Everything You Ever Wanted to Know About Income Tax

Income tax

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Income tax refers to the tax you pay to the government based on your earnings / income or profit. This is used by the government to develop infrastructure and bring new plans and policies for the citizens of the country. 

Tax is that part of your money that gets deducted directly from your salary / income, every month, in the form of Tax Deducted at Source (TDS) and forms a part of direct taxes, along with others such as wealth tax, corporate tax and capital gains tax. This is different from the other category which includes taxes like VAT, GST and the service tax – the one that you pay in restaurants which form a part of indirect taxes. 

Income tax is an inevitable imposition on the citizens of the country for their own betterment and development. But before we deep-dive into it, there’s something else equally important to know.

Understanding your salary slip is the starting point of understanding your income tax. The very first question you need to answer is under which tax slab your income falls because only then your income tax liability and how you can save on your taxes can be calculated. So, things like Dearness Allowance (DA), House Rent Allowance (HRA), Medical Allowance, etc.

Let’s have a look at the other important aspects of income tax worth knowing for an Indian citizen.

What is the Income Tax Act?

The Income tax Act of 1961 is the section of law that defines clearly how the government of India is supposed to charge its citizens. It enables the government to collect taxes from its citizens, in order to develop infrastructure, policies and other administrative facilities. 

Over a period of years, a number of amendments have been made to the act. With the introduction of a new budget plan by the government of India every year in February, various changes are brought in the Income tax act. Thus, the tax slab rates change every year.

Along with that “The Taxation Laws (Second Amendment) Act, 2016” is an amendment Act, No. 48 of 2016, to Income-tax Act, 1961 and The Finance Act, 2016. It was passed during the 2016 Winter Session of Indian Parliament. The Taxation Laws (Second Amendment) Bill, 2016 was passed in Lok Sabha as a money bill on 29 November 2016 urging the citizens of the country to declare their undisclosed incomes after Indian 500 and 1000 rupee note demonetisation.

The Taxation Laws (Second Amendment) Bill, 2016, was brought up in the Lok Sabha during the 2016 Winter Session of Indian Parliament. The bill was introduced on 28 November 2016, by the then Finance Minister of India, Arun Jaitley. The bill was passed by Speaker Sumitra Mahajan, with a voice vote without debate in Lok Sabha. The Government, clarified that gold asset in the form of jewelry of people, were not up for taxation as per the introduced Bill.

What is Income Tax Returns (ITR)?

Income tax return (ITR), is a form used for reporting your gross taxable income from a variety of sources, claiming tax returns and revealing the amount of tax you are liable to pay to the Income Tax Authority of India. 

ITR is filed by Individuals who get salaries, firms, Hindu Undivided Families (HUF) and even self-employed Individuals. Moreover, an Income tax Return can be filed online by visiting the website of the Income Tax department – https://incometaxindiaefiling.gov.in/

Various forms for filing Income Tax Return are ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 and ITR7. Along with this, the Income Tax Act (1961) and the Income Tax rules (1962) urge the citizens to file their ITR, at the end of every financial year.

Our guide to e-file your income tax returns can help you with filing your income tax returns, the various ITR forms there is and the benefits you stand to get upon e-filing your ITR.

Types of Taxes

Taxes that we pay to the government are further subdivided into 2 categories. The first one being Direct Taxes and the second one being Indirect Taxes. 

types of taxes

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Let’s talk in detail about the two:

Direct Taxes

The taxes that are imposed directly on your income by the government are called Direct taxes. These taxes are overlooked by the Central Board of Direct Taxes (CBDT). These taxes are only to be collected by the government and can’t be transferred to any other entity for payment.

The different types of direct taxes are :-

  • Income Tax – This tax is imposed by the government on your income/earnings/profits. The rate at which the tax is charged depends on your earnings and is applicable only to your taxable income. It is chargeable to individuals, corporate houses, firms, companies, trusts, Hindu Undivided Families (HUF’s), and any artificial judicial person.
  • Wealth TaxWealth tax is charged on all of your property. It is basically the tax collected on the property you own depending on the current value of the property in the market. It’s charged without discrimination from all HUF’s, individuals and firms.
  • Corporate TaxCorporate tax is levied on the net profit of domestic firms including Indian as well as foreign organisations. The income of the company even in the form of royalties and dividends are to be taxed. Moving further, currently companies that have a turnover of Rs. 250 crores or less are liable to pay 25% of their net profit as corporate tax while companies with a turnover of over Rs. 250 crores have to pay 30% in the form of tax.Different types of corporate taxes collected are :-
    • Minimum Alternative Tax (MAT): MAT is imposed on low earning/ no earning companies that declare little or no income in order to save taxes.
    • Fringe Benefits Tax (FBT): This particular tax is imposed on the fringe benefits offered by the company like drivers or maids to the employees.
      • Dividend Distribution Tax (DDT): An amount that is declared or paid as a dividend to the shareholders by a domestic company is taxed under the Dividend Distribution Tax. A different feature of this tax is that it is applicable to domestic companies only. Foreign companies distributing dividends in India are not supposed to pay DDT (such dividends are taxable in the hands of the shareholder).
    • Securities Transaction Tax (STT): SST is a tax payable in India on the value of securities transacted through a recognized stock exchange. 
  • Capital Gains Tax – Capital tax is charged based on the difference between the sale price of the asset and the original purchase price. Tax on capital gains is demanded only when the asset is sold or “realised”.

Indirect Taxes

These are the taxes that are not directly imposed on the individual but are collected from an intermediary used by the individual. It’s basically a tax charged for the services used by the consumer.

In 2017, a combined Goods and Service Tax (GST) was introduced which can be said to be the amalgamation of all other indirect taxes.

  • Goods & Services Tax – Goods and Services Tax (GST) is an indirect tax imposed on the supply of goods and services. It is a complete, multistage, destination based tax. Complete because it has taken under it almost all the indirect taxes. Multi-Staged as it is imposed at every stage in the production process, but is meant to be returned to all parties in the various stages of production other than the final consumer. And destination based tax, as it is collected from point of consumption and not the point of production like other taxes before.

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How to e-file your Income Tax?

Read: Compelete Guide to Income Tax E-filing

The past few years have witnessed a staggering change in the Income Tax Department of India. With the process of digitisation, the whole process of filing Income Tax Return has become hassle free. The whole procedure has become much more convenient for the users as they can pay their taxes online, track returns and see the history of their payments through online portals available.

Some of the pre-requisites of filing an ITR are:

  1. A Permanent Account Number (PAN) – It makes for your user ID for logging in to the e-filing website.
  2. A phone number that is preferably linked to your Aadhaar account.
  3. A current address that is valid.
  4. A valid email id.
  5. Most importantly, get your Digital Signature Certificate (DSC) on the Income Tax website and register it. In case you don’t have a DSC you can first file your return and then send an email to the IT department’s centralised Processing Centre (CPC).

Steps in the E-filing Process

    1. In order to file your Income tax return you must register yourself on the website of Income tax department in India. The link to the website is https://incometaxindiaefiling.gov.in/. You will be asked to provide your PAN, your Name and Date of Birth. Furthermore, you will be asked to keep a password and your PAN will make for your User ID.
    2. Once the process of logging in is complete, click on e-file to get the ITR option.
    3. Choose the type of form you want to fill. ITR1, ITR2, ITR3, ITR4, ITR5, ITR6, ITR7 are all different kinds of forms available for filing. Make sure you click on the relevant assessment year option.
    4. A few details will be filled in automatically by the ITR website. You can even pick the details that you want or don’t want to be filled automatically. After choosing, click “continue”.
    5. You will now be directed to a page where you can fill up the form. Do read the general instructions before filling up the form very carefully. Fill in other required details like Basic information, Income details, Section 80G and Taxes paid.
    6. Preview the form once before you submit it. It’s very important that you fill in all the correct information.
    7. Once previewed and verified properly, just click on the “submit” button. Your return will be uploaded at this step. You will just be required to verify once.
    8. The three verification options are,
      a) Through Aadhar-linked One Time Password (OTP).
      b) Through the Electronic Verification code (EVC).
      c) By taking the print-out of ITR-V and signing it before mailing it to CPC. This step must be taken within 120 days of e-filing.

Benefits of Income Tax Returns

There are multiple benefits of Income Tax Returns. Some of them are:-

  • Carrying forward of losses – The only way to compensate for your losses of the previous financial year in the current financial year is by filing ITR. Losses such as business loss, capital loss and speculation loss can only be carried forward when ITR is filed before the due date.
  • Tax refund – Sometimes people pay more tax than what is required so filing an ITR is an easy way to get back the extra tax you have paid unknowingly.
  • Easy Loan Processing – ITR filing makes you a more credible customer when it comes to Loan approvals and other bank related issues. It makes the whole process of loan sanctions much easier. 
  • Foreign travel and Passport related processes – ITR filing makes it easier for you to get foreign travel related Visas. Along with that, you can easily get your passport made with ITR as it serves as a Non-ECR proof.
  • Insurance Claim – In case there is an accidental death, the insurance company will need proof of income in order to pay the insurance claim. The filing of ITR makes for a good proof in such circumstances.
  • High risk life cover policies – If you want to get a policy that offers a high risk life cover, all insurance companies will want to have a look at your ITR. Nobody wants to insure a tax evader.

What is Taxable Income?

In simple language, your taxable income is the portion of your income that you are liable to pay tax for. It is generally described as the Gross Income that comes under the Income tax slab after removing all exemptions and tax reductions.

Taxable income includes bonuses, wages, salaries, tips, investment income and even unearned income. Unearned income includes alimony, government payments, child support, lottery money and unemployment benefits. 

Last but not the least, taxable income also includes earnings from appreciated assets that have been capitalised during the year and interest and dividend incomes too.

Income Tax Slab 2019-20

Individuals in India are taxed on the basis of their Income as prescribed in the Income Tax slab. The budget that is introduced in every financial year gives you information about the latest Income Tax slab and charges. The Individual taxpayers are majorly divided into 3 categories as per their age. 

The three categories are –

  1. Individuals that are residents and below 60 years of age.
  2. Individuals that are residents and above 60 years and below 80 years of age.
  3. Individuals that are residents and above 80 years of age.

Here’s everything you would want to know about Income Tax slabs 2019-20.

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Income Tax for NRIs

NRIs are also supposed to pay a certain amount of tax in India. As per FEMA (Foreign Exchange Management Act), an individual is only considered an NRI if he/she spends a certain number of years abroad and subsequently a comparative period of absence in India. 

The income earned by an NRI abroad is exempted from Income Tax deductions in India naturally. However, if income is earned through Indian sources including Mutual funds, capital gains, term deposits and exceeds a certain base limit then NRIs are as much liable to pay tax as any other Indian citizen. 

It is important to understand that the rules for taxation of NRIs vary considerably as compared to the rules for Indian citizens. However, the Indian law ensures justice as Income Tax Act,1961, works uniformly to cover both whenever they are charged under it.

Taxes on Mutual Funds

Mutual funds provide earnings in two forms. Capital gains form the first type of earnings. Taxes on capital gains are paid by the investors themselves. The second types of taxes are paid on dividends and are called Dividend Distribution Taxes (DDT). DDT is paid by the Fund House on behalf of the investors.

ELSS and ULIP are two great tax saving options. ELSS offers a good 3 year lock-in period while ULIP gives you a minimum 5 year lock-in. Both of them are excellent tax saving choices.

Here’s a complete guide to taxation in mutual funds, in case you’d want to know more about it.

Written by

Priyanshi Bhardwaj