Tax Terms for Beginners

Filing taxes for the first time is not exactly a thrilling experience for most individuals. With multiple sections, exemptions, and calculations, the Indian taxation system can seem daunting. Moreover, if you’re unaware of different taxation terms and rules, it’s easy to make mistakes that can lead to missed savings opportunities or penalties. 

Therefore, it’s important to understand basic tax terms so you can navigate the process with confidence. If tax-related jargon seems overwhelming, fear not—we’re here to help.

Essential Tax Terms for Beginners

  1. Income tax return

Income Tax Return (ITR) shows the gross taxable income of a salaried individual for the fiscal year. In simple terms, the ITR form informs the Income Tax Department about the income you have earned in the previous year or the assessment year. If your income is more than the basic exemption limit, you must file an ITR.

There are seven types of ITR forms depending on taxpayer categories: 

– ITR 1 (Sahaj): Individuals earning up to Rs. 50 lakhs from salary, pension, or other sources fill out this form.

– ITR 2: This form applies to individuals and HUFs (​​​Hindu Undivided Family) without business or professional income.

– ITR 3: This applies to business or professional income earners.

– ITR 4 (Sugam): This form is for individuals using presumptive taxation schemes with income below Rs. 50 lakhs.

– ITR 5: This ITR form is exclusively for entities like firms, and trusts. 

– ITR 6: This is for companies filing online without claiming Section 11 exemptions.

– ITR 7: This form serves political parties, charitable trusts, and educational institutions. 

2. Previous Year (PY) and Assessment Year (AY)

In the world of taxes, the Previous Year simply refers to the financial year (April 1^st– March 31^st) for which the tax return is being filed. The year after the financial year is the Assessment Year for the taxpayer. It is the year in which your income is assessed to calculate the tax.

3.Tax Deducted at Source (TDS)

TDS is the payment that is collected at the source of the income. The payer deducts a part of your payment as tax and deposits it directly with the government on your behalf.

It is mandated by the Income Tax Act for specific situations and simplifies tax collection by making partial payment in advance. 

TDS applies to interest income and your salary. However, certain payments are exempt from TDS, such as interest on government securities and savings bank accounts, agricultural income, etc.

Employers issue a TDS certificate known as ‘Form-16’ when they deduct tax from your salary. This form serves as proof of tax compliance and fosters financial transparency.

4. Section 80C

If you’re looking to optimise your tax liability and save money, you must be familiar with Section 80C of the Income Tax Act. This section outlines the exemptions on specific investments and expenditures, lowering your taxable income.

Section 80C provides a wide range of tax-saving opportunities through investments in instruments like the National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), etc. Under this section, you can claim tax deductions up to Rs. 1.5 lacs.

5. Gross Total Income (GTI)

Calculating the GTI is the first step in your tax filing journey. GTI includes income from various sources, such as salary, gains from business or profession, income from house property, income generated from other sources, and capital gain.

6. Net Total Income (NTI)

NTI is the final taxable income on which you have to pay taxes. It is calculated by subtracting the applicable deductions and exemptions from the GTI under Sections 80C, 80D, 80G, etc.

For example, if your GTI is Rs. 10 lakhs and you claim deductions worth Rs. 1.5 lakhs under Section 80C, your NTI will be Rs. 8.5 lakhs. This means you’ll have to pay taxes on Rs. 8.5 lakhs as per the applicable tax slab.

7. Surcharge

The surcharge is the additional tax levied on individuals whose income exceeds the limit set by the government. It is calculated as a percentage of the total payable tax and serves as a measure to ensure the rich and poor are treated fairly.

In India, surcharges are levied on individuals with an annual income of more than Rs. 50 lakhs.

8. Tax slab

The income tax slab refers to the range of income that determines an individual’s applicable tax rate. The slabs may be revised annually and are declared by the finance minister in the Union Budget.

Individuals need to pay taxes ranging from 5% to 30% based on their annual incomes.

9. Advance Tax

Advance tax is the tax you pay before the end of the financial year based on your expected income. So, instead of paying the entire amount at the end of the year, you can pay it in regular instalments to ease the financial burden. For example, for FY 2024-25, you can pay advance taxes in four specific periods:

• Up to 15^th June: 15%
• Up to 15^th September: 45%
• Up to 15^th December: 45%
• Up to 15^th March: 75%

10. Self-Assessment Tax (SAT)

Self-assessment tax is levied on individuals who have received unexpected income from sources without accounting for TCS/TDS or if they failed to account for certain income while calculating advance tax.

SAT is also applicable when an individual switches jobs and the new employer does not consider the employee’s previous salary.

Wrapping up

While income tax terms may seem daunting to a beginner, understanding the different tax terms can help you gain more control over your finances. Moreover, with a strong understanding of the various tax saving provisions, you can reduce your tax liability and enhance your savings.