Income Tax Basics & Slabs

If you earn money in India, you need to understand income tax. Don't worry—it's simpler than you think, especially if you're a salaried employee!

What is Income Tax?

Income tax is money you pay to the government based on your income. It's the government's primary source of revenue, used for infrastructure, defense, welfare programs, etc.

Who Has to Pay Income Tax?

Basic Exemption Limit (New Tax Regime 2024):

• Income up to ₹3 lakhs per year = NO TAX
• Above ₹3 lakhs = Tax applicable based on slabs

Important: This is TOTAL income from all sources (salary + rent + interest + business + capital gains).

The Two Tax Regimes (Choose One)

India gives you a choice between two systems:

Old Tax Regime

• Higher tax rates
• BUT allows many deductions (80C, HRA, etc.)
• Good if you have home loan, investments in PPF/ELSS

New Tax Regime (Default since FY 2023-24)

• Lower tax rates
• BUT no deductions (except ₹50K standard deduction)
• Simple, good for most salaried people

Old Tax Regime Slabs

Income Range	Tax Rate
₹0 - ₹2.5 lakhs	NIL
₹2.5 - ₹5 lakhs	5%
₹5 - ₹10 lakhs	20%
Above ₹10 lakhs	30%

But allows deductions up to ₹1.5L (80C), HRA, home loan interest, etc.

How Tax is Actually Calculated (Step-by-Step)

Example: Rahul earns ₹10 lakhs per year (New Regime)

Slab	Calculation	Tax
₹0-3L	No tax	₹0
₹3-7L	4L × 5%	₹20,000
₹7-10L	3L × 10%	₹30,000
Total Tax		₹50,000
4% Cess	₹50K × 4%	₹2,000
FINAL TAX		₹52,000

Effective Tax Rate: 5.2% (not 10%!)

Key Point: You DON'T pay 10% on entire ₹10L—only on amount in each slab. This is called Progressive Taxation.

Components of Your Salary (CTC Breakdown)

CTC (Cost to Company) ≠ In-Hand Salary

Example: ₹10 LPA CTC

CTC: ₹10,00,000
├─ Basic Salary: ₹5,00,000 (50%)
├─ HRA: ₹2,00,000 (20%)
├─ Special Allowance: ₹1,50,000
├─ EPF (Employer): ₹60,000
├─ Gratuity: ₹30,000
└─ Other Benefits: ₹60,000

Deductions:
├─ EPF (Employee): -₹60,000
├─ Professional Tax: -₹2,400
└─ Income Tax (TDS): -₹50,000

In-Hand Salary: ₹7-7.5 lakhs annually

Lesson: CTC ≠ What you take home!

What is TDS?

TDS = Tax Deducted at Source

Your employer deducts tax from your salary every month and pays the government on your behalf.

Benefits:

• You don't have to pay lump sum tax at year-end
• Employer handles it
• Just file return to claim refund if TDS is excess

Common Deductions (Even in New Regime)

1. Standard Deduction: ₹50,000

• Automatic deduction for all salaried
• No proof needed
• Reduces taxable income

2. NPS (National Pension System): ₹50,000

• Additional deduction in New Regime (Section 80CCD(2))
• Employer contribution to NPS
• Good for retirement + tax saving

3. Leave Travel Allowance (LTA)

• Can claim for domestic travel
• Old regime only

4. House Rent Allowance (HRA)

• If you pay rent
• Old regime only
• Complex calculation (50% of HRA or actual rent-10% of salary, whichever is lower)

Old vs New Regime: Which to Choose?

Pro Tip: Use online tax calculators (ClearTax, ET Money) to compare both regimes for YOUR specific situation.

Income Tax Return (ITR) Filing

Who Must File:

• Income above ₹2.5 lakhs (₹3L in new regime for some)
• Even if no tax, file if income > ₹2.5L
• Required for visa, loans, etc.

When to File:

• July 31 every year for previous financial year (April-March)
• Extensions usually given till August/September

How to File (For Salaried):

1. Download Form 16 from employer
2. Go to incometax.gov.in
3. Register/Login with PAN
4. Fill ITR-1 (Sahaj) form—very simple for salaried
5. Upload Form 16 details
6. Verify using Aadhaar OTP/Net Banking

Time Taken: 15-30 minutes for first time, 10 minutes later

Common Income Sources (Taxable)

Fully Taxable

• Salary (after standard deduction)
• Freelance/Business Income
• Rental Income (after 30% standard deduction)
• Interest from FD, Savings (above ₹10K per bank)

Partially Taxable

• Capital Gains (stocks held less than 1 year = short term = taxed, >1 year = long term = lower tax)

Exempt (No Tax)

• Agricultural Income (fully exempt)
• Life Insurance Maturity (under ₹2.5L premium conditions)
• PPF Maturity (EEE status—exempt at all stages)
• Scholarship, Awards (Padma awards, etc.)

Tax Saving Tips (Legal)

1. Section 80C (Old Regime): up to ₹1.5L deduction

• EPF/PPF contributions
• ELSS mutual funds (tax-saving funds)
• Life insurance premiums
• Tuition fees
• Principal repayment of home loan

2. Section 80D: Health Insurance

• ₹25,000 for self + family
• ₹50,000 if parents above 60
• Preventive health checkups: ₹5,000

3. Section 80CCD(1B): NPS

• Additional ₹50,000 beyond 80C limit
• Available in both regimes

4. Section 24b: Home Loan Interest

• Up to ₹2 lakhs deduction
• Old regime only

Penalties for Not Filing

• Late Fee: ₹5,000 if filed after deadline (₹1,000 if income less than ₹5L)
• Interest: 1% per month on unpaid tax
• Prosecution: Jail time for serious evasion (rare for salaried)

Lesson: File on time every year, even if tax is zero!

Common Mistakes

❌ Mistake 1: "I don't need to file if TDS is deducted"

Wrong! Filing is mandatory if income > limit, even with TDS.

❌ Mistake 2: Hiding income

All sources are tracked (Form 26AS shows ALL income). Don't risk it.

❌ Mistake 3: Not claiming deductions

Use 80C, HRA if eligible—it's YOUR money saved!

❌ Mistake 4: Late filing

₹5,000 penalty is avoidable. Set reminder for June to file in July.

7-Day Action Plan

Day 1: Download Form 16 from your employer
Day 2: Register on incometax.gov.in with PAN
Day 3: Check your Form 26AS (shows all TDS deducted)
Day 4: Use tax calculator to compare New vs Old regime
Day 5: Decide which regime suits you
Day 6: File ITR online (takes 20-30 min)
Day 7: Verify ITR using Aadhaar OTP

Quiz

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💡 Pro Tip: Tax isn't scary if you understand it. File on time, claim deductions you're eligible for, and don't try to evade—it ALWAYS catches up. Pay Caesar what's his, but not a rupee more!