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Everything you need to know as a First Time Taxpayer

If you are a well-earning individual, you must be aware of the taxation system in the country. But, do you know about tax planning? Basically, tax planning is the act of arranging your finances to better manage your tax liabilities. Often, a big part of tax planning is focused on ways to reduce tax liability. Most people believe that income tax is extremely simple. But, if you are doing it for the first time, it can be extremely daunting.

As scary as it may seem, filing income tax return for the first time is a special occasion. It is the final sign that you have reached adulthood and are financially strong enough to contribute back to the economy and society.  What makes it an intimidating experience is the various rules, guidelines set or which type of ITR you should file. But you do not need to worry. Here is everything you need to know about filing income tax returns:

Why is income tax collected?

One of the first questions that might come to you when thinking about income tax is: why do you have to do it? Paying your income tax is your duty as a citizen towards your country. It makes sure that you have a small contribution towards the development of the nation. However, it has very practical benefits too. In addition to meeting your civic responsibility, paying income tax is very important for compliance processes. For example, if you wanted to take a loan, or apply for a Visa, etc., the concerned authorities would look at your income tax status. Having a clean and proper tax history builds a good impression and goodwill with various reputed organizations. More important than anything, not paying tax has heavy consequences. You will have to pay heavy fines or even risk imprisonment in extreme cases.

When is income tax paid?

The income tax department follows the fiscal calendar. This means that they close their financial records for the year in the middle of the year and open up new records. This is during the March to April period of the year. The fiscal year starts on April 1st of each year and lasts till March 31st of the next year. You only have a limited amount of time after the fiscal year ends to pay your income tax.

You can file your income tax returns physically or online by July 31st. People that fit in the ₹5 lacs and above tax bracket have to file their returns online. The same applies to people who own assets outside India and people that need income auditing. The process of filing income tax online is simple and can be started by registering yourself on the income tax department’s official website. You can also calculate your income tax using an income tax calculator which is available online.

What counts as income?

Generally, anything added to the total money you have might be income. However, the income tax department has specific guidelines and classifications regarding what would be considered income. Most people have a singular source of income and that makes it easier to determine the amount you need to pay as tax. But there are also scenarios where people have multiple sources of income. In this case, each of these sources of income may be processed separately. Ultimately it means that having multiple sources of income means that you have to pay more income tax. The specified sources of money that classify as income as per the income tax department are:

  • Income from salary
  • Income from property
  • Income from capital gains
  • Income from business
  • Income from other sources

All of these sources of income can be taxed separately. The tax coming out of these would be pooled and you will get a final figure of what you need to pay.