Income tax is a form of direct tax collected by the government from eligible individuals, HUF, Corporate Entities, or Local Authorities as a means of revenue collection to fund infrastructure development and other government expenditure, including subsidies in the social sector. The Central Board of Direct Taxes administers income Tax under the Ministry of Finance, Government of India. The rates for payment of tax are defined in the IT Act, 1961, amended in the Union Budget and passed by the Indian Parliament in February for the ensuing financial year.
What is the Income Tax?
Ever wondered what Income Tax is and how it works? In simple language, Income Tax is a part of earnings or gains by individuals and entities in a financial year paid to the Government. It is a form of direct tax collected by the Government, at rates defined by it with a basic guiding principle of higher rates for higher earnings. Earnings may be both actual and notional, on which the taxable slab rates are imposed and changed from time to time, in sync with price levels prevalent in the country. Tax compliance and widening of the tax base is of prime concern to the Government. The latest statistics in this regard reveal that there has been a rise of 14% in taxpayers numbering 8.45 Crores in the Financial Year 2018-19, as compared to the previous year’s 7.42 Crores. To raise and ensure greater compliance, several tax-saving opportunities and avenues are offered to the taxpayer to reduce the burden of tax liability. Taxes and TDS are paid in advance. On filing IT Return, it is verified by the Income Tax Department, and if found higher than the actual tax payable, it is refunded.
What is the Financial and Assessment Year?
As already described, earnings for taxation purpose is determined for a particular financial year. It is the period from 1st April to 31st March of the next year. The corresponding Assessment Year is considered to be the period from 1st April of next year to 31st March of the following year. The illustration will clear the concept.
Financial Year: 1st April 2019 through 31st March 2020. It is also called Previous Year.
Assessment Year: 1st April 2020 through 31st March 2021.
What are the types of taxable income in India?
Earnings in a financial year by eligible taxpayers fall under the purview of income tax rules in India. It is imperative to check them out:
Income from Salary/Pension
For the computation of taxable income in this category, Basic Pay, Allowances, Perquisites, and Profits in exchange for a salary, is considered taxable income. Similarly, Pension received by retired employees is similar to salary for Income Tax.
Income from Profession/Business
Irrespective of actual or possible income of individuals in their capacity from business or professions, it is considered taxable income after adjustment of permissible deductions
Income from House/Property
A taxpayer, who enjoys ownership of one or more house property, may earn rent on it. This earning is taxable. Income tax rules under this category are also applicable to interest on home loans. After deduction under certain heads, the remainder is taxable as income from other heads.
Income from Other Sources
This head comprises of interest earned from Fixed Deposits or Savings Account.
It is the outcome of the sale of capital assets like Gold, House Properties, Stocks, Mutual Funds, etc. The gains are categorized as short or long term capital gains, depending on the period of holding of these assets. Although part of Income Tax, it is not added to taxable income for the fact that it is taxed at a separate rate.
Income from Betting, Horse Racing, Lottery, etc.
Due to a different tax regime, it is excluded from taxable income.
Why is Income Tax significant in India?
The composition of revenues earned by the Government does interesting reading. Approximately 71% of it comes from taxes and duties, 7% from non-tax sources and the remaining 20% is obtained through borrowings and other liabilities. It helps the Central Government to share a; part of the earned revenues with the states, interest payments, fund sponsored schemes, Defense-related expenditure, pay pension, subsidies, expenditure directed by Finance Commission, etc. A part of the revenue is earned through taxes, which are either direct or indirect. While direct tax is paid to the Government, indirect taxes are collected by others and passed on to the Government like a restaurant, service vendors, purchase of items, goods, and services tax, etc. Again direct taxes are broadly classified as:
- Income Tax: Paid by individuals or HUF on earnings at rates prescribed by the Government
Corporate Tax: Paid by Corporate Entities out of profits earned by them. The Government also prescribes the rates here from time to time.
Who are liable to pay Income Tax?
As per rules defined in the Income Tax Act, 1961, all individuals and businesses having an income, irrespective of the amount, are required to file IT Returns. However, at prevailing tax slab rates, an individual earning more than Rs 2.5 Lakh in a financial year is liable to pay income tax, provided the net taxable income after adjusting all deductions, and exceeds the prescribed threshold. Both Resident and NRI Indians falling under this category must file IT Return. However, the former needs to do so on global income, while the latter only on income in India. Considering all these factors, Income Taxpayers include:
- Salaried Individuals
Self Employed Individuals
Self Employed Professionals
Hindu Undivided Family (HUF)
Association of Persons (AOP)
Body of Individuals (BOI)
Companies and Corporate Entities
Legally Recognized Artificial individuals
Eligibility criteria for Income Tax in India:
The basic principle applied to Income Tax in India is one's ability to pay. Accordingly, different rates are prescribed for different income slabs, by the Government in the Finance Bill passed by the Parliament after the presentation of Budget in February every year. The rates are further divided into 3 groups – below 60 years, above 60 to below 80 years and above 80 years of age. The initial threshold varies in all the age groups.
|Income Tax Rates applicable to FY 2019-20 (AY 2020-21)|
|Income Slabs (Rs)||Below 60 years||Above 60 to below 80 years||Above 80 years|
|2.5 Lakh to 3 Lakh||5%||Nil||Nil|
|Above 3 Lakh to 5 Lakh||5%||5%||Nil|
|Above 5 Lakh to 10 Lakh||20%||20%||20%|
|Above 10 Lakh||30%||30%||30%|
|Section 87 (A)||100% tax rebate to those whose taxable income does not exceed Rs3.5 Lakh|
|Cess||4% Health and Education|
|Surcharge||10% for income from Rs 50 Lakh to Rs 1 Crore|
|15% for income above Rs1 Crore|
How is Income Tax calculated in India?
Income Tax is calculated in India by first arriving at the gross income for the financial year by clubbing income from all sources. Deductions permitted by the Income Tax Act 1961, is then applied. Tax deductions and exemptions are covered by different sections apart from the standard deduction of Rs.50000. After all, adjustments are made; gross taxable income is arrived at. Applying the described slab wise rates, the final tax liability is known.
Based on the above premise, a person less than 60 years in age, having a gross annual income of Rs.40 lakhs with a full deduction of Rs.1.5 lakhs under Section 80C will have a tax liability as under.
|Financial Year 2019-20 (Assessment Year 2020-21)|
|Gross Annual Income||Rs 4000000|
|Less Standard Deduction||Rs 50000||Rs 3950000|
|Less Section 80C||Rs 150000||Rs 3800000|
|Gross Taxable Income||Rs 3800000|
|Calculation of Total tax Liability|
|Income (Rs)||Slab Rate||Tax Amount (Rs)|
|0 - 250000||0||0|
|Health and Education Cess||4%||38100|
Income Tax Deductions / Exemptions in India:
Now that for calculating income tax liability, tax deductions have been mentioned, it is prudent to find out more about them. It has been the constant endeavour of the Government to widen the tax base to improve the tax compliance and collections in proportion to the GDP, which in our country is still low. To boost compliance and ensure social responsibility, a host of deduction opportunities have been provided through various sections of the IT Act, 1961, to mitigate the burden of income tax liability. One of the most popular among them is Section 80C, offering a deduction of Rs 1.5 Lakh usually and Rs 2 Lakh in some cases. These deductions are adjusted for working out the final tax payable liability of the taxpayer.
|Section Name||Exemption Limits||Particulars|
|Section 10 (13A)||As per norms||House Rent Allowance|
|Section 24||Rs 2 Lakh||Interest on Home Loan|
|Section 80C, 80CCC, 80CCD||Rs 1.5 Lakh in aggregate||EPF, VPF, and PPF|
|Life Insurance Premium|
|Contribution to Annuity|
|Senior Citizen Savings|
|National Savings Certificate|
|Tax Savings Deposit - Bank|
|Tax Savings Deposit – PO|
|ELSS and Mutual Funds|
|Tuition Fees for 2|
|Repayment of Home Loan|
|Stamp Duty for Registration|
|NPS and APY|
|Section 80CCD (1B)||Rs 50,000||NPS with PRAN|
|Section 80D||Rs 1 Lakh||Health Insurance|
|Section 80DD||Rs 1.25 Lakh||Disability|
|Section 80DDB||Rs 60,000||Outgo for Treatment|
|Section 80E||Interest on Education Loan|
|Section 80EE||Rs 50,000||First Time Home Buyers|
|Section 80EEA||Rs 1.5 Lakh||Additional HL after April 2019|
|Section 80EEB||Rs 1.5 Lakh||Purchase of Electronic Vehicle|
|Section 80G||Relief Fund|
|Section 80GG||Rs 60,000||Rent|
|Section 87A||Rs 25,000||Taxable income up to Rs.3.5 L|
|Section 80 TTA||Rs 10,000||Interest on Savings Account|
|Section 80 TTB||Rs 50,000 for SC||Interest on Deposits|
|Section 80U||Rs 1.25 Lakh||Self-Disability|
The Sections and their deduction limits have been tabulated for easy comprehension. However, it is essential to remember that within the overall limits, there are individual clauses that may impact the final effective admissible deduction. As an example, Life Insurance premium admissible for deduction under Section 80C is restricted to 10% of the sum assured for policies purchased after 1st April 2012. The corresponding rate for a disabled individual is 15% of the sum assured from 1st April 2013.
Filing of Income Tax Return
Income Tax is required to be paid in advance to the IT Department. For the salaried individual, the projected income during the fiscal determines the tax liability after applicable deductions. A proportional tax is deducted from the salary every month and deposited. Similarly, self-employed and professionals need to calculate their projected income and deposit it pro-rata. Only senior citizen pensioners need not deposit advance tax. After the financial year is over, every taxpayer has to file IT Return mandatorily. If the return shows that excess tax has been paid during the year in question, the excess amount is refunded after verification.
IT Return is thus defined as detailed information about the income of the taxpayer and tax paid to the IT Department. It is a form to be filed every year within the specified date as per Income Tax Rules. Failure to do so within the deadline invites penalty. Income Tax Online allows E-filing of IT Return and is the most convenient mode of compliance.
IT Return Forms in India
Filing of IT Returns in prescribed forms is compulsory. Even Income Tax online for E-Filing needs these forms to be filled by the taxpayer. The valid forms for the Financial Year 2019-20 are:
|IT Return form for the Financial Year 2019-20|
Who should File IT Return in India?
Ad per Income Tax Rules, the following have to file IT Returns in India compulsorily:
- All individuals below 80 years of age having taxable income higher the prescribed threshold
All registered companies which generate income regardless of earning profit
Those who claim a refund for excess tax paid in the fiscal
NRIs with income accrual in India over Rs 2.5 Lakh
Documents required to file IT Return
It is usual for taxpayers to use an E-filing facility for IT Returns. It is necessary to keep all the relevant documents handy to ensure error-free submission of IT Return. The following documents are necessary to proceed with the process of E-filing.
- Form 16: The employer provides it with information related to salary and perquisite income during the year. It also contains details of TDS and its deposit.
Form 16A: It is about details about income from other sources like interest and TDS thereon
Form 16B: It details TDS for sale of property
Form 16C: It details TDS from the tenant for the rent paid
- Form 26 AS: It is the consolidated tax statement downloaded from TRACES showing comprehensive tax credit against PAN card of the taxpayer
It is to be noted that with the E-filing of IT Returns, one does not need to submit the documents mentioned earlier, either in hard or soft copy.
E-filing of IT Return
Electronic filing or E-filing of IT Return is one of the most convenient modes for processing of Income Tax online. There are several compelling reasons for adopting E-filing, which can be done by an individual directly at the IT Department portal or with professional help, using pre-approved tax preparation software. On submission of the IT Return, an acknowledgement called ITR-V is generated. The final stage of E-filing is the E-verification of ITR-V within 120 days. It is important to remember that E-verification is possible only if the Assesse’s PAN and Aadhaar Cards are linked. Else, a hard copy of ITR-V duly signed by the Assesse needs to be sent to the CPC of Income Tax Department.
With E-filing, the taxpayer automatically ensures the following:
One has to summarize several TDS, related to income or investment in India. There is every possibility of excess tax deduction. E-filing ensures quick processing of tax liabilities and refund if warranted through electronic means in the verified account.
Authentic Income Chart
It generates an authentic documentation flowchart that can be handy for verification of loan application.
It is accepted as genuine income proof for future reference by multiple agencies.
Adjustment Against past losses
Since it is an authentic record of income, antecedents and various losses of all nature are recorded. It may be worthwhile information in the future to claim adjustment against past losses.
It is mandatory to file error-free returns within the specified deadline or face penalties up to Rs 10,000. Thus submission of return in time helps filing of Revised Return for multiple reasons without much hassle.
Tracking IT Return Status Online
One of the greatest advantages of E-filing is the option to track the status of IT Return online. It is facilitated by Income Tax Online after the E-filing process is accomplished and "Verified." The status of IT Return changes to "ITR Processed." Checking the status online is simple, and there are two ways of doing it.
First Option - Without Login Credentials
- Invoke the ITR Status Tab on the official E-filing portal
- A new page opens where the PAN Number, ITR Reference Number, and the Captcha code is input
- On submission successfully, the ITR Status is displayed on the monitor screen.
Second Option – With Login Credentials
- Login to the E-filing portal
- Select Tab “View Returns / Forms”
- A dropdown menu appears.
- Select Income Tax Returns and Assessment Year
- Once completed, the appropriate status of the ITR is displayed on the monitor screen.
Advantages of E-filing of IT Return:
Having understood how E-filing is done, it goes without saying that there a host of advantages. Some of the major ones are:
Not only is the processing quick and simple, but acknowledgement verification is also swift. This leads to an early refund electronically as compared to a paper-filed return.
The E-filing software is specially designed with features of validation along the way. It ensures error-free submission of IT Return.
Like any digital facility, the process is available 24/7 at one's convenience. Furthermore, the software is user friendly, guiding the process seamlessly.
In-built security in the system ensures data integrity and cannot be breached due to multiple safety layers.
Access to Past Data
Data storage is one of the many positive features of E-filing. It adds to the ease as many fields are populated automatically during the E-filing process.
Multiple modes of communications like Email and SMS are used to post updates of the filing process.
The refund process is extremely quick and accurate, as the proceeds are credited to the verified account through NEFT.
Importance of Tax Planning
Saving on tax liability is also intrinsic to financial planning. While choosing the various investment options, it is essential to not only allocate financial resources judiciously for the future safety of the family but also build a suitable corpus for leading a contented retired life. The dictum that money saved is money invested holds good in proper tax planning too, as its main objective is to reduce tax liability. Certain steps can always be adopted as tax planning measures to optimize savings.
- It helps in taking full advantage of deductions, relief, and rebates within the ambit of Income Tax Rules to lessen the tax burden
Insurance has been one of the key vehicles of prudent financial planning and as a tax saving instrument of choice. Selecting a good blend of Term, Endowment, Wealth Creator and Health insurance is ideal to ensure protection, yield as well as make the best of Section 80C deduction
Tax planning helps to focus on sections that reduce tax pay-out the most
Tax planning also dictates how protection is required to be shaped – like life insurance, supplemented by health insurance, and in turn, maximize tax savings
Young taxpayers are benefited the most by tax planning, encouraging them to start saving early
- It is wise to seek the help of professional tax consultants or Income Tax Guide as they are equipped, not only with the arithmetic part of tax savings but also with Income Tax rules and regulations
Impact of Budget 2020 on Income Tax:
It has been proposed in the 2020 Budget for taxpayers to choose between the unchanged old regime of tax slabs carried forward from Financial Year 2019-20 with deductions or the new regime, with different tax slab rates without any deductions. The slab rates are:
|Income Tax Slab Rates for Financial Year 2020-21 (Assessment Year 2021-22)|
|Income Slabs (Rs)||Income Tax Rate|
|0 – 5 Lakh||5%|
|Above 5 Lakh to 7.5 Lakh||10%|
|Above 7.5 Lakh to 10 Lakh||15%|
|Above 10 Lakh to 12.5 Lakh||20%|
|Above 12.5 Lakh to 15 Lakh||25%|
|Above 15 Lakh||30%|
|Section 87 (A)||100% or Rs 12,500 tax rebate to those whose taxable income does not exceed Rs 5 Lakh|
|Cess||4% Health and Education|
|Surcharge||10% for income from Rs 50 Lakh to Rs 1 Crore|
|15% for income above Rs 1 Crore|
Ans: Standard Deduction was introduced instead of Transport and Medical Allowance Deduction, and the amount permissible for FY 2019-20 is Rs 50,000.
Ans: Global income of Resident Indian citizens is taxable, while for NRI, it is the only income in India that is taxable.
Q: What are the basic two categories of eligible instruments in Section 80C for Income Tax deduction?Ans: The basic classification is based on whether it is Investment or Expenditure. For example, life insurance is an investment, while the tuition fee is expenditure.
Ans: No documents are needed to be uploaded. However, they should be stored for furnishing to the IT Department if asked for or ion case of any query.
Ans: It is a statement prepared by the IT Department showing all the TDS details in a Financial Year against a PAN card. In other words, it contains information of all TDS by any deductor on behalf of the taxpayer or self-assessment tax deposited to the IT Department.
Ans: It is downloaded from the portal of TDS Reconciliation Analysis and Correction Enabling System (TRACES) of the IT Department.
Ans: The different modes furnishing IT Return are:
- Paper form
- Electronically under digital signature
- Electronically transmitted under electronic verification code
- Electronically transmitted and after that submitting duly signed hardcopy of ITR-V for verification
Ans: The concept for payment of Income Tax is Pay as You Earn. The Government collects tax by the following means.
- Advance or Self-Assessment Tax
- Tax Deducted at Source (TDS)
- Tax Collected at Source (TCS)
Ans: It is the total of all income from different heads in a Financial Year.