Income Tax 101: What You Need to Know 

Have you ever wondered why our parents often talk about the topic tax? It is something that might have ignited curiosity among us. So, what exactly is income tax? 

Income tax is the money salaried employees pay directly to the government. The tax levied from the public is supposed to be utilised by the government to offer better infrastructure, such as roads, highways, and transport. To illustrate, if A earns ₹6,00,000 a year and is liable to pay ₹ 60,000 to the government, then that amount is the tax deducted from the income of the taxpayer.  

However, not all are obligated to pay their tax. So which section of the income group are liable to pay?  

There are two types of tax regimes - old tax regime and new tax regime. As per the old tax regime, those who earn more than ₹ 2,50,000 annually are liable to file their income taxes. It is to be noted that earning income differs from person to person and hence, the government has stipulated tax brackets for various income groups. For example, if a person earns less than ₹ 2,50,000 per year, income tax cannot be levied on them. In the new tax regime, up to ₹ 3,00,000 tax is exempted. To declare the income, expenses, and deductions, taxpayers submit a form called Income Tax Return (ITR), which is a form issued by the government helping taxpayers to claim deductions under section 80 C and 80D of the Income Tax Act. The deductions help individuals reduce their taxable income. It is mandatory to file income tax returns annually for the salaried employees or else they can be penalised. However, individuals who do not come under any income groups are exempt from filing their returns. Even if not mandatory, filing income tax returns can be beneficial for individuals as it helps to establish financial records, claim refunds, and apply for government schemes.  To file tax returns, taxpayers are required to have PAN and Aadhaar cards issued by the Income Tax Department and Unique Identification Authority of India respectively. 

Different types of taxes  

Mainly there are two types of taxes in India: Direct tax and Indirect tax.   

Direct tax - In simple terms, this is the tax individuals pay directly to the government which cannot be transferred to another entity or another individual. Income tax is a direct tax which is directly paid to the government.  

Indirect tax - This is the type of tax levied on goods and services. This includes Service Tax, Value Added Tax (VAT), Central Excise Duty, Stamp Duty, etc. In India, the Goods and Service tax (GST) was introduced in 2017 by the Finance Ministry to simplify the process of collecting tax from taxpayers. For example, A buys a shirt for ₹1000, and the GST rate is 18%. The retailer would charge A ₹1,180 (₹1000 + 18%). The retailer remits the tax to the government through a process called GST return filing.    

Do minors pay taxes?  

Minors have to file their taxes if they earn more than ₹1500 annually. Their income will be clubbed with the income of the parent who earns more, and they have to pay the tax. However, parents can avail themselves of a tax exemption on minor’s income of ₹1,500 per child per year for a maximum of two children. But how do minors’ earn money?  

The income received by a minor can be of two types, earned and unearned money. The minor can earn money due to their talent, such as winning a competition or through a business venture they are part of. In the case of unearned money, they receive it in the form of a gift from relatives or can be investments made by the parents in their name. Irrespective of how the income is earned, minors are required to file their tax returns.  

Children’s Education Allowance 

Parents spend huge amounts of their earnings as investments for their wards on education. However, the school fees and related expenses can mount as a financial burden on families. Toalleviate the financial burden, the government offers tax deduction or financial benefit, under section 80 C of the Income Tax Act, 1961, in the form of children’s education allowance (CEA) to the families. Under CEA, various fees are reimbursable (paid back) such as tuition fee, special fee (charged for specialised courses like electronics, music, agriculture) sports fee, etc. Under tuition fee, each parent can claim a deduction up to ₹ 1.5 lakh for a maximum of 2 children separately.  

Published - September 20, 2024 11:28 am IST