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What Is Income Tax?

 

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 return³ and pay their taxes due as per the applicable laws. Non-payment of tax and non-filing of tax returns³ 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.

 

Income tax overview

 

In 1860, income tax was introduced in India for the first time by Sir James Wilson, the pre-independence finance minister of India. He enforced the Income Tax Act, 1860 to cover up for the losses sustained by the government due to the military mutiny of 1857. From time to time, the act was replaced with different licence taxes. In 1886, a separate Income Tax Act was passed, which was further amended by the Income Tax Act of 1918 and 1922. The Income Tax Act of 1922 became highly complicated due to several changes. Hence, the final Income Tax Act of 1961 was introduced on April 1, 1962.

 

Presently, the Income Tax Act of 1961 is applicable in India. Over the years, the act has undergone several changes, even those of far-reaching nature, as proposed by the Union Budget every year. Currently, the act levies income tax under the following five heads: 

 

  • Income from Salary 

  • Income from House Property 

  • Income from Profits and Gains of Profession 

  • Income from Capital Gains 

  • Income from Other Sources 

 
As of today, income tax is one of the most critical sources of revenue for the government. The government uses the money collected from taxes for developing infrastructure, improving healthcare and education facilities, enhancing defence equipment, and promoting other welfare schemes.  
 
 

Income tax rules

 
The Income Tax Act, 1961 was introduced for the sole purpose of governing and administering income tax in the country. However, in 1962, specific Income Tax Rules were laid down to ensure proper enforcement and application of the Income Tax Act, 1961. The Income Tax Rules cannot overrule the provisions of the Income Tax Act and must be read in combination with the act.  
 
 

Who are taxpayers?

An Indian citizen below the age of 60 years, earning more than ₹2.5 lakhs annually is liable to pay income tax as per a pre-determined percentage. Indian citizens above the age of 60 years and earning more than ₹2.5 lakhs are liable to directly pay taxes to the Government of India.  

 

Apart from an individual, the following entities also have to pay taxes on their annual income: 

 
  • Hindu Undivided Family (HUF) 

  • Association of Persons (AOP) or Body of Individuals (BOI) 

  • Local authorities 

  • Corporate firms and companies 

  • Artificial judicial person 

 

What Are The Types Of Taxes Levied In India?

Broadly, there are two kinds of taxes:

  • Direct tax. And
  • Indirect tax.

 

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:

 

 

Long term Capital Gain Tax and Short Term Capital Gain Tax

 

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.

 

 

Long term Capital Gain Tax and Short Term Capital Gain Tax

 

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 free³. 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: Tax Deducted at Source

 

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.

 

TDS Rates Chart

 
TDS Rates for Residents as per FY 2020-21 
 
 
ParticularsLimit (in ₹)TDS Rate (in %)
  From 01/04/2020 to 13/05/2020From 14/05/2020 to 31/03/2021
Salaries Normal slab rateNormal slab rate
Premature EPF withdrawals50,0001010
Interest on securities
(8% Taxable Savings Bonds, 2003, 7.75% Taxable Savings Bonds, 2018)
10,000107.5
Interest on securities
(local authority, listed debentures, others)
5,000107.5
Dividends5,000107.5
Interest from a banking co., a co-operative society or a post office40,000107.5
Interest others5,000107.5
Lottery winning10,0003030
Horse race winning10,0003030
Contractor (one-time)
Individual/HUF
Others
30,000 
1
2
 
0.75
1.5
Contractor (consolidated annual payment)
Individual/HUF
Others
1,00,000 
1
2
 
0.75
1.5
Insurance commission
Company
Other than company
15,000 
5
10
 
3.75
10
Life insurance maturity1,00,00053.75
NSS2,500107.5
Repurchase mutual funds 2015
Lottery commission15,00053.75
Brokerage15,00053.75
Rent
Plant/Machinery/Equipment
Land/Building/Furniture
2,40,000 
2
10
 
1.5
7.5
Transfer of immovable property except agricultural land50,00,00010.75
Rent by Individual or HUF50,000/month53.75
Joint development agreement 107.5
Professional fees30,000107.5
Technical fees30,00021.5
Call centre operator fee30,00021.5
Director fee 107.5
Payment of income for units of:
mutual fund
administrator
specified company
5,000107.5
Compensation on transfer of immovable property except agriculture land2,50,000107.5
Income from business trust 107.5
Distribution of rental earnings 107.5
Investment fund income 107.5
Individual/HUF
Company
Others
25
30
30
 18.75
22.5
22.5
 

 

Income tax slabs & rates 2020-2021

 
 
New Tax Structure 
 
 
Annual IncomeNew Tax SlabOld Tax Slab
Up to ₹2.5 lakhsNILNIL
₹2.5 – ₹5 lakhs5%5%
₹5 – ₹7.5 lakhs10%20%
₹7.5 – ₹10 lakhs15%20%
₹10 – ₹12.5 lakhs20%30%
₹12.5 – ₹15 lakhs25%30%
Above ₹15 lakhs30%30%

 

 

The new tax regime allows individuals and HUFs to pay lower taxes without claiming deductions under different sections. Unlike the old tax regime, the new tax regime does not differentiate taxpayers into age groups.  

 

Additionally, new tax regime has not replaced the old tax structure; it is an option available to the taxpayers. 

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.

  • Category 1: includes an Individual, Hindu Undivided family (HUF), Association of Persons(AOP) and Body of Individuals(BOI).
  • Category 2: Firms Category
  • Category 3:  Companies

 



 

Category 1 entities are taxed according to slabs of Income.

 

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 5,00,0005% of total income exceeding 2,50,000
5,00,001 to 10,00,000Tax Amount of 12,500 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000
Above 10,00,000Tax 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 SlabSenior Citizens (between 60 years – 80 years)Super Senior Citizens(above 80 years)
Up to 3,00,000NilNil
3,00,001 to 5,00,0005% of income exceeding 3,00,000Nil
5,00,001 to 10,00,000Tax 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 10,00,000Tax Amount of 1,10,000 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000Tax 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:

  • Above Rs. 50,00,000 and up to Rs. 1 crore – then 10% surcharge on income tax is applicable.
 
  • Above Rs. 1 crore – then 15% surcharge on income tax is applicable,

 

 

In the Union Budget 2019-20, a new surcharge on income tax for super-rich individuals has been levied. So individuals earning:

  • Between Rs. 2 crores and up to Rs. 5 crore – then a surcharge on income tax of 25% is applicable
  • For Above Rs. 5 crore – surcharge on income tax of 37% is applicable.

 

 

In addition to the above, Health & Education Cess of 4% is applicable to the income tax plus surcharge (if applicable).



 

Category 2

 

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).



 

Category 3

 

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.

 

  • Foreign Companies are taxed at the rate of 40%. Surcharge on income tax is levied if the income is between 1 crore and 10 crores at the rate of 2% and with income higher than 10 crores at the rate of 5%.
  • Cess shall be levied at 4% of the amount of tax + surcharge(if applicable).

 

 

What About Separate Income Tax Slabs For Women And Men?

 

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

 

Currently there are no separate income tax slabs for men and women. The normal slab rates applicable to individual is applicable to all.

 

Exceptions for tax slab

The income tax slab rates are not applicable for all types of income. Income from Capital gains is taxed differently as per the asset owned by the individual and the tenure of ownership – long-term or short-term.

Capital gain tax rates

Type of Capital Asset/GainsHolding PeriodTax Rate
(as per applicable slab rate)
House propertyMore than 2 years

Less than 2 years
20%
Equity mutual funds
(Capital gains above ₹1 lakh)
More than 1 year

Less than 1 year
10%

15%
Debt mutual fundsMore than 3 years

Less than 3 years
20%
Shares

Securities Transaction Tax (STT) paid (Capital gains above ₹1 lakh)

STT unpaid
 

More than 1 year

Less than 1 year
 

10% (long-term), 15%(short-term)

20%
Fixed maturity plans (FMPs)More than 3 years

Less than 3 years
20%

 

How To Save Tax³?

 

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 ₹1,00,000/- annually. The ULIP policy he has chosen will give him life cover for 15 years as well as a maturity amount.  

 

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 ₹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. 

 

Additionally, he is paying ₹10,000 as premium for his term life insurance plan, which he had purchased 5 years ago, with a sum assured of ₹50,00,000 and a tenure of 20 years. Here, he gets pure insurance cover at low premium costs. Also, the premium paid is deductible from his taxable income under Section 80C. 

 

He also pays an amount of ₹40,000/- into PPF, which is also deductible under Section 80C. 

 

By making the above investments Mr. Vyas can take the entire ₹1.5 lakhs of deduction available under Section 80C. 

 

A further ₹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. 

Tax benefits on life insurance

 

Life insurance is a great investment because it protects you and your family as well as helps you save tax. As per the Income Tax Act, 1961, the premiums you pay towards a life insurance policy are exempt from taxes up to ₹1.5 lakh under Section 80C. Taxation relief is allowed on life insurance policies purchased for self, spouse, or dependent children.  

 
 

However, you must pay premiums against these policies from your income. Moreover, the total policy premiums must not exceed 10% or 20% of the sum assured for policies purchased after April 1, 2012, and before April 1, 2012, respectively.  

 
 

Life insurance policies purchased for a disabled family member are free from taxes under Section 80C, provided the premiums do not exceed 15% of the sum assured.  

 
 

The following plans enjoy tax benefits under Section 80C of the Income Tax Act against the premiums paid: 

 
  1. 1. Term Insurance Plans

  2. 2. Unit Linked Insurance Plans

  3. 3. Guaranteed Returns and Income Plans

  4. 4. Child Insurance Plans

  5. 5. Retirement Insurance Plans
 
 

Maturity proceeds and death benefits received from life insurance plans with maturity benefits are also exempt from taxes under Section 10(10D) if the premiums do not exceed 10% of the sum assured.  

 
 
For ULIPs, the maturity payouts are tax-free under Section 10(10D) if the total annual premium in a financial year does not exceed ₹2.5 lakhs. If the total premium exceeds ₹2.5 lakhs, the maturity payouts will be considered as capital gains and taxed accordingly. 
 
 

Our plans that help you save tax

 
 
Edelweiss offers various life insurance plans that help you save on taxes. These include: 
 
 
 
Edelweiss Tokio Life Zindagi Plus planEdelweiss Tokio Life GCAPEdelweiss Tokio Wealth Secure Plus plan
Offers comprehensive protection for you and your family along with COVID-19 cover.Provides you life cover, protection against critical illness along with guaranteed returns.Protects you till you are 100 years old and also allows you to include your partner and children in the same plan.

 

 
 
 

 

How to calculate your income tax

 

For calculating your Income Tax Payable, there are certain broad steps to be undertaken.

 

  • Step 1: Calculate your total income.
  • Step 2: Deduct all allowable deductions from Income as a good tax planning practice.
  • Step 3: Apply the appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.
  • Step 4: Deduct the Tax Rebates allowable under the Income Tax Act.
  • Step 5: Deduct taxes already paid by way of TDS, TCS and advance taxes from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable.

 

 

Let’s understand the steps in some detail.

 

Step 1: Calculate your Total income

 

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.



 

Step 2: Deductions from Taxable Income

 

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 benefits³ 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 bonus⁵ completely tax free³ 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 Saving³ 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 benefits³ 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:

 

  • Premiums paid towards Life Insurance (for self, spouse or dependent children),
  • ULIP or deferred annuity plan deposit (for self, spouse or dependent children)
  • Fixed Deposits made for a period of five years,
  • Public Provident Fund (PPF) contributions or contribution made by employee to approved Superannuation Fund
  • Investments in NABARD Bonds,
  • Investments with Post Office in their post office saving schemes for tax benefit , or senior citizen savings schemes (SCSS)
  • Investments in National Savings Certificates – for current year investment and the accrued interest.
  • Investment in tax saving³ mutual fund schemes which are linked to equity markets such as ELSS funds, notified pension funds or others.
  • Certain expenses are also included such as for:
    • Tuition fees paid for two children
    • Repayment of Principal component of housing loan
    • Stamp duty, Registration expense or other expenses for residential house

 

 

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 saving³ 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 saving³ 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.



 

Step 3: Appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.

 

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.



 

Step 4: Deduction of the Income Tax Rebates allowable under the Income Tax Act.

 

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.



 

Step 5: Deduct the Taxes already paid:

 

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 Calculator

 

A taxpayer can calculate their income tax manually or use an online income tax calculator. The rate of income tax is determined as per the annual income in the income tax slab. For instance, for a salaried taxpayer, the income from salary is calculated by including:

 

  • Basic income 

  • House rent allowance (HRA) 

  • Transportation allowance 

  • Special allowance 

 
Further, salary components like leave travel allowance (LTA), telephone bills, etc., are exempt from taxes. The taxpayer can claim HRA deduction, provided they live in rented accommodation. 
 

 

What are the different taxable heads of income?

 

The Income Tax Act, 1961 levies taxes on income from the following sources:

 

  • Income from salaries: Income received by an employee from an employer is categorised in this head. If the employee is below the taxable income limit, the employer will withhold taxes. All deductions made from the salary, all exemptions granted, and the net income paid are mentioned in Form 16 generated by the employer.

  • Income from capital gains: All income earned from the sale of capital assets owned by the taxpayer are categorised in this head. Capital assets include land, building, bonds, stocks, debentures, jewellery, etc.

  • Income from house property: Rental income received by the taxpayer from their house property falls in this category. However, the house property must not be used for business or professional purpose.

  • Income from business: All profits earned from a business or by providing professional services are included in this category. Such income is taxed as per applicable tax slab rates. 

  • Income from other sources: Any income earned by the taxpayer from sources other than the ones mentioned above is listed in this category. Some of these incomes include:
    • Winning from horse race or lottery

    • Dividends

    • Pension after the pensioner’s death

    • Rental income (other than house property)

    • Gifts

    • Interest on government bonds, securities, etc.
       

 

What are income tax returns?

 

All Indian citizens with a source of regular or irregular income need to file their income tax return (ITR) every financial year. Even if the person falls below the taxable limit, they should file their ITR. There are different ITR forms for individuals and HUFs as per their income sources and tax-paying status such as individual, HUF, BOIs, AOPs, etc. 

 

Uses and benefits of filing income tax returns

 

All Indian citizens should file their ITR because of the following uses and benefits: 

 

  • Smooth loan processing: Filing ITR makes it easier for the lender to assess the borrower’s financial credibility. It helps in the easy and quick processing of loans.

  • Foreign VISA: Several countries in the world issue a VISA only after submission of valid ITR proofs.

  • Tax refund: ITR forms are used to file for a tax refund in case of additional advance tax payment.

  • Carry forward of losses: Losses such as speculation loss, capital loss, business loss, etc., can be carried forward only if the ITR is filed.

  • Passport approval: Application and approval of a passport are easier when the ITR copy is submitted. 

  • Insurance claim: ITR is very useful at the time of making an accidental death claim. 

  • Government tenders: ITR documents will come in handy when applying for government tenders, panel registrations, etc.

  • High insurance sum: ITR forms are required by the insurance company to provide a high sum assured.  

 

Types Of Income Tax Returns³

 

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 taxpayer 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:

 

ITR 1 form

- 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.

 

ITR 2

- 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.

 

ITR 3

- 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.

 

ITR 4

- is filed for all sources of income as per ITR 1 and if the Presumptive income is greater than 50 lakhs.

 

ITR 5

- Is to be used by Firms, LLP’s, AOP’s and BOI’s.

 

ITR 6

- is to be used by Companies who are not claiming exemption under Section 11.

 

ITR 7

- 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 return³ 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 returns³ online for salaried employees and non-salaried taxpayers.

 

Despite the black reputation that filing tax returns³ 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 returns³ for last 3 years if you would like to right an earlier wrong.

 

Filing your tax returns³ 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 – Form 16A & Its Importance:

 

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.

 

How To File ITR?

 

Income tax returns³ have to be filed by person whose annual income exceedsminimum amount not subject to tax. Companies and firms have to file their income tax return³ without fail and regardless of profits or losses incurred. Filing an income tax return³ 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 Return³. You need to first create your computation of Income Tax. You have to file your Income tax return³ 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.

 

Income Tax Refund

 

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.

 

 

What is Income Tax Act?

 

The Income Tax Act governs and administers the income tax laws in India. As per the act, below are the tax categories:

  • Salaries

  • Profits and gains from business or profession

  • Income from house/property

  • Capital gains

  • Income from other sources 

Tax deductions under Income Tax Act

 

The Income Tax Act, 1961 allows several deductions under different Sections to help you reduce your taxable income.

 

Section 80C:

This Section offers deduction up to ₹1.5 lakhs for payment towards life insurance, provide fund or superannuation.

Section 80CCC:

This Section grants tax deduction for the payment made on insurance companies and LICs approved as pension plans. The policy should be in the individual’s name and must be up to ₹1.5 lakhs out of taxable income.

Section 80CCD:

This Section offers an exemption on contributions made by the employee and employer towards the new pension scheme. The tax exemption cannot be more than 10% of the salary.

Section 80D:

This Section provides an exemption from taxes on premiums paid on health insurance for self, spouse and dependent children.

Section 80DDB:

This Section grants deduction on medical expenses incurred in the treatment of any disease or illness specified in rule (11DD). This benefit is available for self, family member or any member of HUF.

Section 80E:

The interest paid on an education loan is exempt from tax under this Section.

Section 80EE:

This benefit is applicable for people who buy their first home with a value of fewer than ₹40 lakhs. Loans up to ₹25 lakhs or less are eligible for this exemption.

Section 80RRB:

Income from royalties and patents is exempt from taxes. Patents registered under the Patent Act, 1970 up to ₹3 lakhs can be saved.

Section 80TTA:

Interest income earned up to ₹10,000 from the post office, cooperative society and saving banks account is free from tax.

Section 80U:

This Section offers disability benefit up to ₹1 lakhs, provided a disability certificate is presented.

Section 24:

Interest on a home loan is tax-exempt under this section. Apart from deduction under Section 80C, 80CCF and 80D, an exemption up to ₹2 lakhs can be taken under this Section. For rental properties, 30% of the rent received and municipal taxes paid are exempt from taxes.

 
 
 

Tax Exemptions under Income Tax Act

 
 

Section 10(10D):

Under Section 10(10D) of the Income Tax Act, any amount received under a life insurance plan is exempt from taxes. This is inclusive of bonus, interest, or any other grant received in the plan. However, this rule is not applicable for:

 

  • Sum received under Section 80DD (3) 


  • Sum received under a Keyman Insurance Policy 


  • Sum received other than death benefit under a life insurance plan issued on or after April 1, 2003, but before March 31, 2012. In this case, the premium payable in any of the policy years should not be more than 20% of the sum assured. For plans issued on or after April 01, 2012, the exemption is allowed on policies with premiums lower than 10% of the sum assured.  


  • For ULIPs, the maturity payout will be tax-free if the total annual premium in the given fiscal year is under ₹2.5 lakhs. 


What Comes Under Tax Evasion?

 

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.

 

Income Tax Penalty

 

Penalties are payable under the Indian Income Tax Act, 1961 in certain cases. There is Penalty for late filing of income tax return³, penalty for late filing of TDS return, penalty for non-filing of return of income and also penalties payable for:

 

  • Default in making the payment of taxes in full or in part. Maximum Penalty levied shall be equal to the amount of tax in arrears.
 
  • In cases where income has been under reported – penalty may be to the extent of 50% of the income under reported and 200% if underreporting is wilful.
 
  • For failure to maintain books of accounts the penalty is 25,000/-.
 
  • For undisclosed income the penalty payable depends on the time and nature of disclosure of income. If income is admitted during a search and the tax is paid by the assesse then a penalty of 30% of the undisclosed income may be levied and in other cases penalty of 60% of the undisclosed income.
 
  • Failure to get the accounts audited and furnish audit report can result in a heavy penalty of Rs.1,50,000/- or 0.5% of turnover whichever is lesser.
 
  • Failure to deduct tax at source or failure to collect tax at source carries a penalty equal to the amount of tax that was to be deducted or collected. Furnishing incorrect statements will also cause a penalty that may be from 10,000 to 1,00,000.
 
  • There are other penalties for taking payments in excess of prescribed amounts by ways other than bank transfer, bank draft or account payee cheque; for failure to furnish information when asked; for non-compliance with department notices, quoting wrong PAN or TAN, etc. 

 

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Fire Away Queries

Like teachers say, there are no silly questions

What is a financial year in the context of income tax calculations?

For tax calculations, the financial year begins on the 1st of April of a year and ends on the 31st of March of the next calendar year. 

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Who should pay income tax?

An individual, group of persons or an artificial body who has received an income during the previous financial year should pay income tax. The Income Tax Department classifies taxpayers in these categories: 

  • Individual 

  • HUF (Hindu Undivided Family) 

  • Association of Person (AOP) 

  • Companies 

  • Body of Individuals (BOI) 

  • Firms 

  • Local Authority  

  • Artificial Judicial Person 

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What is PAN?

PAN stands for Permanent Account Number. This is a unique ten-digit code issued by the Income Tax Department for each taxpayer. The taxes paid, refunds received, or penalties are issued against the PAN.  

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What is the tax exemption limit in India?

The Department of Income Tax in India does not levy any tax on individuals and other eligible entities with an annual income below ₹2.5 lakhs. Above the minimum threshold, there is a different tax rate charged per annual income slabs.  

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What are the different heads under which income tax is levied in India?

Income under these five heads is taxed in India: 

  • Salaries 

  • Capital gain 

  • Income from house property 

  • Gain or profits of profession or business 

  • Income from other sources 

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0 - Provided the premium paying term is more than or equal to 10 years.

3 - As per provisions of Income Tax Act, 1961. Tax benefits are subject to changes in tax laws.

5 - If declared, Cash Bonus is a non-guaranteed bonus which may be payable based on the performance of the participating fund of the Company.

 

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