An income tax is a tax imposed by the central government on Individuals or entities in respect of the income or profits earned by them which is commonly known as taxable income. Taxes are sources of revenue for the government. The government utilizes this revenue for developing infrastructure, providing healthcare, education, and subsidy to the farmer/ agriculture sector and in other government welfare schemes. Personal income tax is a type of income tax that is levied on an individual's wages, salaries, and other types of income. Business income taxes apply to corporations, partnerships, small businesses, and people who are self-employed. The tax imposed on companies is usually known as corporate tax and is commonly levied at a flat rate.
The government of India decides the rate of income tax as well as income tax slabs on which individuals are taxed. Those under higher income slabs are taxed at higher rates. The taxable income slabs are changed from time to time, keeping in mind the price levels. Sometimes, the government also provides income tax rebates, which benefit people in the lower-income group.
Types of Income Tax Payers:
The Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.
Taxpayers are categorized as below:
· Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
Further, Individuals are broadly classified into residents and non-residents. Resident individuals are liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on income earned or accrued in India. The residential status has to be determined separately for tax purposes for every financial year on the basis of the individual tenor of stay in India.
Types of Income Taxable in India
1. Income from Salary/Pension: This includes basic salary, taxable allowances, perquisites, and profit in lieu of salary, as well as pension received by the person who himself/herself has retired from the service. Incomes from salary and pension are included in the computation of taxable income.
2. Income from business/profession: This includes actual and presumptive incomes from business and professions that individuals do in their personal capacity and is added to taxable income after adjustment of the deductions allowed.
3. Income from house property: The rules under this head describe how rent from one or more house properties is to be treated for the purpose of calculation of taxable income. An income tax assessee can claim certain deductions such as municipal taxes and a standard deduction for house maintenance in certain cases. The final net income or loss under this head is then added to or deducted from the income from the other heads.
4. Income from other sources: This includes incomes like interest from a savings account, fixed deposits (FDs), family pension etc, which are included in the taxable income.
5. Income from Lottery, Betting, and Horse races etc: Such incomes are included in the total income, but excluded from taxable income as different tax rates are applicable on these types of income.
6. Capital Gain: Capital gains arise at the time of selling capital assets like gold, house properties, stocks, securities, mutual fund units etc. Depending on the types of capital assets and the period of holding, gains on the sale of such assets are categorized as short-term and long-term capital gains.
Income tax in India is calculated on the basis of tax rates determined by the government for an Assessment Year (AY). Once the gross total income is calculated by adding all the above sources, whichever applicable, deductions on account of tax-saving investments, allowed expenses, donations etc are adjusted. Income Tax Return (ITR) is a form which a person is supposed to submit to the Income Tax Department of India. It contains information about the person’s income and the taxes to be paid on it during the year. Information filed in ITR should pertain to a particular financial year, i.e. starting on 1st April and ending on 31st March of the next year. As per the tax laws laid down in India, it is compulsory to file your income tax returns if your income is more than the basic exemption limit. The income tax rate is pre-decided for taxpayers. A delay in filing returns will not only attract late filing fees but also hamper your chances of getting a loan or a visa for travel purposes.
The Income Tax Department has prescribed 7 types of ITR forms - ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7 and applicability of the form will depend on the nature and amount of income and the type of taxpayer.
ITR-1: This form is also called Sahaj. This is to be filed by resident individuals having total income upto 50 lakhs from the following sources:
2. One House Property
3. Other sources like Interest , family pension etc but excluding winning from lotteries and income from horse races
4. Agricultural income up to INR 5000/-
This form does not apply to an individual who has invested in Unlisted Equity Shares or is a Director in a company or has a total income of over Rs 50 lakh.
ITR-2: To be filed by Individuals and HUF’s who are not eligible to file form ITR-1 and don’t have income from profits and gains from business or profession.
ITR-3: To be filed by Individuals and HUFs having income from profits and gains from business or profession.
ITR-4: This form is also called as Sugam. To be filed by resident individuals, HUFs and firms (other than LLP) who are residents having total income up to ₹ 50 lacs and having income from business or profession computed under section 44AD, 44ADA or 44AE
ITR-5 This form applies to assessees other than Individual, HUF, Company, and persons filing the ITR-7 Form.
ITR-7: This form is applicable for the persons, including companies, who required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) of the Income Tax Act.
Documents and Details required for Filing Income Tax Return (ITR)
· Pan card & Aadhar card
· Bank Account Details
· Form 16, 16A
· Advance Tax or Self Assessed Payment Challan
· Details of Tax Saving Investments
· Sales/Income, Purchases and Expenses details
· Details of Fixed Assets
· Proper Books of Accounts ( If maintained)
Due Dates for Filing Income Tax Return
Person (other than company) not covered under tax audits
Person covered under tax audits
Person who has undertaken international transactions and is liable to report under 92E
Why should Income tax return be filed??
It is an annual activity seen as a moral and social duty of every responsible citizen of the country. It is the basis for the government to determine the amount and means of expenditure of the citizens and provides a platform for the assessee to claim refund, among other forms of relief from time to time.
1. Filing returns is a sign that you are responsible. Not just that, it also makes it easier for individuals and businesses to enter into subsequent transactions since their income is recorded by the tax department with applicable tax, if any, having been paid.
2. Even if your income level does not qualify for mandatory filing of returns, it may still be a good idea to voluntarily file returns. In most states, registration of immovable properties requires advancing as proof the tax returns of last three years.
3. If you plan to apply for a home loan in future it is a good idea to maintain a steady record of filing returns as the home loan company will most likely insist on it. Financial institutions may insist on seeing your returns over the past few years before transacting with you.
4. Various losses incurred by an individual or a business, both speculative as well as non-speculative, short term as well as long term capital losses and various other types of losses not recorded in the tax return in a financial year, cannot be shown for exemption in subsequent years for the purpose of tax calculation. So it’s best to file returns regularly, because you never know when you may want to claim an adjustment against past losses.
5. Under the Income Tax Act, non-filing of returns can attract a penalty of Rs 5,000. So while filing returns is a voluntary activity, there are times when it could hold legal implications for those who do not do so, especially if they must file a revised return in future.
Advantages of Filing Income tax return
1. The acknowledgment of Income Tax Return (ITR) is quick. More importantly, refunds, if any, are processed faster than paper-filed returns.
2. E-filing software with built-in validations and electronic connectivity is seamless and minimizes errors considerably. Paper-filings can be prone to errors.
3. No time and place constraint in filing returns online. E-filing facility is available 24/7 and you can file anytime, anywhere at your convenience.
4. Better security than paper filings since your data is not accessible to anyone either by design or by chance.
5. You can easily access past data while filing returns.
6. Convenience of direct deposit for refund and direct debit for tax payments. You have the option to file now, pay later - decide what day to debit your bank account for tax payment, among other convenience features.