Mission AAO 2025

Class 3 – Basics of Income Tax

Income tax is one of the most significant forms of revenues for the Ggovernment.
Income tax is levied on individuals on the income they earn. In India, it is levied based
on brackets system and a new tax regime is also in place. The revenues generated by
the form of income taxes will be utilised by the government to offer better amenities
for the public, such as roads and housing. All individuals earning above a certain
threshold should mandatorily file their income tax returns in order to stay tax
compliant.
Key Points to Look after in this chapter
1- Tax Slabs and New Tax Regime
2- Understanding the Deductions Nicely
3- Remembering all Tax Slabs with Trick
4- Practice Numerical
Key Factors to remember while writing
1- Remember Section Numbers
2- Tabular and Diagrammatic presentation is must
Key Points that if asked can hit Jackpot
1- Draw Attractive Format while attempting Numerical
2- Highlight Things where ever necessary

All the best Let Us Start.

Assessment Year Vs Financial Year
The assessment year (AY) is the year that comes after the FY. This is the time in
which the income earned during FY is assessed and taxed. Both FY and AY start on 1
April and end on 31 March. (12 Months)

For instance, for FY 2023-24, the assessment year is AY 2024-25.

The financial year (FY) in Hindi is called वित्तीय िर्ष and assessment year (AY) in
Hindi is called विर्धषरण िर्ष.

Residential Status (Section 6)

The taxability of an individual in India depends upon his residential status in
India for any particular financial year. The term residential status has been coined
under the income tax laws of India and must not be confused with an individual’s
citizenship in India. An individual may be a citizen of India but may end up being a
non-resident for a particular year. Similarly, a foreign citizen may end up being a
resident of India for income tax purposes for a particular year.
Resident and Ordinarily Resident: A resident and ordinarily resident will be charged
to tax in India on his global income i.e. income earned in India as well as income earned
outside India.
Resident but not ordinarily resident: There is a thin line in taxability of income
between ROR and RNOR, RNORs are not required to pay taxes on Income earned
outside India as well as received outside India.
Non-Resident: A Non-resident will be charged tax only on the income ‘received in
India’ or source of income ‘received from India’. However, income earned outside India,
having no connection with India, is not taxable
(Not In Syllabus but worthy of having a look towards the end)
Types of Regime and Slabs
Currently there are two types of Tax Regime Available:

1. Old Tax Regime

2. New Tax Regime

Tax Slabs
1. Income tax for salaried individuals (including pensioners)-

Old or Existing Regime Slabs

For Individuals Less than 60 years
Income tax slab Income tax rate
Up to 2,50,000 Nil
Rs. 2,50,001 to Rs.5,00,000 5% above Rs.250000
Rs. 5,00,001 to Rs. 10 lakhs Rs.12500+20% of above Rs. 5 lakhs
Above Rs.10 lakhs Rs.112500+30% of above Rs. 10 lakhs

For Individuals aged above 60 years &

less than 80 years (Senior Citizen)
Income tax slab Income tax rate
Up to 3,00,000 Nil
Rs. 3,00,001 to Rs.5,00,000 5% above Rs.3,00,000
Rs. 5,00,001 to Rs. 10 lakhs Rs.10000+20% of above Rs. 5 lakhs
Above Rs.10,00,000 Rs.110000+30% of above Rs. 10 lakhs

For Individuals 80 years & Above (Super Senior Citizen)

Income tax slab Income tax rate
Up to 5,00,000 Nil
Rs. 5,00,001 to Rs. 10,00,000 20% of above Rs. 500000/-
Above Rs.10 lakhs Rs.100000+30% of above Rs. 10 lakhs

Important Point –
1. Rebate u/s 87-A Resident Individual whose Total Income is not more than Rs.
5,00,000 is also eligible for a Rebate of up to 100% of income tax or ₹ 12,500
2. Health and Education Cess @4% is applicable
 New Tax Regime under section 115-BAC
The taxpayers opting for New Tax Regime will not be allowed certain
Exemptions and Deductions (like 80C, 80D, 80TTB, HRA) available in the Old
Tax Regime.

All individuals (All age groups)

Income tax slab Income tax rate
Up to 3,00,000 Nil
Rs. 3,00,001 to Rs.7,00,000 5% above Rs.3,00,000
Rs. 7,00,001 to Rs. 10,00,000 Rs. 20,000 + 10% of above Rs.7,00,000
Rs. 10,00,001 to Rs.12,00,000 Rs. 50,000 + 15% of above Rs.10,00,000
Rs. 12,00,001to Rs.15,00,000 Rs. 80,000 + 20% of above Rs.12,00,000
Above Rs.15,00,000 Rs. 1,40,000 +30% of above Rs.15,00,000
Tax rebate up to Rs.25,000 is applicable if the total income does not exceed Rs
7,00,000 (not applicable for NRIs).

Basics – Important Link - https://cleartax.in/s/income-tax-basics-for-beginners

Salary

Salary income refers to the compensation received by an employee from a current or

former employer for the execution of services in connection with employment. Thus,
income is taxable as salary under Section 15 only if an employer-employee
relationship exists between the payer and payee.

Salary includes-

(1) Pay as defined in FR 9(21)

(2) Bonus
(3) Dearness Allowance (DA)
(4) Compensatory allowance (CCA, FMA)
(5) HRA (With provision for exemption)
(6) Value of rent-free quarters (Rent free quarters license fee is an income)
(7) Fees retainable by the employee
(8) Honoraria
(9) Reimbursement of Tuition fee
(10) Pension (But family pension not included under salary)
(11) Subsistence allowance
(12) Interim Relief
(13) OTA
(14) Employer`s contribution to the new pension scheme.

Not include in Salaries

(1) Retirement Gratuity/ Death Gratuity

 (2) Uniform allowance (Dress Allowance)
(3) Value of Leave Travel Concession
(4) Leave encashment on Retirement.
(5) Commutation of pension

Important Point - Any interest on contribution made in excess of Rs. 5.00 L (GPF) will be
taxable as “Income from Other Sources” in the hand of employee or person contributing to
those funds.

Allowances Treatment under Income Tax Act

Travelling Allowance Fully exempted

Conveyance allowance Fully exempted
Hill/special/tribal area Exempted prescribed limits as per
compensatory conditions of the area of posting
allowance
Children Education allowance Rs.100 per month exempted
Hostel Subsidy allowance Rs. 300 per month exempted
Dress allowance Fully exempted
Transport Allowance Transport Allowance of Rs. 1,600 per
month is tax-free for a salaried
employee. Any amount received in
excess of Rs. 1600 is taxable (Not
applicable now). For Differently Abled
its Rs.3200
HRA Detailed Below

House Rent Allowance -Section 10 (13A)

HRA full form is House Rent Allowance. It is a part of your salary provided by the employer
for the expenses incurred towards rented accommodation. You can claim HRA exemption
only if you are residing in a rented house. Least of the following is exempt:
a) Actual HRA Received
b) Rent paid minus 10% of salary
c) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or
Chennai)

Important Points

1) Salary= Basic pay including DA if D.A. is included for retirement

benefits)
2) Salary= Basic pay excluding DA, I f DA will not be taken for
retirement benefits)
 (i) If HRA is received by an employee who is living in his own house or if he
does not pay any rent then HRA is fully Taxable.
(ii) It is mandatory for employee to submit PAN of the landlord to the employer if
rent paid is more than Rs. 1,00,000.

Various Deductions available

Standard deduction Rs. 50000/- Section 16 (I a)

Profession tax paid Actual amount Section 16(iii)
Entertainment Allowance received by 1/5 of salary or Rs. Section 16(ii)
a Govt. Servant 5000/-, whichever
is less.
Interest paid on housing loan & Rs. 2,00,000 Section 24-B
housing improvement loan. In case of
self- occupied
property.
Section 80 of Chapter VI A

80-C Life insurance (PLI, LIC etc.)

a)
GPF, PPF, SSA, SCSS
b)
CGEGIS
c)
Maximum
NSC, 5 years fixed Deposit
d)
limit
Housing loan principal
e)
Tuition fee (Restricted to two children)
f) permissible
80-CCC Annuity plan of LIC or another insurer
towards Pension Scheme Rs.1,50,000/-
80-CCD (1) Employee contribution to NPS 10% of salary
Section Self-contributions towards payments made Max.
80CCD(1B) to NPS,excluding deduction claimed under Deduction ₹
80CCD (1) 50,000
Section Employer`s Contribution to the Pension Deduction
80CCD (2) Schemeof Central Government limit of 14%

Section 80- Deduction towards payments made to Rs. 25000/-

D Health Insurance Premium & Preventive (Rs. 50000/-
Health check up For self/ Spouse or if any person
dependent children/ CGHS Contribution
is senior
citizen) and
Up to Rs.
5000 for
preventive
health check-
up, included
in above limit.
80-DDB Deduction towards payments made Deduction
towards Medical Treatment of Self or limit of
dependant for specified diseases. 40,000
(1,00,000 for
Senior
Citizen)
Section 80- Deduction towards interest payments on Deduction
EEB loan for purchase of Electric Vehicle where limit of
the loan is sanctioned between 1st April 1,50,000
2019 to 31st March 2023. on the
interest paid
on loan taken
Section 80-E Deduction towards interest payments Total amount
made on loan for higher education of Self paid towards
or relative. interest on
loan taken
Section 80 –G For Donation to notified funds 50% and
Donations (Cash Donation Limit Rs. 2000/-) 100% of
Total
Donation
made
80-TTA Deduction on interest received on saving Rs. 10000/-
bank accounts by Non-Senior Citizens
80-TTB Deduction on interest received on deposits Rs. 50000/-
by Resident Senior Citizens
Section 80-U Deductions for a resident individual Flat
taxpayer with Disability deduction
Rs. 75000/-
availablefor
a person
with
Disability,
irrespective
of expense
incurred
Rs.1,25,000 in
case of Severe
Disability
(More than
80%)
Section 80- Deduction towards payments made Flat
DD towards Maintenance or Medical treatment deduction
of a Disabled Dependent or Paid / Rs. 75000/-
Deposited any amount under relevant availablefor
approved scheme
a person
with
Disability,
irrespective
of expense
 incurred
Rs.1,25,00
0 in case of
Severe
Disability
(More than
80%)

Important Point
Premium on life insurance policy can be claimed as deduction under section 80C. In
case of an individual, deduction is available in respect of policy taken in the name of
taxpayer or his/her spouse or his/her children.

2. Provision for Tax Deduction at Source on salaried employees and

Pensioners

(a) In case of salaries, the tax is affected by deduction at source under Section 192 of

the IT Act, 1961, it is duty of any person (DDO, employer) responsible for

any income chargeable under the Head of Salaries to deduct the tax at the rate

appropriate to the estimated salary of the year.

DDO = Drawing and Disbursing Officer

(b) Any salary disbursing Authority, at the time of payment, deduct income tax on

the amount payable at the average rate of income tax computed on the basis of

the rate of tax in force for the financial year in which the payment is made, on the

estimated income of the assesses under this head of the financial year.

(c) The aggregate tax calculated on the estimated income is divided in to 12 equal

instalments and rounded of to nearest rupees is required to deducted from the

monthly salary.

(d) The tax shall be deducted from the salary bills of the employees and credited to

the appropriate Head of Account which will ultimately be adjusted to the Govt.

account by book transfers.

(e) Form 16 shall be prepared by employer/ DDO andissued to the employee

3. Monthly/Quarterly/Annual Returns by DDOs under Income tax Act

(a) The tax determined as per estimated income of a year should be

deductedfrom the salary u/s 192 of the Act monthly basis.
(b) The person deducting the tax (employer in case of salary income), is
required to file duly verified Quarterly Statements of TDS in Form 24Q for the
periods as mentioned below:

Due dates of filing Quarterly Statements in Form 24Q

Quarter Quarter Date of ending of Due date
quarter
1st April-June 30th June 31st July
Quarter
2nd July-Sept 30th September 31st October
Quarter
3rd Oct- Dec. 31st December 31st January
Quarter
4th Jan-March 31st March (Annual Return) 31st May
Quarter

4. Section 203 requires the DDO to furnish to the employee a certificate in Form 16
detailing the amount of TDS and other particulars. Rule 31 prescribesthat Form 16
should be furnished to the employee by 15th June after the end of the financial
year in which the income was paid and tax deducted.

5. Admissible deduction may be allowed by DDO to salaried employee

(including pensioners)

- DDOs have been authorized u/s 192 to allow certain deductions,

exemptions or allowances or set-off of certain loss as per the provisions
of the Act for the purpose of estimating the income of the assessed or
computing the amount of tax deductible under the said section.

- DDOs shall obtain from the assesses evidence or proof or particular of

claims such as House rent Allowance (where aggregate annual rent exceeds
one lakh rupees); Leave Travel Concession or Assistance; Deduction of
interest under the head ―Income from house property and deduction under
 Chapter VI-A as per the prescribed form 12BB.
- If employee (deductee) fails to furnish his/her PAN or Aadhaar number as
the case may be, to the deductor, the deductor has been made responsible
to make TDS at higher rates. i.e., at the rate or rates in force or at the rate
of 20%.
6. TDS on Income from Pension-
• In the case of pensioners who receive their pension (not being family
pension paid to a spouse) from a nationalized bank, Post Office, provisions
apply in thesame manner as they apply to salary-income.
• The deductions from the amount of pension under section 80C on account
of contribution to Life Insurance, Provident Fund, NSC etc., if the
pensioner furnishes the relevant details to the banks, may be allowed.
• Pension after commutation will be considered as income.

Worth Reading Links

https://cleartax.in/s/income-tax-basics-for-beginners
https://cleartax.in/paytax/TaxCalculator
https://cleartax.in/s/salary-income?ref=income-tax-calculator