INCOME TAX IN INDIA
Income tax is that percentage of your income that you pay to the government to fund infrastructural development, pay the salaries of those employed by the state or central governments etc. All taxes are levied based on the passing of a law, and the law that governs the provisions for our income tax is the Income Tax Act, 1961.
Income tax is only of the direct means of taxation like capital gains tax, securities transaction tax, etc. and there are many other indirect taxes that we pay like sales tax, VAT, Octroi, service tax, etc. The income tax you pay every month or upon every contractual earning is what forms a large part of the revenue for the Government of India. These revenue functions are managed by the Ministry of Finance, which has delegated the responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).
Taxes are calculated on the annual income of a person, and an annual cycle (year) in the eyes of the Income Tax law starts on the 1st of April and ends on the 31st of March of the next calendar year. The law recognizes and classifies the year as “Previous Year” and “Assessment Year”. The year in which income is earned is called the previous year and the year in which it is charged to tax is called the assessment year. The assessment year that starts on April 1st 2015.
Taxes are collected by the government in three primary ways:
Voluntary payment by taxpayers into designated banks, like advance tax and self-assessment tax.
Taxes Deducted at Source (TDS) which is deducted from your monthly salary, before you receive it.
Taxes Collected (TCS).
Income Tax Return (ITR): There is a prescribed form through which the particulars of income earned by a person, and the taxes paid thereon, are communicated to the Income Tax Department. There are different forms for the filing of returns based on different status and heads of income. This is called the return of income. It’s basically just you telling the government how much you’ve earned, from where you’ve earned it, and how much tax you’ve paid on it.
The different forms which have been prescribed for different classes of taxpayers are as follows:ITR Form NameDescription of TaxpayerITR – 1This is applicable to all individuals having salary or pension income or income from one house property, or income from other sources (which aren’t income from lottery winnings and income from race horses). This is also known SAHAJ.ITR – 2This is for Hindu Undivided Families that have income from sources other than “Profits and Gains of Business or Profession”.ITR – 3This is for Hindu Undivided Families or individuals who are partnered in a firm. The income here is either by the way of interest, salary, bonus, commission or remuneration that’s due or received from the partnered firm. The head of income should be “Profits and Gains of Business or Profession”.ITS – 4SThis is for individuals and Hindu Undivided Families who’ve opted for the presumptive taxation scheme of Section 44AD / 44AE. This is also called SUGAM.ITR – 4This is for individuals or Hindu Undivided Families who carry on a proprietary business or profession.ITR – 5This is for firms, LLPs, AOPs, BOIs, artificial judiciary persons, co-operative societies and local authorities. This does not apply to trusts, political parties, colleges, etc. who are required to instead file return of income under Sections 139(4A), 139(4B), 139(4C) and 139(4D) and do not use this form.ITR – 6This for companies that don’t claim exemptions under Section 11. Charitable and religious trusts can claim exemptions under Section 11.ITR – 7This is for persons and companies who are required to furnish returns under Sections 139(4A), 139(4B), 139(4C) and 139(4D).ITR – VThis is the acknowledgement of filing of return of income.
One can acquire these forms from http://www.incometaxindia.gov.in
Income Types or Taxable Heads of Income
Income from different sources is taxed differently. These sources are called heads of income and are as follows:
Income from Salaries All income received from an employer by an employee is taxed under this heading. Employers are bound to withhold tax compulsorily under Section 192 if the income of their employees falls under a taxable bracket. Employers must also provide a Form 16, which contains details of tax deductions and net paid income.
Income from House Property Income here is taxable if the assesse is the owner of a property that’s been given out on rent. The property should not be used for business or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means you and your family live there, and do not have to pay taxes on this.
Profits and Gains Of Business or Profession These are the taxes that will be applicable for income from business or professional services rendered. The provisions for computing the tax on this type of income is in accordance with Sections 30 to 43D.
Income from Capital Gains: This is for the taxes applicable on income that arises when capital assets are transferred. Capital assets are property of any value that’s held by the assesse like land, buildings, equity shares, bonds, debentures, jewellery, art, assets, etc.
Income from Other Sources Basically, any source of income that cannot be classified under the above heads of income falls under this heading. There are also some specific and pre-determined incomes which fall under this heading, like:
Income by way of dividends.
Winnings from horse races / lotteries.
Employee’s contribution towards staff welfare schemes, any fund set up under the ESIC Act that’s received by the employer from the employees.
Interest on securities like debentures, government securities and bonds.
Interest on compensation.
Rental income other than house property.
Family pension received after the death of the pensioner.
Interest income that is earned other than by way of securities.
Deductions for your taxable amount are available under various sections of the Income Tax Act , 1961.
Section 80C Deductions under this section are only available to individuals and HUF. This section allows for certain investments like NSC, etc. and expenditures to be exempt from taxation up to the amount of Rs. 1,50,000.
Section 80CCC Deductions under this section are on payments made to LIC or any other approved insurance company under an approved pension plan. The pension policy must be up to Rs.1,50,000 and be taken for the individual himself out of the taxable income.
Section 80CCD Deductions under this section are for contributions to the New Pension Scheme by the assesse and the employer. The deduction is equal to the contribution, not exceeding 10% of his salary. The total deduction available under Section 80C , 80CCC and 80CCD is Rs.1,50,000. However, contributions to the Notified Pension Scheme under Section 80CCD are not considered in the Rs.1,50,000 limit.
Section 80D This is the section that deals with income tax deductions on health insurance premiums paid. In the case of individuals, the insurance policy can be taken to cover himself, spouse, dependent children – for up to Rs.15,000 and parents (whether dependent or not) – for up to Rs.15,000. An additional deduction of Rs.5,000 is applicable if the insured is a senior citizen. In the case of HUF, any member can be insured and the general deduction will be for up to Rs.15,000 and an additional deduction of Rs.5,000. A total of Rs.2,00,000 can be claimed as deductions whether the assesse is an individual or a HUF. Section 80DDB This section is for deductions on medical expenses that arise for treatment of a disease or ailment as specified in the rules (11DD) for the assesse, a family member or any member of a HUF.
Section 80E This section deals with the deductions that are applicable on the interest paid on education loans for an education in India.
Section 80EE This section deals with tax savings applicable to first time home-owners. Applies for individuals whose first home purchased has a value less than Rs.40 lakh and the loan taken for which is Rs.25 lakh or less.
Section 80RRB Deductions with respect to income by way of royalties or patents can be claimed under this section. Income tax can be saved on an amount up to Rs.3,00,000 for patents registered under the Patents Act, 1970.
Section 80TTA This section deals with the tax savings that are applicable on interest earned in savings bank accounts, post office or co-operative societies. Individuals and HUFs can claim a deduction on an interest income of up to Rs.10,000.
Section 80U This section deals with the flat deduction on income tax that applies to disabled people, when they produce their disability certificate. Up to Rs.1,00,000 can be non-taxed, depending on the severity of the disability.
Section 24 This section deals with the interest paid on housing loans that is exempt from taxation. An amount of up to Rs.2,00,000 can be claimed as deductions per year, and is in addition to the deductions under Sections 80C, 80CCF and 80D. This is only for self occupied properties. Properties that have been rented out, 30% of rent received and municipal taxes paid are eligible for tax exemption.
TDS or Taxes Deducted at Source – is a system incorporated by the Income Tax Law to deduct taxes before the income has been disbursed to the person earning it. It is charged depending on your income tax slab, at its point of origin. You do not get a full amount from which to deduct an income tax amount and pay it back, but get charged even before you’ve earned your income.
The income tax here is deducted by the payer and remitted to the government on your behalf. TDS on income will not apply if your net taxable income is below Rs.2,50,000 for individuals, Rs.3,00,000 for senior citizens and Rs.5,00,000 for super senior citizens.
It’s important to know which tax bracket one falls under and the investments that can be made to exempt a portion of the income from taxation. A lot of money can be saved through investments, and this helps the flow of funds through investible channels in the economy, thus helping the country develop. Health insurance policies, investments and other deductions can be used to your benefit, if you balance them out well.
Making relevant investments can help save a lot on tax, and earn a lot in eventual interest income. Most tax-saving investments have lock-in periods where the funds cannot be accessed, and in this time compound interest at a rate higher than most savings bank accounts.
Income Tax E-Filing
You can e-file your Income Tax Return, TDS return, AIR return and Wealth Tax Return online. E-filing your return has obvious advantages like the fact that you won’t have to deal with the hassle of paperwork and waste time sorting through it all. You can simply log on to the secure website and e-file your return.
This government website also has provisions for you to submit returns, view forms 26AS, outstanding tax demand, CPC refund status, rectification status, ITR – V receipt status, online application tools for PAN and TAN, e-pay your tax and even has a tax calculator.
Documents Required Before Filing Income Tax Return
Form No.16: Issued by your employer summarizing your income from salary and tax deducted at source.
Form no 16A: Issued by all the payers who have deducted tax while making payment to you during the year. For example Banks where you have FDs.
A/C statements: All your operating accounts during the year for arriving at interest income earned during the year.
Property details: If you have bought any property or put up existing property on rent then details for the rent received and receipts of municipal taxes paid during the year would be required. If the same is purchased through a loan then copy of loan certificates for interest & principal.
Contract Notes: For sale & purchase of shares during the year for calculating capital gains.
Tax Challans: Details of tax payments made during the year in case you have made advance tax or self-assessment payments.
Others: Any other documents for a financial transaction involving tax implications for computing your taxes.
Important Point: You don’t need to submit any of these copies to the I-T department during the process of filing income tax returns, and even originals are also not required to be given to your CA, if you are taking professional help. These documents are required to help you prepare your tax computation and you do need to keep these copies ready in your file/records in case if IT department asks you to furnish the same at a later stage.
Let us understand few important parameters and address a few questions before you go about filing your tax returns:-
1. What is the meaning of filing tax returns? Return of Income i.e. Tax Filing is a process, wherein a person reports/declares to the government about all their income and taxes as paid by them. It is like an NOC from your college library, which you have to take before leaving your college even though you had never visited the library. It establishes the fact that you do not have outstanding obligation, or if at all there were any dues, they had been cleared.
2. Who needs to file Income tax Return? A person is required to file his or her “Return of Income”, if their taxable income exceeds INR 2.50 lakhs in a particular financial year; so, anyone earning more than basic exemption limit needs to file his or her tax return by the due date as prescribed by the government.
3. What are the benefits of filling income tax returns (ITR)? Filing returns or not has never been a choice, as it is a legal obligation and must be fulfilled by everyone who falls under the prescribed category as mentioned above. Though apart from a legal obligation, filing tax return is always helpful.
4. My tax is already deducted at source by my employer and paid to the government, then why do I need to file income tax return? Although tax has been deducted and there is no further liability to pay tax, you have to compulsorily file your income tax return if your income exceeds the basic exemption limit.
5. I have not been able to submit my Investment details for e.g. life insurance premium etc. to my employer and excess tax has been deducted. So can I still declare & claim the benefit? Yes, you can claim these benefits while filing Income Tax returns and can submit your refund claim.
6. Why file Income Tax Return?
Income tax is a tax paid to the central government on personal income. The Income Tax Act, 1961 under Section 139 makes it obligatory upon any person to file return if the person’s total income during the year exceeded the amount which is not chargeable to income-tax(also called as the exemption limit). When one files one’s tax returns every year, one manages to create a financial record with the tax department. This financial / tax history is viewed and used by agencies , such as when one avails any kind of loan (home, personal, vehicle loan etc), when one applies for VISA etc. If a person who is legally bound to file his return does not file it then Penalty of Rs. 5000 is imposed for non-filing of return within the assessment year. Interest is also chargeable for non-filing or late filing.
You can also be prosecuted if the tax payable (net of advance tax and TDS) is above Rs 3,000. You can also be imprisoned for three months to three years, besides being fine.
How to fill Income Tax Return
Offline You could either hire a Chartered accountant(CA) who will do the entire groundwork as well as compute your tax liability, or you can do it yourself. With CA you will provide the information required above. He will do the calculation, ask you to pay any extra tax amount due and sign on the relevant ITR form. The CA would also take care of the task of submitting the from to the income tax office concerned and provide you the acknowledgement. The CA may typically charge you anywhere between Rs. 200 and Rs. 3,000, depending on how varied your sources of income are and other factors such as complexity in calculating tax returns for ex: capital gains.
If you do it yourself then you would need to download the relevant ITR Form from www.incometaxindia.gov.in Fill up the required details in the form, submit it at the ward concerned at the income-tax office and collect the acknowledgement.
Online You can use Indian Govt tax e filing website and file your Income Tax Online, Here is a step by step guide for E-Filing your Income Tax
Filing Your Income Tax after The Due Date If due to some unforeseen circumstances, you couldn’t file your income tax return within the due date [i.e. time allowed by section 139(1)]
You can still file your income tax return. However, this extended time comes with conditions and consequences. The extended time allowed to you by the income tax act is one year from the end of the relevant assessment year. So for example, if you missed the due date for filing your tax return for the financial year 2014-15, you can still file a belated return on or before 31st March
Apart from this, you can also file a return for FY 2014-15 by 31st March 2016 in order to avoid paying the penalty of Rs 5,000 along with interest.