Defining the ‘Previous year’
Previous year or the financial year or your tax year is the 12 month period that begins on 1st April and ends on the 31st March of the next year. No matter when you start your job, your tax year closes on 31st March and a new tax year starts on 1st April. So, it is important to plan your taxes for each financial year.
Assessment Year
It is a term you’ll often hear in relation to tax filing. It is the financial year after the previous year in which you will ‘assess’ and file your return for the previous year. So, assessment year is 2019-20 for the previous year 2018-19. Assessment year is the year in which you will file your return for the previous year. For instance, if you start your job on 1 January 2021, your tax year closes on 31 March 2021. 2020-21 is your previous year and your AY is 2021-22. The last day to file your return is 31st July 2021 (extended to 31st December 2021).
Understanding your Salary
When you start your job – reach out to your payroll or HR department and get your Salary details/ Pay Slip / Tax Statement. Here, you will get an idea of the major components of your salary and how much tax will be deducted from your salary based on them.
Example: Most companies give House Rent Allowance or HRA, and you can save tax on that if you are living on rent.
Income on which you pay Tax
Besides the salary income you receive, you may be earning an income from several other sources. Your Total Income is the sum total of all heads of income below.
Sources of Income
Income from Salary
Salary, Allowances, Leave encashment basically all the money you receive while rendering your job as a result of your employment agreement
Income from House Property
Income from house or building, this may be owned and self-occupied or may be rented
Income from Capital Gain
Income from gain or loss when you sell a capital asset
Income from Business or Profession
Income/loss that arises as a result of carrying on a business or profession
Income from Other Sources
This is the residual head – includes your income from savings bank accounts,fixed deposits,family pension or gifts received
Deductions reduce your Gross Income. These are the amounts Income Tax Department allows you to reduce your Income, bringing down your tax liability.
Sum of All heads of Income = Gross IncomeGross Income – Deductions = Taxable Income