Income Tax is a Direct Tax that is levied on the net income earned by an individual, company or any other person. The amount that is calculated as income tax is calculated as a percentage on the earnings of the said person or entity. Each person is required to declare their earnings to the government by way of an annual income tax return and pay their taxes due as per the applicable laws. Non-payment of tax and non-filing of tax returns is punishable by the law.
In India – income tax is levied by the Government of India under the Income Tax Act, 1961. The money collected into the government coffers is used to pay for expenses on infrastructure, development, fund other public services and other such expenses needed to perform the government tasks and obligations that are required to run a country.
India, like most other countries, employs a progressive system of taxation, where the rate of tax is higher for high income earners. There are a series of deductions available on the tax payable in respect of certain expenses or investments. The savvy taxpayer makes note of these and does adequate tax planning to optimise their tax liability.
Broadly, there are two kinds of taxes:
Direct Taxes are taxes levied directly on the person who is ultimately bearing the cost of the tax. Income Tax is the most prominent form of Direct Tax.
Indirect Tax are taxes that are levied indirectly on goods/ services such as Goods and Service Tax on production of goods, transport of goods, sales of goods and services etc. These taxes are levied on the person providing these goods/ services but are borne by the ultimate user of the goods and services. GST, Professional Tax, Customs Duty etc. are examples of Indirect taxes.
Within the purview of Income Tax (IT) which is a Direct Tax, there are certain terms to be understood with respect to taxation. Some of these are:
Assets are considered long term or short term on the basis of what they are and how long they are held.
Shares and securities of a company that are listed on a recognized stock exchange, units of UTI, units of equity oriented mutual funds and zero coupon bonds are considered long term when they are held for a period greater than 12 months.
Immovable property such as land, building, house etc. are considered long term when they are held for a period greater than 24 months.
Movable property such as jewelry and other assets are considered long term when they are held for a period greater than 36 months.
This distinction is important as the income tax rates applied to capital gains differ greatly.
Where short term capital gains are taxed at 15% or the rate of the individuals slab as applicable, long term capital gains are taxed at 10%/ 20%. Also, the long term capital gains provides the option of indexation benefit, which is basically the cost of the asset adjusted for inflation so that only real gains are taxed.
Dividend distribution tax is paid by an Indian Company when it pays the dividend to its shareholders. This tax is paid at the rate of 15% by the company. The dividend income in the hands of the recipient is tax free. However dividend income exceeding Rs. 10,00,000/- in a year from Indian Companies is subject to a Dividend Tax of 10% in the hands of the recipient. Dividends received from foreign companies are subject to tax as per the slab of income of the taxpayer.
TDS means that the person who is responsible for making payments to you will deduct tax before paying you the balance amount. In this way, tax is deducted at the source of income itself. On deducting the tax, this amount has to be paid by the person deducting into the governments account within the stated time period and they will issue you a TDS certificate.
This TDS certificate is proof of the tax having been deducted from your income and the proof you need to claim the same as credit.
Examples of payments on which Tax is deducted at source is Salary, interest on fixed deposits in banks, other payments to vendors exceeding the limits specified etc.
India follows a progressive system of taxation. This basically means that the income tax rates are determined as per threshold amounts set by the government and for lower amounts a lower rate of tax is levied and as the income slab goes higher the rate of tax levied is greater.
In India the person or entities being taxed are broadly divided into three categories.
The basic income tax slabs on which the Income is taxed is as follows:
| Income Tax Slab(in Rupees) | Tax Rate for Individual Below the Age of 60 Years,for AOP and for BOI |
|---|---|
| 0 to 2,50,000* | Nil |
| 2,50,001 to 5,00,000 | 5% of total income exceeding 2,50,000 |
| 5,00,001 to 10,00,000 | Tax Amount of 12,500 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000 |
| Above 10,00,000 | Tax Amount of 1,12,500 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000 |
The Individual taxpayers are further subdivided into senior and super senior citizens. Senior citizens are from 60 – 80 years of age and super senior citizens are above 80 years of age. The income tax slab rates applicable for senior citizens and super senior citizens are as follows:
| Income Tax Slab | Senior Citizens (between 60 years – 80 years) | Super Senior Citizens(above 80 years) |
|---|---|---|
| Up to 3,00,000 | Nil | Nil |
| 3,00,001 to 5,00,000 | 5% of income exceeding 3,00,000 | Nil |
| 5,00,001 to 10,00,000 | Tax Amount of 10,000 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000 | 20% of income exceeding 5,00,000 |
| Above 10,00,000 | Tax Amount of 1,10,000 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000 | Tax Amount of 1,00,000 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000 |
In addition to the basic tax - surcharge is also applicable slab wise. The surcharge is calculated on the Tax amount. If the income is:
In the Union Budget 2019-20, a new surcharge on income tax for super-rich individuals has been levied. So individuals earning:
In addition to the above, Health & Education Cess of 4% is applicable to the income tax plus surcharge (if applicable).
Firms are taxed at 30% tax plus surcharge of 12% where income is more than 1 crore and cess of 4% shall be levied on tax +surcharge (if applicable).
Companies are taxed according to whether they are Domestic Companies or Foreign Companies.
Domestic companies with annual turnover of up to Rs 400 crore pay income tax at the rate of 25%. For other domestic companies, the tax rate is 30%. However, domestic companies can avail an option to pay tax at the rate of 22%, provided they do not claim certain deductions under the Income Tax Act.
Earlier there used to be separate income tax slabs for women and men. For instance, back in 2010-11, the basic exemption which women (aged up to 65 years) could claim annually was Rs 1.9 lakhs. Whereas for men (up to 65 years), the basic exemption that could be claimed annually was Rs 1.6 lakhs
We will be looking at how to calculate your income and tax - but remember, beyond the basic calculations there are several clever investments that can be made which can create a substantial savings from your tax liability. Not only that - these modes of investment will also create the financial security and savings that you need for the future.
Let’s take an example:
Mr Vyas has taxable income of Rs. 10,00,000/-
He has at the age of 45 invested in a ULIP life insurance policy where he pays a premium of Rs.1,50,000/- annually. The ULIP policy he has chosen will give him life cover for 15 years as well as a maturity amount of double his investment at the assumed reasonable rate of 9% returns. The dual income tax benefit of ULIP is that not only is the 1,50,000 premium deductible from his taxable income - but the benefit shall accrue at maturity along with the bonus are all tax free in Mr. Vyas’s hands under Section 10(10D) of the Income Tax Act. So on a yearly investment of 1,00,000; Mr Vyas received insurance cover for a period of 15 years - an expected maturity benefit of Rs. 30,00,000/- and bonus of over 1,00,000/- at a modest calculation rate of 8%. The income tax benefit of the maturity proceeds is over and above this calculation.
He also pays an amount of Rs. 50,000/- into PPF. By making the above investments Mr. Vyas can take the entire 1.5 lakhs of deduction available under section 80C.
A further Rs.50,000/- in NPS will be allowed under section 80CCB(1B), taking the entire deduction amount to 2,00,000/-.
Just by taking advantage of one section 80C, Mr. Vyas has reduced his taxable income from 10,00,000 to 8,00,000 and saved around 60,000/- in taxes. Read further to know more about all such benefits and more.
For calculating your Income Tax Payable, there are certain broad steps to be undertaken.
Let’s understand the steps in some detail.
Income is calculated under the following heads:
Income from Salary – All income from an employer that is received as salary is to be offered as Salary income earned. This is detailed in the Form 16 given by the employer to the employee.
Income from Capital Gains – Income earned on sale of capital assets is taxable under the head of Capital Gains. Capital Assets include assets such as land, building, jewellery, stocks, bonds, etc. The long term capital gain tax rate for AY 2020-21 is 10%/ 20% plus cess.
Income from house property – Rental income earned from owned house property is taxable under this head.
Income from business / profession – The profits and gains earned from any business or profession are taxable under this head.
Income from other sources – All other income that is not included under the other heads of income fall under this residual head of income. This includes interest income, pensions received, dividend received, winnings from lottery or gambling, gifts received etc. The classification of income is important from the perspective of filing returns. All income is calculated on the basis of the financial year as defined in the Income Tax Act as the twelve-month period from April 1st of a year to March 31st of the following year. For example, financial year 2019-20 would mean the period between 1st April 2019 to 31st March 2020.
The Income Tax Act allows some deductions from the Income that has to be taxed. This is the step that can help you save a lot of tax on your income for the year. Sections 80C to 80U of the Income Tax Act, 1961 specifies these deductions. In addition, there are other deductions under Section 16, 24 etc which could be availed.
So what are these deductions from taxable income and how can a person get the income tax benefits of these?
Spend on a good life insurance policy – not only does a good life insurance policy provide coverage to your loved ones in the event of your death, but it makes for good financial planning as well. The premium paid for life insurance policies of the taxpayer for self and for his dependent wife and children are deductible from tax under Section 80C. This amount is deductible if the annual premium is less than 10% of the sum assured. Section 10(10D) of the Income Tax Act, 1961 provides for certain exemptions with respect to proceeds from life insurance policies. It allows the entire maturity proceeds or surrender proceeds of the policy which include the sum assured along with any bonus completely tax free to the recipient, subject to prescribed conditions. So as you can see payments paid towards life insurance policies have a twofold income tax benefit – for the years while paying the premium as well as for the maturity proceeds.
Tax Saving Investments under Section 80C - There are certain financial investments which has been listed by the Income tax laws as deductible from your taxable income. The key motive of this incentive seems to incentivize people to perform proper financial planning and structuring for present and future. The key point to be noted is that you are creating investments for yourself and receiving income tax benefits on them. However, this benefit is given to individuals and Hindu Undivided Families only.
Investments can be made under section 80C to the extent of Rs 1,50,000. Apart from this, investment in notified pension schemes provide additional benefit to the extent of Rs 50,000 under section 80CCD(1B). This total of Rs.2,00,000/- in investments can save you an amount of Rs.60,000/- if you fall under the 30% tax bracket.
Some of the key tax-saving investments provided under Section 80C are:
Let’s take an example of a person who invests in ULIP (Unit linked insurance plan).
ULIP is the purchase of units that are invested over a diverse range of securities by trained investment professionals. ULIP is also a tax saving investment. It differs from pure investment in equity linked savings scheme funds as it includes an insurance element as well. This Insurance element causes the ULIP charges to be higher but only in the short run and this is also due to the mortality cost that they include. The good part is that ULIP’s are however required to maintain an overall charge similar to any other mutual fund. So over the long run the ULIP will give the person similar returns, at a similar cost – with the huge added benefit of insurance cover. This is beneficial for long term investments than for short term investments.
An additional income tax benefit on ULIPs over ELSS tax saving investments is that in addition to the Section 80C deduction - the ULIP maturity amount is tax free in the hands of the investor under section 10(10D) subject to minimum lock-in period of five years.
So within the options available for claiming deduction under Section 80C there are many choices to be taken into consideration – for maximum benefit. There are also other tax saving option other than Section 80C which are explained below.
Spend on a great health insurance policy for self and family: The health care costs have left no doubt in anyone’s mind that medical insurance is an absolute necessity for every single person. The lack of adequate medical insurance has brought many an unfortunate to the brink of financial ruin. The Government in its efforts to encourage the purchase of medical insurance has offered a tax exemption under section 80D.
Under Section 80D an amount of Rs.25,000/- is allowed as a deduction from taxable income when this amount is paid for medical insurance of self, spouse and children. In case of tax payer being above the age of 60 years the higher deduction is shall be available for Rs.,50,000/-.
For a person who pays for health insurance of dependent parents an additional Rs.25,000/- is allowed as deduction. In case the parents are aged above 60 years then a deduction of Rs.50,000/- is allowed.
In total a maximum deduction of Rs.1,00,000/- can be claimed under this section which gives a tax saving of over 30,000/- in the 30%slab. As you can see these savings can be quite substantial. Using an income tax calculator will help you know the benefit you can gain.
You can also avail deduction of Rs. 5,000 for the cost incurred for preventive health check-ups for self, spouse, children or parents. This amount is over and above premium limit of Rs 25000/50000 specified above.
Make a note of any expenses incurred for a disabled dependent relative. Under Section 80DD – any expenses incurred for a disabled dependent – depending on the extent of their disability is allowed to be claimed as a deduction from taxable income. The expenditure incurred for their treatment as well as maintenance can be claimed under sections 80DD and 80DDB respectively.
Under Section 80DDB - If persons for whom medical treatment is taken are:
Upto 60 years – a deduction of Rs.40,000/- is allowed. Over 60 years – the deduction allowed is Rs.1,00,000/-. Under Section 80DD - If the disability if more than 40% but less than 80% then the deduction allowed is Rs.75,000 For disability of 80% or more – which is classified as a severe disability – a deduction of Rs.1,25,000/- is allowed.
Interest paid on loan taken for higher education: In another case we see tax deductions being held out as an incentive for reform, under Section 80E of the Income Tax Act, 1961. In case of loans taken for higher education of self or spouse or children from approved financial institutions, the interest paid thereon is allowed as deduction. It is better to plan your finances and take a loan for education for the period where the benefit is available.
Interest paid on loans taken for purchasing a single residential property is also deductible from tax under Section 80EE. So it might be better to take a housing loan if you don’t already have a house property in your name as a tax planning measure.
Donations made to a recognized institution under 80G: If you donate an amount every year – findi a recognized institution that you can donate to makes your donation amount deductible from Taxable income. The deduction is available depending on the charity chosen. The deduction allowed can be 50% or 100% of the amount donated depending on the charity donated to and the qualifying amounts. The qualifying limit is 10% of the gross total income of the person.
For example donation to the Prime Minister’s relief fund is eligible for 100% deduction without any qualifying limit whereas donation to associations to promote family planning or sports allows 100% deduction subject to a maximum limit. In some examples donations to certain charities gives you 50% of the amount donated as deduction. For example donation to PM’s drought relief fund gives 50% deduction without any qualifying limits and the donation to some other approved charity gives 50% deduction with qualifying limit.
Interest received on savings bank account held by an individual: Section 80TTA allows interest income from saving bank account/s to be taken as a deduction subject to a maximum amount of Rs.10,000/-. This is only for Individuals and HUF’s.
Specific Deductions: There are many sections that allow specific deductions for example for an author on royalty income or to a patent holder or some other such. It is a good idea to consult a tax practitioner with full details of the sources of income so they might guide you on all possible tax saving measures that can be taken.
Section 24 allows deduction of interest paid for purchase of house property: in case of house property bought the interest expense paid on the purchase of it can be claimed as a deduction upto Rs. 200000 under Section 24.
As per the slab rates and basic rates discussed for all kinds of assessee’ s each person’s tax liability will be calculated on the basis of slab rate as applicable. Once the listof sources of income are ready and the deductions have been claimed. However, income from Long term capital gain and Income from gambling would be taxed at different rates of tax and the remaining income is taxed as per the slab rates given.
Tax rebate is a deduction allowed from the tax calculated as payable to government. This rebate is given under Section 87A of the Indian Income Tax Act, 1961. Under Section 87A a tax rebate is allowable to those Individuals whose total annual income falls below Rs.5,00,000. This rebate is limited to a maximum of Rs.12,500/-.
This in effect causes that - no tax is payable for income under Rs.5,00,000/- of Income but it is important to note that it is still essential to file a return of income. Individuals with income exceeding Rs.5,00,000/- do not get the benefit of any rebate under section 87A.
By way of TDS, TCS and advance taxes has to be deducted from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable. All certificates of Tax deducted at source, tax collected at source and challans of advance tax paid have to be maintained securely. Once the tax liability is determined the prepaid sums of tax has to be deducted from the payable amount and the balance amount is either the amount left to be paid or they may be a refund due to you, which will be claimed at the time of filing of the Tax Return.
Income Tax Return is an income tax declaration which is filed by all taxpayers stating the income – sources of income, tax due and tax paid during the year. There are seven ITR form types notified by the Income Tax Department – they are ITR 1Sahaj Form, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. An Income tax payer must know which form they should fill in for filing their income tax returns. Form applicable dependents on the individual entity and their sources of income.
A simplistic guide is that:
- is used by resident individuals with income that is less than 50 lakhs. And people who have income from Salary, income from other sources and have only one house property. It is the most common ITR type for salaried people with income less than 50 lakhs.
- is used by all who would file ITR 1 but have income greater than 50 lakhs. Also people who have Income from capital gains, Income from house property, Hold directorships in a company or hold unlisted equity assets, or foreign assets and/or have foreign income.
- When in addition to income from ITR 2 requirements a person also has Income from Business / Profession or is a partner in a firm and their income is greater than 50 lakhs then ITR 3 must be filed.
- is filed for all sources of income as per ITR 1 and if the Presumptive income is greater than 50 lakhs.
- Is to be used by Firms, LLP’s, AOP’s and BOI’s.
- is to be used by Companies who are not claiming exemption under Section 11.
- is to be used by Persons and companies who claim exemption under Sections 139 of the Income Tax Act, 1961.
There are no separate ITR form for housewife or senior citizens. The forms are the same and based on sources of income. You can look up your sources of income and decide to file ITR for housewife, senior citizens or any other categories. You should file an income tax return if your income is above the exempt income tax limit, or you have lottery winnings, or you wish to claim income tax refund on tax paid, to create a proper financial base which helps with obtaining loans and visa etc. and if the tax payer is a company or firm then irrespective of profit or loss it is mandatory to file ITR.
By adhering to these rules you will find it easy to comply with the requirements of the income Tax Act, 1961 and build a good financial base for yourself. You will find online income tax calculators to assist you and you may file ITR return online easily as well. There are detailed instructions on how to file income tax returns online for salaried employees and non-salaried taxpayers.
Despite the black reputation that filing tax returns have attained – they are an important part of the government process. Not only would you be fulfilling your responsibility by you would create a solid base with your declared income on which you can start collecting legal assets. In case you have missed filing your return you can get income tax extension and there are also instructions on how to file income tax returns for last 3 years if you would like to right an earlier wrong.
Filing your tax returns is a good idea and one to be embraced to get the income tax benefit. There is an income tax helpline available for various general tax issues 1800 180 1961 as well as other helplines for specific issues.
Form 16 is the form given to a salaried employee by his employer. This form contains all information about the employee such as his name, address, his PAN number, his TAN and other details such as details of employment such as a period of employment, joining date etc. In Part B of Form 16 the form mentions the basic salary, all allowances given, HRA calculation for income tax and other deductions allowed. It includes details of payments in EPF, tax deducted and paid into government account as TDS and balance salary paid to employee. Form 16 is the only document a salaried employee needs to be able to prove income and claim TDS.
Form 16A is what the income taxpayer receives from person who deducts TDS. This form contains details such as name and address, PAN details, nature of payment, amount of payment, TDS deducted and paid along with income tax challan details and signature of person responsible for deducting and paying tax into government account.
This is the form that is required to claim the tax deducted at source as tax paid against any dues. The Form 16 online availability is now a convenient form for taxpayers. The traces form 16 can be generated from the TRACES website where all details of TDS and TCS are input by the deductors. The person has to put in their TAN number and other details as required and request the Form 16 data to be downloaded.
Pensioners whose pension exceeds the taxable limit can ask the disbursing bank to provide form 16 for pensioner’s certificates to make it easy to file their returns of income. Both these forms are important for you to file your return of income smoothly and easily.
Income tax returns have to be filed by person whose annual income exceedsminimum amount not subject to tax. Companies and firms have to file their income tax return without fail and regardless of profits or losses incurred. Filing an income tax return is also necessary even if you have no tax to pay but need to claim your tax refund for taxes deducted at source.
So how do you file your Income Tax Return. You need to first create your computation of Income Tax. You have to file your Income tax return online or by using Tax utilities. The correct form as applicable should be use for filing returns.
All details have to be filled out in all the requisite columns of the forms. Be sure that all the fields are filled out carefully. At the time of online filling, TDS section will get auto populated and you will have to verify that it is correct.
Thereafter in case of online filing of ITR - you should check all details and if there is any tax payable immediately pay the same and enter the details of tax paid. Your tax liability should show as nil. Upload the digital signature if needed. And as a last step e verify your return filed.
An income tax refund is due to a person when the amount of the tax already paid to the government is higher than the tax liability computed. Under the electronic system of filing the tax returns - the tax refund is generally sent to you within 120 days of verifying the return of income filed. So the sooner you file the ITR the quicker your refunds will get processed. The refund status can be checked online as well.
When the tax refund amount is higher than 10% of tax payable there is compulsory interest payable by the income tax department to the assesse. In such cases you may note your refund is higher than expected. The rate is about 0.5% per month or part of month.
In case of any glitch where the refund has not been processed one can follow up with the jurisdictional assessing officer.
Tax Evasion is covered under Chapter XXII of the Income Tax Act, 1961 and is considered a criminal offence. While filing the return of tax it is important to abide by the intent as well as the letter of the law. There are several acts that are specifically mentioned in the Income tax Act that are considered offences and carry severe fines, penalties as well as prosecution.
These offences may arise on failure to fulfill basic requirements – such as not filing return of income in a timely and honest manner, failure to pay taxes on time, failure to pay tax deducted at source or tax collected at source on time, and such. Or maybe willful – such as a willful attempt to evade tax, failure to comply with notices, failure to produce books of accounts, false statements in return, falsification of books, abetment in filing wrongful return etc.
What is important to know is that all such acts carry a heavy fine and penalty with the possibility of prosecution.
So whether it be a simple error or deliberate falsification – the returns if scrutinized would likely to result to applicability of provisions as mentioned in Sections 275A to Section 280C of the Income Tax Act, 1961.
Penalties are payable under the Indian Income Tax Act, 1961 in certain cases. There is Penalty for late filing of income tax return, penalty for late filing of TDS return, penalty for non-filing of return of income and also penalties payable for:
(ULIP)
