Tax Simplified - Part 1: Understanding Tax Slabs

Just the thought of tax makes us feel like running away from everything. We do not even want to start thinking about it. Most of the times we share all our details to a friend who helps us in filing the tax. Some of us even pay CAs to do the dirty work for us. We suddenly wake up in the month of March and see where can we invest to save our taxes. More often than not we end up paying a lot of taxes just because we either did not plan it well in advance or we do not know how to do it. I know friends who realize they have not planned well and have ended up paying high taxes just because they did not plan and invest before March 31st. And they do it again the next year.

In this chapter, we will discuss taxes like we are explaining taxes for dummies. No more running away from taxes.

Everyone who earns an income in any form in India is subject to file Income Tax return (ITR). Income Tax Department of India has broken down the incomes into 5 different streams. Any income that falls into each of those has to be considered as income to which you have to pay tax.

How to Calculate my Tax?

Before we get into the calculation of tax, let us understand that our government has given us two regimes (read options) to choose from – Old Regime and New Regime. We will first understand calculation for old regime which most of us would prefer to choose.

The amount of tax that we ought to pay to the government is calculated based on tax slabs. Now, what are tax slabs? Have a look at the table below:

Your tax is calculated based on which slab does your total income fall into. One of the biggest misconceptions is we will be taxed for the entire income based on the slabs we fall into. If your income is 6.5 Lakhs per annum, you don’t pay 20% for the entire 6.5 Lakhs. First, there is a standard deduction of 50,000 for all the income levels.

Let us see how your tax will be calculated if your income is 6.5 Lakhs per annum.

Let us take another example to understand this process better. Let us assume your salary is 12.5 Lakhs per annum.

Government gives a rebate on income for everyone whose salary falls in between 2.5 Lakhs to 5 Lakhs. That means if your income is between 2.5 lakhs and 5 Lakhs, you do not need to pay any tax. (Important: you still have to file ITR but you do not have to pay anything to the government).

Example:

However, you don’t get this rebate if your income is even a rupee more than 5 Lakhs. If your income is 5,60,000 a year, your tax goes as follows:

Click here to go to Tax Simplified - Part 2: Tax Deductions.

Write your Tax queries here. We will try to help you out with your taxes.