taxable income.
Nature	Fixed amount or specific categories.	Varies based on specified expenses or investments.
Applicability	Available to specific individuals or entities based on criteria set by the government.	Available to individuals or entities who meet specific conditions outlined by tax laws.
Examples	HRA exemption, LTC exemption, agricultural income exemption.	Section 80C, 80D, 80E deductions for investments, insurance premiums, education loan interest, etc.
Limitations	Usually capped at a certain percentage of total income or a fixed amount.	Typically subject to maximum limits specified in tax laws.
Impact on Taxable Income	Directly reduces the taxable income by the exempted amount.	Reduces taxable income by the deducted amount after computing the total income.
Documentation Required	May require specific proofs or documents to claim.	Often requires receipts or documents as evidence for eligible expenses or investments.

This table should provide a clear overview of the distinctions between exemptions and deductions in taxable income in India. In conclusion, understanding the difference between exemptions and deductions is crucial for taxpayers in India to optimize their tax liabilities. By using a tax calculator and leveraging these provisions effectively, investors and individuals can minimize their tax burdens and enhance their financial planning. 

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FAQ

In India, the government offers two income tax regimes: the old tax slab and the new tax slab. 

While the new tax regime introduced in the 2020 budget features lower tax rates with no deductions, the old tax regime continues to entice taxpayers with its numerous deductions and exemptions.

This choice and flexibility with the new vs old tax regime allows you to choose a tax regime that benefits you the most based on your financial situation, investments, and spending pattern.

This blog delves deep into the old tax regime, outlining its tax slabs and exploring the various tax-saving opportunities it presents.

Old Regime Tax Slabs: Income and Tax Rates

The old tax regime’s structure is meticulously designed to cater to individuals across different age groups, offering three distinct categories: general taxpayers (individuals below 60 years), senior citizens (aged 60 years but below 80 years), and super senior citizens (aged 80 years and above). 

Here’s a detailed breakdown of the tax slabs in the old regime:

Income Range (₹)	Tax Rate
For General Taxpayers (Below 60 Years)
Up to 2,50,000	Nil
2,50,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%
For Senior Citizens (60-79 Years)
Up to 3,00,000	Nil
3,00,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%
For Super Senior Citizens (80 Years and Above)
Up to 5,00,000	Nil
5,00,001 – 10,00,000	20%
Above 10,00,000	30%

Note: Health and Education cess of 4% is levied on the income tax amount, along with surcharges applicable to incomes exceeding ₹50 lakhs.

Standard Deduction Under the Old Regime Tax Slab

Introduced in Budget 2018, the standard deduction replaced the transport allowance and medical reimbursement, simplifying tax calculations for salaried employees and pensioners.

The standard deduction under the old tax regime offered a flat deduction of ₹50,000 for salaried employees and pensioners, providing relief without the need to prove any expenses. 

This deduction directly reduces taxable income, enhancing the take-home pay of eligible individuals.

What are Surcharges in the Old Regime Tax Slab? What are the Surcharge Rates?

In India’s tax system, surcharges are additional taxes imposed on incomes above specific thresholds, making the tax system more progressive. This means that those with higher incomes must pay more taxes than those with lower incomes. 

These are calculated before the Health and Education Cess of 4%.

Income Range (₹)	Surcharge on Income Tax
50 lakhs to 1 crore	10%
1 crore to 2 crores	15%
2 crores to 5 crores	25%
Above 5 crores	37%

What are Rebates in the Old Tax Regime Slab?

In the old tax regime, a rebate under Section 87A allows you to receive a rebate, or equivalent, of up to  ₹12,500 if your net taxable income is up to ₹5,00,000. 

This can reduce your tax liability to zero. 

Tax rebates provide significant relief to low-income earners and make taxation more equitable.

Old Regime	New Regime
Salary	8,00,000	8,00,000
Allowance	2,50,000	–
Effective Salary	8,00,000 – 2,50,000	–
	5,50,000	8,00,000
Exemption	50,000	50,000
Effective income	5,00,000	7,50,000
Slab 1 Tax	2,50,000 x 0% = 0	3,00,000 x 0% = 0
Slab 2 Tax	50,000 x 5% = 2,500	3,00,000 x 5% = 15,000
Slab 3 Tax	2,00,000 x 5% = 10,000	1,50,000 x 10% = 15,000
Due Tax	12,500	30,000
Rebate (87A	12,500	0
Health and Education Cess	0	1200
Payable Tax	0	31,200

*Remember, a rebate is applicable on your taxable income only when it is less than 5 lakhs in the old regime and 7 lakhs in the new regime. Anything above this threshold and the rebate under section 87A is no longer available.

Tax Saving Opportunities in the Old Tax Slabs 

Tax Deductions Under the Old Tax Regime Slab

Tax deductions are expenses or investments that can be subtracted from gross total income to reduce the overall taxable income and, thus, the tax liability.

Below are some key sections under which deductions can be claimed:

Section 80C Deductions

Under the old tax regime, Section 80C is one of the most vital tax-saving incentives. You can claim a deduction of up to ₹1.5 lakhs on listed investments and expenses.

This section provides details of tax-saving options that can be useful for your future financial plans.   

Investment Option	Interest Rate	Minimum Lock-in Period	Risk Associated
ELSS	12%-15%(varies depending on market fluctuations)	3 Years	High
FD(Fixed Deposit)	Up to 8.40%	5 Years	Low
NPS	8% – 10%	Till the investor is 60 years of age.	High
NSC	7.7%	5 Years	Low
PPF	7.10%	15 Years	Low
SCSS	8.20%	5 Years	Low
Sukanya Samriddhi Yojana	8.20%	21 Years	Low
ULIP	8% – 10%(varies depending on market fluctuations)	5 Years	Moderate

Note: Under Section 80C, the total combined deduction from all the above investments cannot exceed ₹1.5 lakhs.

Home Loan Tax Benefit

If you are an aspiring homeowner, you are eligible for various deductions related to home loans with the old tax regime slabs. 

Here are some details of the tax-saving options under this criteria.   

Deductions Category	Sections	Maximum Deduction
Principal	80C	₹1.5 Lakh
Interest	24b	₹2 Lakh
Interest	80EE	₹50,000
Stamp Duty	80C	₹1.5 Lakh
Interest	80EEA	₹1.5 Lakh

Note: Deduction limits are applicable only when specific conditions under the categories are met.

Section 80TTA Deductions

Section 80TTA under the old tax regime provides individuals and Hindu Undivided Families (HUFs) in India with a deduction on interest income earned from eligible sources. 

Here are some details of the tax-saving options under this section that you can choose to avail yourself of.

Type of Interest Income	Eligibility	Maximum Deduction
Savings Account Interest	Individuals and HUFs	₹10,000
Cooperative Society Deposit Interest	Individuals and HUFs	₹10,000

Note: Deduction limits are applicable only per individual or HUF, not per account.

Section 80D Deductions

Section 80D under the old tax regime provides individuals and Hindu Undivided Families (HUFs) in India with a deduction on Medical insurance premiums. 

Here are some details of the tax-saving options that you can avail of under this section.

Policy Holder	Deduction(Self & Family)	Deduction(Parents)	Preventive Health Check-Up	Maximum Deduction
Self & Family (below 60 years)	₹25,000	–	₹5,000	₹25,000
Self & Family + Parents (all below 60 years)	₹25,000	₹25,000	₹5,000	₹50,000
Self & Family (below 60) + Parents (above 60 years)	₹25,000	₹50,000	₹5,000	₹75,000
Self & Family + Parents (all above 60 years)	₹50,000	₹50,000	₹5,000	₹1,00,000
Members of HUF(below 60 years)	₹25,000	₹25,000	₹5,000	₹25,000
Members of HUF(a member is above 60 years)	₹50,000	₹50,000	₹5,000	₹50,000

Section 80E Deductions

Section 80E under the old tax regime provides a limitless tax exemption on the interest paid on your children’s education loans. Here,  either of the parents repaying the loan can avail of this taxation exemption.

Nature of Loan	Deduction Limit
Interest paid on loan for higher education	No upper limit (for 8 years or until interest is paid, whichever is earlier)

Section 80G

Section 80G of the Income Tax Act allows deductions for donations made to specified charitable organizations, offering taxpayers the opportunity to reduce their taxable income while contributing to social causes.

Type of Donation	Deduction Limit
Donations to certain funds, charitable institutions	50% or 100% of the donation, subject to specified limits

Tax Exemptions

Exemptions are allowances offered on specific components of an individual’s income, which are not subject to tax, thereby reducing the taxable income.

House Rent Allowance

If you are a renter, the House Rent Allowance provides tax benefits on submission of valid rent receipts. Under the old tax regime, exemption depends on the salary, rent paid, and HRA received. 

The exemption depends on the least of the following:

• Actual HRA received.
• 50% of basic salary (for metros) or 40% (for non-metros).
• Rent is paid minus 10% of the basic salary.

If your annual rent is over ₹1 Lakh, you will need the landlord’s PAN. 

Leave Travel Allowance (LTA)

Exemption for travel expenses (not accommodation or food) to any destination in India twice in a block of four years.

Conclusion

The old tax regime, with its detailed tax slabs and many tax-saving opportunities, offers a significant advantage in efficiently planning taxes. 

By understanding and utilizing the deductions, exemptions, and rebates available with old tax regime slabs, you can significantly reduce your tax liability, making an informed choice crucial for your financial well-being.

FAQs on Old Tax Regime

Wondering what is professional tax? Are you earning an income from a salary in India? Are you a practicing professional like a lawyer, doctor, or chartered accountant? If yes, then you must pay Professional Tax in India.

Professional tax stands out as a unique component in India’s complex taxation tapestry. It is a tax levied by state governments. 

Despite its name, professional tax return filing is not just confined to professions but extends to all trades and employment. 

This blog aims to demystify what Professional Tax is, outlining its rates, due dates, compliance requirements, and eligibility criteria.

What is Professional Tax?

Professional tax is a direct tax levied by state governments on the income earned by individuals working in government or non-government entities or practicing professionals such as lawyers, doctors, and chartered accountants. 

The maximum amount that can be levied as professional income tax is ₹2,500 per annum, as per the Constitution of India. It is important to note that not all states impose professional tax.. It varies from state to state based on the respective state government’s legislation.

Eligibility Criteria for Professional Income Tax

The eligibility for professional tax is determined by the income threshold set by the respective state governments. If you are earning above a certain amount specified by the state’s legislation, you are required to pay this tax. 

Professional tax will be applicable if you belong to any one of the following:

• Employees with fixed annual salaries
• Self-employed individuals like part-time earners or freelancers
• All professionals, like lawyers, architects, chartered accountants, or doctors
• Pensioners 

How is Professional Tax Calculated?

1. Understanding Professional Tax Slabs for Different Salary Brackets

Professional tax is calculated based on the salary brackets defined by each state. For instance:

• Karnataka: Rs. 200/month for salaries above Rs. 15,000.
• Maharashtra: Rs. 200/month for 11 months and Rs. 300 in the last month for salaries above Rs. 10,000.

2. Example Calculation of Professional Tax Deduction

Let’s say an individual earns Rs. 20,000 per month in Maharashtra:

• Professional tax deduction: Rs. 200 for 11 months + Rs. 300 for the 12th month.
• Annual professional tax: Rs. 2,500.

3. Factors That Impact Professional Tax Amount

• State-specific slabs and rates.
• Type of employment (salaried or self-employed).
• Applicable exemptions (e.g., physical disability).

Professional Tax Deduction: Benefits and Compliance

1. Benefits of Professional Tax Deduction for Employees

• Tax Benefits: Professional tax is eligible for income tax deductions under Section 16 of the Income Tax Act.
• Compliance Advantage: Ensures compliance with state laws, avoiding penalties.

2. Importance of Timely Compliance by Employers

Employers must deduct and remit professional tax on time to avoid penalties and maintain their credibility.

3. Penalties for Non-Payment or Late Payment of Professional Tax

Failure to comply can result in penalties, often calculated as a percentage of the unpaid amount, along with interest.

States With and Without Professional Income Tax

States/union territories that levy professional tax	States/union territories that do NOT levy professional tax
Andhra Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Puducherry, Sikkim, Tamil Nadu, Telangana, Tripura, West Bengal	Andaman and Nicobar Islands, Arunachal Pradesh, Chandigarh, Dadra and Nagar Haveli, Daman & Diu, Delhi, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Lakshadweep, Punjab, Rajasthan, Uttarakhand, Uttar Pradesh

List of Some State-Wise Professional Income Tax Slabs

State	Salary Slabs	Professional Tax
Karnataka	Salary > ₹15,000	₹200/ month
Andhra Pradesh	Salary between ₹15,001 -₹20,000	₹150/ month
	Salary > ₹20,001	₹200/ month
	For Certain Professionals	Tax Per Month
	For contractors with annual turnovers below ₹10 lakhs	Nil
	For contractors, owners/lessees of factories, hotels, bars, etc., with a turnover above ₹25 lakhs + Anyone employed in the entertainment industry	₹2500/month
West Bengal	Salary between ₹10,001 -₹15,000	₹110/ month
	Salary between ₹15,001 -₹25,000	₹130/ month
	Salary between ₹25,001 -₹40,000	₹150/ month
	Salary > ₹40,000	₹200/ month
	For professionals with an annual gross income of ₹4,80,001 and above	₹2400 per annum
Maharashtra	Salary up to ₹10,000 (women)	–
	Salary between ₹7,501 -₹10,000 (others)	₹175/ month
	Salary > ₹10,000	₹200 all month and ₹300 for last month
Tamil Nadu	Salary between ₹3,501 -₹5,000	₹22.5/ month
	Salary between ₹5,001 -₹7,500	₹52.5/ month
	Salary between ₹7,501 -₹10,000	₹115/ month
	Salary between ₹10,001 -₹12,500	₹171/ month
	Salary > ₹12,500	₹208/ month
Telangana	Salary between ₹15,000 -₹20,000	₹150/ month
	Salary > ₹20,000	₹200/ month
Kerala	Salary between ₹3,000 -₹4,999	₹20/ month
	Salary between ₹5,000 -₹7,499	₹50/ month
	Salary between ₹7,500 -₹9,999	₹75/ month
	Salary between ₹10,000 -₹12,499	₹100/ month
	Salary between ₹12,500 -₹16,666	₹125/ month
	Salary between ₹16,667 -₹20,834	₹166/ month
	Salary > ₹20,834	₹208/ month

It’s important to note that these slabs are subject to change based on the state government’s policies.

Who Should Collect and File the Professional Tax Returns?

The maximum amount anyone is liable to pay when it comes to Professional Tax is ₹2500 per year, regardless of which Indian state you are a resident of.. The responsibility for professional tax return filing varies:

• Employers: If you are a salaried employee, then your employer must deduct the Professional Tax from your salary and deposit it with the state government. 
• Individual Professionals: If you are practicing law, medicine, or accountancy, you must directly file professional tax returns with the state government based on the slabs applicable to your earnings.
• Business Owners: If you are a sole proprietor and business owner (partnership firm, corporate), pay professional tax on your earnings, in addition to collecting and depositing the tax for your employees.

In this scenario, the business owner is required to secure two types of certificates: one for paying professional tax on their business activities, known as a professional tax registration certificate, and another, a professional tax enrollment certificate, which authorizes them to withhold the tax from their employees’ salaries and remit it. Additionally, the laws of the particular state may necessitate individual registrations for each branch of the business.

Professional Tax Return Filing: Compliance and Due Dates

Statewise Due Dates ?

State	Periodicity	Professional Tax Due Date
Andhra Pradesh	Monthly	10th every month
Assam	Monthly	28th every month
Bihar	Yearly	30th of November
Gujarath	Monthly	15th every month
Jharkhand	Yearly	October 31st
Karnataka	Monthly	20th every month
Kerala	Half Yearly	28th of February and 31st of August
Madhya Pradesh	Monthly	10th every month
Maharashtra	Monthly	On the last day of every month
Manipur	Yearly	30th of March
Meghalaya	Monthly	28th of every month
Odisha	Monthly	On the last day of every month
Mizoram	Yearly	June 30th
Puducherry	Half Yearly	30th of June and the 31st of December
Sikkim	Quarterly	The 31st of July, the 31st of October, the 31st of January, and the 30th of April
Tamil Nadu	Half Yearly	30th of September and the 31st of March
Telangana	Monthly	10th of every month
West Bengal	Monthly	21st of every month

Compliance

Compliance with professional tax regulations involves timely deductions and payments to the state government. 

Employers must obtain a registration certificate from the professional tax office when they employ staff, and they are required to file returns – monthly, quarterly, or annually, depending on the state’s regulations.

Failure to comply with professional tax regulations can lead to a penalty of up to 2% of the tax amount due to be paid.  Therefore, both employers and professionals must stay informed about the due dates and compliance requirements in their respective states.

All About Professional Tax Return Filing

• The applicability of professional tax is based on the state of profession, employment, or trade.
• Each state that implies professional tax also follows a strict payment deadline. Failure to comply with the same can result in penalties. 
• You require proper identification documents and company documents as an employer to complete professional tax return filing. These can be documents like your PAN Card, Aadhar, bank statements, address proof like utility bills,  etc.
• Professional tax can be paid online if your state offers an online portal or website. States like Tamil Nadu, Karnataka, Maharashtra, West Bengal, etc., offer dedicated online portals.  If this option is unavailable in your state, you can pay the same offline in your state.  

Exemptions for Professional Tax Return

The professional tax is applicable to all income earners. However, there are some exemptions in this category, and they are as follows. 

• An employee or working professional who is 40% mentally or physically challenged 
• Factory workers hired on a contractual basis. 
• Any income earner above the age of 60.
• Any worker in government bodies like the Army, Navy, Air Force, etc. 
• Workers from any union territory. 
• Female employees with a specific limit of monthly income. However, this is an individual decision of each state that applies professional tax. 

Conclusion 

Professional tax, impacts individuals and businesses. 

Understanding how it works, what rates apply to you, when you need to make your payments and the subsequent penalties regarding late payments and professional tax return filing is essential for everyone subject to this tax. 

Since professional tax is governed by state legislation, it is important to be aware of the specific rules and regulations applicable in each state. Staying compliant not only contributes to the state’s revenue but also ensures avoidance of any legal repercussions.

To reduce your tax liability in other tax brackets, like capital gains tax, consulting a SEBI-registered advisory can help. You will get professional guidance on which long-term stocks to buy and how to manage them with detailed reports for better financial independence.

FAQs on Professional Tax

With the financial year ending, do you fear the upcoming tax season? Do you find yourself struggling to calculate your tax liability? Do you wish a magic tool could do this task for you? Well, there is! A tax calculator is a tool that allows you to estimate your taxes based on your income, deductions, and exemptions. Sounds interesting, right? 

But wait, there is a catch. A tax calculator is only as useful when you give the right inputs. If you make some common mistakes when estimating your taxes, you might get a nasty surprise when you file your return. 

Do you know that filing incorrect tax returns can result in severe penalties such as imprisonment? Yes, you heard me correctly! That is why you should exercise caution and avoid making these common mistakes when using tax calculators.

What is a Tax Calculator?

Tax Calculator is an online tool that helps you calculate your net income and tax liability after taking into account various deductions, exemptions, and rebates available under the Income Tax Act. You can use this tool to plan your investments and savings and optimize your tax outgo.

Inputs Required in A Tax Calculator

Some of the common inputs are:

Basic details: Your age, residential status, financial year, and assessment year. These details help determine your applicable tax slab and rates.

Income details: Your income from various sources, such as salary, house property, capital gains, business or profession, and other sources. These details help calculate your gross total income.

Exemptions: The income exempt from tax, such as HRA, LTA, EPF, gratuity, etc. These details help reduce your taxable income.

Deductions: The amount of investments or expenses eligible for tax deduction, such as 80C, 80D, 80G, 80E, 80TTA, etc. These details help lower your tax liability.

Tax credits: The amount of tax already paid or deducted, such as TDS, TCS, advance tax, self-assessment tax, etc. These details help adjust your final tax payable or refundable.

How to use a tax calculator correctly?

Here are some tips on how to use a tax calculator properly:

1. Choose a tax calculator that suits your needs

You can choose a tax calculator based on the complexity of your income calculations.  For example, if you are self-employed, you might want to use a specialized tax calculator that can handle your business income and expenses.

If you only have salary income, you might prefer a simple tax calculator that only asks for your basic information.

2. Enter your information carefully and completely

The utility of a tax calculator is limited to the data you enter. Make sure to enter your income, deductions, and loans accurately and honestly. 

Don’t forget to include any additional sources of income you may have, such as interest, dividends capital gains etc. Also, don’t miss out on any loan obligations you have.

3. Check the results for errors or inconsistencies

A tax estimator can help you estimate your tax liability, but it is not a substitute for professional tax consultants. 

You should always review and compare the results to previous tax returns, pay slips, and bank statements.

Common sources of income and deductions that people miss or miscalculate

Here are some of the most common sources of income and deductions that people miss or miscalculate:

Self-employment income 

You may be working as a freelancer, contractor, or consultant, you need to report your self-employment income and pay self-employment tax on it. You also need to deduct your business expenses, such as equipment, supplies, travel, or home office. 

However, many people either forget to include their self-employment income, or overstate or understate their business expenses, which can result in paying too much or too little tax.

Capital gains 

If you sell any assets, such as stocks, bonds, or property, you need to report your capital gains or losses on your tax return. You also need to distinguish between short-term and long-term capital gains, which are taxed at different rates. 

However, many people either fail to report their capital gains, or mix up the holding periods, which can lead to paying the wrong amount of tax.

Alimony 

If you pay or receive alimony as part of a divorce or separation agreement, you need to report it on your tax return. The payer can deduct the alimony payments, while the recipient must include them as income. 

However, many people either neglect to report their alimony, or confuse it with child support, which is not taxable or deductible, which can cause tax problems for both parties.

Charitable donations

If you make any donations to qualified charitable organizations, you can deduct them from your taxable income. You need to keep track of your donations and provide proof of them when filing your tax return. 

However, many people either forget to keep receipts of their donations or claim more than the actual amount they donated, which can result in overstating their deductions and underpaying their taxes.

Tax Blunders: How to Avoid the Top 5 Pitfalls of Tax Estimation

Here are the top five tax blunders that you should avoid at all costs:

1. Not choosing the right tax regime

The government has introduced two tax regimes – the old one with higher tax rates but more deductions and exemptions, and the new one with lower tax rates but fewer deductions and exemptions.

Don’t blindly follow the new regime just because it has lower rates, or stick to the old one just because you are used to it. Choose wisely and save more.

2. Not declaring all your income sources 

You might have income from various sources, such as salary, house property, capital gains, business or profession, and other sources. You need to declare all of them in your tax return, even if they are exempt or below the taxable limit.

If you fail to do so, you might face penalties and interest for under-reporting or concealing your income. Don’t fall into this trap and be honest and transparent.

3. Not claiming all your deductions and exemptions 

You might be eligible for various deductions and exemptions that can reduce your taxable income and tax liability. These include investments under section 80C, health insurance premiums under section 80D, donations under section 80G, education loan interest under section 80E, and many more. 

You need to claim them in your tax return and provide the relevant proofs and documents. Don’t miss out on any of these tax-saving opportunities, make the most of them.

4. Not paying advance tax on time

You need to pay advance tax if your tax liability exceeds Rs. 10,000 in a year, and you don’t have enough TDS or TCS deducted from your income. 

You need to pay advance tax in four instalments – 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15. 

If you fail to pay advance tax on time, you might have to pay interest and penalty for late payment of tax. So, be punctual and disciplined.

5. Not verifying your tax return and refund status 

After filing your tax return, you must verify it either online or offline within 120 days of filing. If you do not verify your tax return, the tax department will not process it, and you will not receive a refund or acknowledgment.

You should also check the status of your refund online to see if there are any discrepancies or delays. If there is an issue, you must contact the tax department to resolve it. Do not ignore your tax return or refund status; instead, be proactive and vigilant. 

The Bottom Line

Tax estimation is a crucial but challenging task for taxpayers, especially those with multiple income sources, deductions, and exemptions. Many common mistakes can lead to inaccurate tax estimation, resulting in penalties, interest, or refunds from the tax authorities. 

A tax calculator can help you avoid common mistakes in tax estimation by providing a clear and comprehensive breakdown of your income, deductions, and tax payable. 

It can also help you compare different scenarios under both tax regimes and optimize your tax savings. By using a tax calculator, you can ensure that you pay the right amount of tax at the right time, and avoid any hassles or surprises later.

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FAQ

Income tax in India represents a significant aspect of the country’s financial structure, influencing the economy and the individual taxpayer. Income tax payment is a financial and legal obligation in India under the 1961 Income Tax Act.

This complex system, governed by various laws and regulations, requires a thorough understanding to navigate effectively. Whether it’s details about the different income sources or tax-saving investments, such as tax-free bonds, taxpayers must provide financial information through Income Tax Returns (ITR) every year.

Having a clear understanding of income tax and tax filing is vital for meeting legal obligations and optimizing your finances. But what exactly is Income tax, and how is it charged?

What is Income Tax?

Income Tax Meaning: A Simplified Explanation

Income tax is a direct tax levied by the government on the income earned by individuals, corporations, and other entities. It is a key revenue source for the government, ensuring the availability of funds for public services and national development.

What is Taxation and Its Role in Economic Stability

Taxation refers to the system by which governments collect revenue from citizens and businesses to fund public expenditures. It ensures economic stability by reducing income inequalities and financing essential services.

Key Objectives of Income Tax in a Country’s Economy

• Funding government initiatives and public services.
• Reducing income disparity through progressive tax structures.
• Promoting savings and investments via tax deductions and incentives.

Types of Income Tax

1. Individual Income Tax: Salaries and Other Personal Earnings

This applies to income individuals earn, such as salaries, freelance income, and other personal earnings.

2. Corporate Income Tax: Tax on Business Profits

Levied on the net income or profit of corporations.

3. Capital Gains Tax: Tax on Investments and Assets

Applies to profits from selling assets like stocks, real estate, or mutual funds.

4. Other Specialized Taxes (e.g., Property Income, Dividends)

Includes taxes on rental income, dividends, and other non-salary earnings.

About the Income Tax Department, India 

The Income Tax Department is a government agency tasked with overseeing the implementation of the Income Tax Act, collecting taxes, and enforcing compliance. 

It operates under the Department of Revenue in the Ministry of Finance and plays a critical role in the nation’s economic management.

 Income Tax Act of 1961 

The Income Tax Act of 1961 is the cornerstone legislation that governs income tax in India. It provides a comprehensive legal framework covering all aspects of taxation, from income definition and tax liability to penalties for evasion. Regular amendments to the Act ensure its relevance and effectiveness in the contemporary economic landscape. 

 Income Tax Return (ITR) 

An Income Tax Return (ITR) is a form taxpayers use to declare their income, expenses, tax deductions, and taxes paid during a financial year. 

Income tax filing is mandatory for individuals and entities that meet certain income criteria, and it also serves as a vital document for various financial applications.

The tax rates and slabs for income tax payment may vary, depending on the nature of income and the taxpayer’s category, making it imperative for taxpayers to stay updated with the latest tax regulations. The submission of ITR by the due dates assigned is mandatory. It is not only to report your income but also to claim applicable tax refunds, if any.

 e-Filing Income Tax 

E-filing is submitting income tax returns online through the Income Tax Department’s official website. It offers taxpayers convenience, efficiency, and security, along with instant acknowledgment of submission. 

The government has greatly encouraged the process, with numerous facilities providing easy compliance.

Income Tax Rules in India

1. Understanding Tax Slabs and Rates for Individuals

India follows a progressive tax structure with varying slabs based on income levels. For example:

• Old Regime: ₹2.5 lakh exemption for individuals below 60 years.
• New Regime: ₹3 lakh exemption for all taxpayers.

2. Differences Between Old and New Income Tax Regimes

• Old Regime: Allows deductions under sections like 80C, 80D.
• New Regime: Lower tax rates but limited deductions.

3. Tax Exemptions, Deductions, and Rebates

Examples include Section 80C for investments and Section 80D for medical insurance.

How is Income Tax Calculated?

1. Income Tax Computation Formula: Total Income x Applicable Tax Rate

The formula involves determining total taxable income and applying the relevant tax rate.

2. Step-by-Step Example of Income Tax Calculation on Salary

Example: If an individual earns ₹10 lakh annually under the new regime:

• Deduct exemptions (e.g., standard deduction of ₹50,000).
• Apply the appropriate tax slab rate.

3. Importance of Declaring Exemptions and Deductions

Proper declaration minimizes tax liabilities and ensures compliance.

Income Tax on Salary: What You Need to Know

1. Components of Salary Considered for Taxation

Basic salary, allowances, and perquisites are subject to tax, but house rent allowance (HRA) and leave travel allowance (LTA) may be exempt.

2. How to Minimize Tax Liabilities With Deductions

Sections like 80C, 80D, and 24(b) can help reduce taxable income.

3. Employer’s Role in Deducting Tax at Source (TDS)

Employers deduct TDS based on income and provide Form 16 for tax filing.

Who is Eligible for Income Tax Payment?

All Individuals earning over ₹2.5 lakhs annually for the old tax regime and ₹3 lakhs annually for the new tax regime are eligible for Income Tax payment.

These include the following taxpayer types:

• Individuals under 60 years
• Individuals between the ages of 60 and 80 years
• Individuals aged over 80 years
• Hindu Undivided Family (HUF)
• Association of Persons (AOP)
• Artificial Juridical Person (An Assessee who does not fall under any of the other categories included in the definition of Person)
• Firms
• Companies

Income Tax Forms 

ITR Forms	Residency	Income	Additional Conditions
ITR 1	Resident(other than not ordinarily resident)	Up to ₹ 50 lakh&Agricultural income  Up to ₹ 5,000	Income from Salaries, one house property, and other sources
ITR 2	Individuals and HUFs	More than ₹ 50 lakh	Individuals, Non-Resident Indians (NRIs), and HUFs that do not have income from profits and gains of business or profession.
ITR 3	Individuals and HUFs	More than ₹ 50 lakh	Individuals and HUFs having income from gains and profits of businesses or professions and not eligible for ITR 1, ITR 2, or ITR 4
ITR 4	Firms (other than LLP), HUFs, and Individuals	Up to ₹ 50 lakh&Agricultural income  Up to ₹ 5,000	Income from professions and businesses computed under sections 44ADA, 44AD, or 44AE
ITR 5	Persons other than individual, HUF, company, and the person filing Form ITR-7	–	–
ITR 6	Companies that have not claimed tax exemption under Section 11 need to use ITR 6	–	–
ITR 7	Persons including companies needing to file their tax returns under Section 139(4A), Section 139(4B), Section 139(4C), Section 139(4D), Section 139(4E), and Section 139(4F).	–	–
ITR V	–	–	Acknowledgment/Verification form used for verification of tax returns without a digital signature

Income Tax Payment Details 

Income tax payments can be made both offline and online, with various options available for different taxpayer categories. 

Advance tax, self-assessment tax, and TDS (Tax Deducted at Source) are some methods through which the government collects taxes.

Common Mistakes to Avoid in Income Tax Filing

1. Failing to Declare All Sources of Income

It is imperative to report all streams of income, encompassing but not limited to interest, dividends, rental income, and freelance earnings. Neglecting to disclose any source of income can trigger penalties and legal repercussions. Deliberately concealing income sources is a violation of the law and can result in severe consequences, including potential criminal charges and substantial fines.

2. Not Utilizing Available Deductions and Exemptions

Taxpayers are entitled to various deductions and exemptions that can significantly reduce their tax liability. Failing to claim these eligible deductions and exemptions can lead to overpayment of taxes. It is crucial to be aware of the deductions and exemptions available and ensure they are accurately claimed on the tax return. By not availing themselves of these legitimate tax benefits, individuals may end up with a higher tax outgo than necessary.

3. Filing Returns Late or Providing Incomplete Details

Adhering to tax deadlines is essential. Submitting tax returns after the due date can attract penalties and interest charges. Additionally, providing incomplete or inaccurate information on the tax return can lead to further complications. Manual entry of data increases the risk of errors, potentially resulting in miscalculations and tax discrepancies. These issues can trigger audits, investigations, and additional financial burdens.

Quick Guide for Income Tax Filing Online 

Filing an ITR online involves a streamlined process accessible through the E-filing portal. Here’s a concise guide to income tax online payment:

1. Access the Portal: Visit the official Income Tax E-filing website and log in using your PAN as User ID, password, and captcha code.
2. Navigate to the E-File Menu: Select ‘Income Tax Return’ under the ‘E-File’ menu to proceed to the Income Tax Return page.
3. Enter Details: Your PAN is auto-filled. Specify the Assessment Year, ITR Form Number, and Filing Type, and choose ‘Prepare and Submit Online’ as the Submission Mode.
4. Filing Mode: Select ‘Online’ as the mode of filing and click on ‘Proceed.’
5. Select Status: Choose the applicable status – Individual, Hindu Undivided Family (HUF), or Firm/LLP
6. Choose ITR Form: Opt from ITR 1 to ITR 4 for E-filing.
7. Fill Sections: Provide the necessary information as required for each of the forms.
8. Review Summary: The website will display a tax computation summary. After reviewing, enter residence details and click ‘Submit’.
9. Verification: Choose a verification method (E-Verify now, E-Verify later, or send ITR-V to CPC Bengaluru) and complete the process with an EVC or OTP.
10. Submit ITR: Finalize your income tax online payment submission. An acknowledgment will be sent to your email.

Conclusion 

Understanding what income tax is and the importance of income tax filing and its implications is crucial. This legal obligation is vital in maximizing your finances legally. 

Moreover, if you’d like to reduce your tax liability when it comes to investments in direct equity and maximize your finances, consulting a SEBI-registered investment advisory can help.These services can offer personalized portfolio management services like quality advice for your direct equity investments to help you make sound financial decisions catered to your unique preferences.

FAQs on Income Tax

Filing Income Tax Returns (ITR) online has become a streamlined and straightforward process in India, thanks to the digital initiatives of the Income Tax Department. E-filing of income tax not only saves time but also ensures accuracy and quick processing of tax returns.

Whether you are a seasoned taxpayer or new to the concept, understanding how to file ITR returns online is crucial to complying with the country’s tax laws.

What is Income Tax Return (ITR) Filing in India?

ITR filing in India is when a person declares their income, deductions, and tax payments for a particular financial year. It is a mandatory exercise for anyone earning a certain level of income, and it helps the government assess the tax liability of an individual or entity. 

E-filing of income tax is not only about paying taxes; it also serves as an important document for availing loans, visas, and other financial services. You can also read more about the concept of taxation with our blog.

Also Read: How to pay less tax.

Documents Required For Income Tax E-Filing

Before you begin income tax e-filing, ensure you have the following documents ready:

• PAN (Permanent Account Number)
• Aadhaar Card
• Bank account details
• Form 16 (if employed)
• Proof of investments and savings
• Details of income from other sources (if any)
• Previous year’s tax returns

Which ITR Form Should You Choose for E-filing of Income Tax?

The Income Tax Department has designated different forms for different categories of taxpayers:

• ITR-1 (Sahaj): This form is for individuals earning income from salaries, one-house property, and other sources (interest, etc.) and having a total income of up to ₹50 lakhs.
• ITR-2: For individuals and HUFs not carrying out business or profession under any proprietorship.
• ITR-3: For individuals and HUFs having income from a proprietary business or profession.
• ITR-4 (Sugam): For presumptive (assumed) income from business & profession without actual estimation of net income 

Choose the form that best suits your income structure.

How To File Income Tax Returns Online?

Step 1 :

• Navigate to the official Income Tax E-filing portal. 

Step 2:

• Log in by entering the required details for:

• Your User ID or PAN
• Your Password
• Captcha code

• Once you are done, navigate to the ‘E-File’ menu and click the ‘Income Tax Return’ option.
• This should redirect you to the main Income Tax Return page. 

Step 3:

• The PAN will be auto-filled on the Income Tax Return page.
• You will need to provide the following details:

• Assessment Year. (This is the financial year that follows the financial year in which your income was earned)
• Income Tax Return Form Number. ( Filing of ITR 1 and ITR 4 can be done online)
• Filing Type. 
• Submission Mode. (The option of ‘Prepare and Submit Online is available here)

Step 4:

• Click on ‘Continue’.
• Navigate to the ‘Mode of Filing’.
• Select ‘Online’ from the drop-down menu.
• Click on ‘Proceed’.

Step 5:

• Click on ‘Status’
• Select Individual, Hindu Undivided Family (HUF), or Firm/LPP depending on what is applicable.

Step 6:

• Select the required Income Tax Return Form. (ITR 1 and ITR 4 are available for E-filing).

Step 7:

• If ITR 1 is selected, you must  complete the five following sections:

Section	Details
Personal Information	Your Full NameYour PANYour Aadhar Number
Gross Total Income	Enter and Verify your income from eligible sources (Salary, pension, house property, interest income, family pension, etc.)If applicable, you must provide details of your exempt income.
Total Deductions	Taxes you have paid from sources but are not limited to Tax Deducted at Source (TDS), Tax Calculated at Source (TCS), Advance Tax, and Self-Assessment Tax.
Tax Paid	Tax Liability is based on the sections you filled out above. Tax payable on Total Income = (Income—deductions claimed—tax paid till date). If the amount calculated here is negative, you can claim it in refunds. However, a positive amount needs to be paid as tax.
Total Tax Liability	Tax Liability is based on the sections you filled out above. Tax payable on Total Income = (Income – deductions claimed – Tax paid till date)If the amount calculated here is negative, you can claim it in refunds. However, a positive amount needs to be paid as tax.

Step 8:

• If ITR 4 is selected, you must complete six sections, out of which five remain the same as above. 

Section	Details
Disclosures	Financial details related to your business. (revenue, expenses, profits, losses, assets, liabilities, investments)Information on Gross Receipts reported for GST, and exempt income earned by the business must be added.
Personal Information	Same as mentioned above.
Gross Total Income
Total Deductions
Tax Paid
Total Tax Liability

Step 9:

• A summary of the tax computation for the current financial year will be provided to you on the screen.
• This summary is based on the information you provided earlier. 
• The webpage will calculate your tax amount, determining whether you owe tax or if you are eligible for a tax refund. 
• Once done with previewing, enter the details of your residence. 
• Click on ‘Submit’ 

Step 10:

• Click on the ‘Proceed to Validation’ option.
• The following verification options can be selected to verify the Income Tax Return:

• E-Verify.
• E-Verify later within 120 days from the date of filing.
• E-Verify via ITR-V through regular or speed post within 120 days from the filing date. ( Addressed to Centralised Processing Center, Income Tax Department, Bengaluru – 560 500 )
• If you choose the self-e-verification option, an Electronic Verification Code (EVC) or One-time Password (OTP) must be generated to complete the process. 
• It can be done in the following ways:
• Generation of Electronic Verification Code (EVC) through the taxpayer’s bank ATM. 
• Generation of One-time Password (OTP) through Aadhar Card.
• Using a pre-validated bank account.
• Using a pre-validated Demat account.

• If you choose the option of self-e-verification, a copy of the ITR form must be sent to CPC Bengaluru at the address mentioned in the form. 
• Verify the details and click on ‘Preview and Submit.’

Step 11:

• Click on ‘Submit’ to submit the Income Tax Return.
• An acknowledgment will be sent to the email ID you submitted.

Conclusion

E-filing income tax is a significant step towards financial responsibility and compliance with Indian tax laws. Although the process is detailed, the Income Tax Department’s user-friendly portal and comprehensive instructions make it easy. 

Remember, timely income tax e-filing not only helps avoid penalties but also aids in faster processing of refunds, if any. The online filing process can be completed smoothly and efficiently with the right documents and a clear understanding of the applicable ITR form.

Optimal financial planning and understanding the details of new vs old tax regimes are crucial for making the most out of the deductibles in the ITR. You can read our blogs to learn more about portfolio management and stock market advisory.

Frequently Asked Questions