Tax

Income Tax Basics for Indian Beginners (2025)

📅 December 29, 2025 ⏱ 12 min read

If you're seeing "TDS" on your payslip or earning your first salary, you've probably wondered what income tax is. This guide explains the basics in plain language - what it is, who pays it, and what you need to do.

What is Income Tax?

Income tax is money you pay to the government based on how much you earn.

Simple logic:

That ₹1 lakh funds roads, schools, hospitals, defense, and everything else the government does.

Why it exists: Government needs money to run the country. Income tax is one of the biggest sources of that money.

Reality check: In 2023-24, India collected ₹19.58 lakh crore from income tax. That's more than the entire GDP of Pakistan.

Who Has to Pay Income Tax in India?

Residents of India

If you live in India for more than 182 days in a financial year (April 1 to March 31), you're a resident for tax purposes.

Residents pay tax on income earned anywhere in the world.

Example: You work in Bangalore earning ₹8 lakh/year + earn ₹50,000 from US freelance work. Both are taxable in India.

Income Threshold

Not everyone pays tax. Only people earning above a certain limit.

Basic concept:

Catch: Even if you earn less and owe zero tax, you might still need to FILE a return (we'll cover this later).

Fun fact: 70% of Indian salaried employees earn below ₹5 lakh/year. Most of them pay zero or minimal tax but still file returns to claim refunds.

Types of Income You Can Be Taxed On

Income tax doesn't just apply to salary. It applies to ALL money you earn.

1. Salary

The most common source.

What's included:

Example: Your CTC is ₹8 lakh/year. This is taxable income (with some deductions possible under old regime).

2. Business or Profession

If you run a business, freelance, or consult, your profit is taxable.

Example:

Important: You're responsible for calculating and paying this tax yourself (not automatically deducted like salary).

3. Capital Gains

Profit from selling assets like stocks, property, gold, etc.

Simple example:

Two types:

We won't go into details here, but know that investment profits ARE taxed.

4. Other Income

Examples:

Bank interest example:

Reality: Many people forget to include bank interest. That's technically tax evasion (even if unintentional).

Old Tax Regime vs New Tax Regime (Simple Explanation)

India now has TWO tax systems. You choose one each year when filing.

Old Tax Regime

How it works:

Example benefit: You invest ₹1.5 lakh in PPF/ELSS. Under old regime, that ₹1.5 lakh is NOT taxed.

New Tax Regime

How it works:

Example: You earn ₹7 lakh. Under new regime, tax is calculated on full ₹7 lakh (minus standard deduction of ₹75,000). No other deductions.

Which to Choose?

High-level logic:

Default since 2023: New regime is the default. You have to actively choose old regime if you want it.

Honest truth: For most young salaried people earning ₹5-10 lakh with minimal investments, new regime is simpler and often results in lower tax.

What is TDS?

TDS = Tax Deducted at Source

Concept: Instead of you paying tax once a year, your employer/bank deducts it BEFORE giving you money.

How It Works for Salary

Your payslip flow:

Your employer already sent that ₹3,000 to the government on your behalf.

At year-end:

Key point: TDS is advance tax. When you file ITR, final calculation happens. Excess TDS gets refunded.

TDS on Bank Interest

If your bank interest exceeds ₹40,000/year (₹50,000 for senior citizens), bank deducts 10% TDS.

Example:

Do You Need to File an ITR?

ITR = Income Tax Return (the form you submit to government declaring your income and tax paid). Learn more about tax filing basics if you're filing for the first time.

When Filing is Mandatory

You MUST file ITR if:

Why File Even If Not Mandatory

Even if you earn ₹2 lakh/year and owe zero tax, filing ITR helps:

1. Get TDS refunds

Maybe your employer or bank deducted TDS but you don't owe tax. Filing gets you refund.

Example: Bank deducted ₹2,000 TDS on your FD interest, but your total income is only ₹2.5 lakh (below tax threshold). File ITR, get ₹2,000 back.

2. Proof of income

Needed for:

Real scenario: Friend couldn't get education loan because he never filed ITR. Bank wanted 2 years of ITR as income proof. He earned well but had no documentation.

3. Carry forward losses

If you made losses in stock trading, you can carry them forward to offset future gains—but ONLY if you file ITR that year.

Common Income Tax Myths

Myth 1: "Tax is only for rich people"

Wrong.

Tax starts at ₹3 lakh/year income under new regime (₹2.5 lakh under old). That's ₹25,000/month salary. Not "rich."

Reality: Most Indian salaried employees in cities pay some income tax.

Myth 2: "If TDS is deducted, I don't need to file ITR"

Wrong.

TDS is just advance tax payment. Filing ITR is the FINAL settlement with the government.

What happens if you don't file:

True story: Someone didn't file ITR for 3 years despite TDS being deducted. When applying for home loan, bank rejected because of no ITR. Had to scramble to file belated returns with penalties.

Myth 3: "Filing tax is very complicated"

Not anymore.

For simple salary income, ITR filing takes 15-30 minutes.

Caveat: If you have capital gains, business income, or multiple income sources, it gets complex. But for first-time filers with just salary, it's straightforward.

Basic Things Beginners Should Do

1. Get a PAN Card

PAN (Permanent Account Number) is your tax ID.

You need it for:

Apply online at incometax.gov.in or NSDL. Takes 7-10 days.

2. Link PAN with Aadhaar

Mandatory since 2023. If not linked, your PAN becomes inactive.

Do it at: incometax.gov.in (free, takes 2 minutes)

3. Link Bank Account with PAN

When government processes your ITR refund, they credit your linked bank account.

Check linkage at: netbanking or income tax e-filing portal

4. Keep Income Records

Save these documents yearly:

Why: Needed when filing ITR. Also useful if tax department asks questions later.

5. Awareness, Not Optimization

As a beginner, focus on:

Don't obsess over:

Keep it simple. As income grows, complexity will come naturally.

Bottom Line

What income tax is: Money you pay to the government based on your earnings. It funds public services and infrastructure.

Why it exists: Government needs revenue to function. Income tax is a major source.

Why beginners should understand it early: Because ignoring tax doesn't make it go away. Not filing ITR leads to penalties, missed refunds, and future problems (loans, visas, legal notices).

The simple truth:

Start early. File on time. Don't panic.

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