The comprehension of one’s income tax responsibility, its computation, and the various forms of taxes one may be accountable for, bears significant weight. Here, we shall delve into the definition of income tax liability, furnished with instances to augment the understanding of this notion. Furthermore, we shall broach supplementary topics to foster a more comprehensive apprehension of the subject matter at hand. Acquainting oneself with the type of taxes you may be responsible for and the credits or deductions accessible to you, can effectively optimize your refund or diminish your tax liability.
What Is Income Tax Liability?
Income tax liability pertains to the financial obligation an individual owes to the government subsequent to filing their income tax return. It is derived from one’s total taxable income and the corresponding tax rate. An assortment of factors influences the sum of income tax liability, including one’s filing status, deductions and credits, and any unique tax provisions particular to their situation.
The process of determining one’s income tax liability necessitates the computation of their taxable income – their earned income minus applicable deductions and exemptions – multiplied by the appropriate rate tied to their tax bracket. This approach affords an approximation of their tax liability for the year.
One should bear in mind that any taxes remitted during the year, like those withheld from paychecks, play a part in this calculation. Therefore, if an individual has already remitted more taxes than their tax liability number indicates, they qualify for a refund. Conversely, if they have paid less than their estimated liability amount, they must compensate for the difference upon submission of their tax return.
Income Tax Liability Examples
Here are some examples of what could contribute to your income tax liability:
1. Income from salary:
This category encompasses those who receive a consistent income stream from employment or pension funds.
2. Income from other sources:
Income from other sources can be generated through interest-bearing financial instruments like fixed deposits and savings accounts.
3. Residential property income:
Income from residential property ownership primarily pertains to revenue streams from renting out such properties, but it also encompasses profits made from the sale of such real estate holdings.
4. Income from capital gain :
Furthermore, income from capital gains includes revenues earned from the sale of valuable capital assets, including mutual funds and shares.
5. Income from business or self-employment:
This encompasses a broad range of sources, from business owners to freelancers, contractors, doctors, lawyers, Chartered Accountants, and more.
Knowing what can contribute to your income tax liability is the first step in understanding how much money you may owe for taxes during the year and how best to prepare for them financially.
How can you reduce tax liability?
In India, taxpayers can legitimately lower their tax liability through several provisions under the Income Tax Act, 1961. Among the most widely known provisions is Section 80C, which offers a host of investment policies that offer both tax saving and capital appreciation benefits. These investment opportunities collectively provide for an INR 1,50,000 deduction per annum. The various investment policies under Section 80C include Tax Saver Funds (ELSS funds), Employee Provident Fund (EPF), Public Provident Fund (PPF), Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Yojana (SSY), Tax Saving Fixed Deposits (FDs), National Savings Certificate (NSC), Life Insurance Premiums, Home Loan repayment, and Tuition fees.
Another way to lower tax liability is by contributing to the National Pension Scheme (NPS) under Section 80CCD (1B), which can reduce the taxable income by INR 50,000 per annum. Health insurance premiums are also eligible for a deduction of INR 25,000 per annum under Section 80D, and this limit increases to INR 50,000 per annum for senior citizens. In cases where an individual is paying for self and senior citizens, the deduction allowed is INR 75,000 per annum.
Those who live in rented premises and receive an HRA can claim a deduction on their HRA amount, while those who don’t receive an HRA can still claim rent expenses of up to INR 60,000 per annum under Section 80GG. Taxpayers can also avail of tax exemptions by donating to charities with an 80G certificate. The maximum exemption amount is either 50% of the donated amount or 10% of the total income. Finally, contributions to political parties and electoral trusts can qualify for a tax waiver under Section 80GGC, provided the party is registered under Section 29A of the Representation of People Act of 1951. However, cash deposits are not allowed, only wired or bank transfers.
Conclusion
Whether you’re a business owner, self-employed individual, or employee, understanding your income tax liability is essential to managing your finances. Knowing your tax bracket, how much you’ve already paid, and how much you owe is a major part of participating in the taxation system. With the right tools and resources, you can calculate and understand your income tax liability. Using an online income tax calculator can help you approximate your liability and plan ahead for the future. Staying familiar with the tax laws and regulations that apply to your situation can help you make smart decisions about your income and tax liabilities.
