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Basic Terms of Income Tax you should know

Taxation in India

Basic Terms of Income Tax you should know

To understand how to file income tax return, it is first necessary to know the primary difference between the financial year and the assessment year:-

  • Financial Year

The Financial Year is also called the Previous Year. It is the 12 months cycle that begins in April and ends in March of the next year. Irrespective of your employment start date, the tax year is fixed from April to March.

Understand this with an example,

Assume you joined a company on October 22, 2021. Your first tax year would be April 2021 to March 2022. You will be taxed on your income from October 22, 2021, until March 31, 2022.

Thus, the tax year or financial year is the year for which the tax is paid.

  • Assessment Year

The assessment year is the year after the previous year. In simple words, it is the year in which you will file your return in the prior year.

So, considering the example mentioned earlier, your previous year or tax year was 2021-22. Thus, your assessment year will be 2022-23, as you will be filing your income tax return between April 1, 2021, and September 30, 2022 (generally).

Understand Your Salary Income/ Head

It is quite essential to understand your entire salary structure on the basis of which you are supposed to file your income tax return. Your salary slip consists of all the information, such as your basic salary, house rent allowance, special allowance, etc., based on your salary structure and the company’s policy.

It also contains details regarding tax deducted, professional tax, employee provident fund, etc. The difference between these two is what gets credited to your bank account as salary.

Note you can use a salary calculator, too, while assessing your salary.

Sources of Income

Sources of IncomeParticulars
Income from SalarySalary, Allowances, Leave encashment basically all the money you receive while rendering your job as a result of your employment agreement
Income from House PropertyIncome from house or building, this may be owned and self-occupied or may be rented
Income from Capital GainIncome from gain or loss when you sell a capital asset
Income from Business or ProfessionIncome/loss that arises as a result of carrying on a business or profession
Income from Other SourcesThis is the residual head – includes your income from savings bank accounts, fixed deposits, family pension or gifts received

The sources of income on which you will be paying taxes can be split into the following –

  • Salary Income– This includes your salary, allowances, leave encashment, and another cash component that you may receive for rendering your services to an organization.
  • Income from House Property– This includes any income you may generate from renting an owned property.
  • Income from Capital Gain– Under this head, all the income that arises from transactions in capital assets such as shares/mutual funds are included.
  • Income from Business or Profession– If you are conducting any business or profession along with your job, then the income from such activity will be your income from business or profession.
  • Income from Other Sources– This includes interest income in a savings account or interest income from deposits with the bank, gifts, etc.

 

Deductions

A deduction can be considered a tax benefit that can be used to decrease your taxable income. A deduction is an amount that Income Tax Department allows you to diminish your Income, which ultimately reduces your tax liability.

It can be calculated as –

Sum of all income = Gross income

Gross Income – Deductions = Taxable Income

Thus, higher is your deduction; lower is your tax liability. Deductions are allowed under section 80 (Section 80C to 80U) of the Income Tax Act.

Standard Deduction

As per the Budget 2018, salaried employees are entitled to a standard deduction of Rs 40,000 from the gross salary. This standard deduction will replace the medical reimbursement amounting to INR 15,000 and transport allowance amounting to Rs. 19,200 in a financial year. Effectively, the taxpayer will get an additional income exemption of Rs 5,800. The limit of Rs. 40,000 has been increased to Rs. 50,000 from FY 2019-20 onwards in the Interim Budget 2019. From FY 2023-2024, this deduction of Rs.50,000 is available and can be claimed under both the old and new tax regimes.

Tax Exemptions

You can call tax exemptions those monetary exclusions that can assist in reducing your taxable income.

Such exemptions help you avail tax reliefs, reduce tax rates or even ensure that tax is applicable on specific parts of your income only.

Understand this with an example,

Suppose you pay rent for your house. Now, you can avail yourself of an exemption on your House Rent Allowance (HRA) which is mainly calculated according to your salary. So, while calculating your taxable income, a particular portion of your HRA gets exempted from the gross income.

80C

Under section 80C, you can reduce up to an amount of Rs 1,50,000 from your gross income. The commonly used investment vehicles under section 80C are –

  • Public Provident Fund
  • Employee Provident Fund
  • Tax saving fixed deposit
  • Equity-linked savings scheme
  • Insurance premium

Tax Deducted at Source (TDS)

Tax Deducted at Source is the tax amount that is deducted and deposited on the taxpayer’s behalf by the employer with the Income Tax Department. TDS is calculated by the employer based on estimated Income tax as suggested by the employee.

The rate at which tax is deducted is dependent on the income tax slab you belong to.

Similarly, interest earned on fixed deposits is also liable for TDS. Typically, the banks deduct 10% of the interest income as TDS as they are not aware of your tax slab. However, the bank will not deduct any tax provided Form No. 15H/15G (as the case may be) is submitted to the bank by the depositor.

However, if you have mentioned your Permanent Account Number (PAN), the bank may deduct 20% of the income as well.

It is a significant element in the income tax filing procedure as it is a measurement technique that the Income Tax Department imposes to secure payment of taxes within the due time frame.

Advance Tax

Advance Tax is the sum of income tax that is paid in much advance instead of a lump-sum payment at the time of filing the ITR. This is paid mainly by businessmen and professionals.

The due dates for paying these tax installments are fixed by the Income Tax Department of India. The dates and tax rates are mentioned below-

  • On or Before 15th June: 15%
  • On or Before 15th September: 45%
  • On or Before 15th December: 75%
  • On or Before 15th March: 100%

Self-assessment Tax

Self-assessment tax is the balance tax that is supposed to be paid by the taxpayer on his assessed income after advance tax and TDS have been taken into account before filing the return of income.

Categories of Tax Payers

  • Residents and non-residents (below 60 years of age)
  • Senior citizens (60 and above years but below 80 years of age)
  • Resident super senior citizens (above 80 years of age)

Calculating Tax Payable

Once your taxable income is known, you will be able to compute the tax that needs to be paid.

  • Old Regime
Income Tax SlabTax Rates
Up to Rs 2,50,000*Nil
Rs 2,50,001 – Rs5,00,0005%
Rs 5,00,001 – Rs 10,00,00020%
Above Rs 10,00,00030%
  • New Regime
Tax SlabRates
Up to Rs. 3,00,000NIL
Rs. 300,000 to Rs. 6,00,0005% on income which exceeds Rs 3,00,000
Rs. 6,00,000 to Rs. 900,000Rs 15,000 + 10% on income more than Rs 6,00,000
Rs. 9,00,000 to Rs. 12,00,000Rs 45,000 + 15% on income more than Rs 9,00,000
Rs. 12,00,000 to Rs. 1500,000Rs 90,000 + 20% on income more than Rs 12,00,000
Above Rs. 15,00,000Rs 150,000 + 30% on income more than Rs 15,00,000

Note, 4% will be levied as Health and Education Cess on income tax amount computed on taxable income.

Once your final tax is computed, you are required to subtract the TDS from the tax liability.

Tax to be paid = Tax Liability – TDS

Thus, the remaining amount after deducting TDS from tax liability needs to be paid to the Income Tax Department while filing returns.

Documents Required to File Income Tax (ITR) in India

If you are filing the income tax return online, there is a set of documents that you need to fill out and submit. The documents may vary according to the source of income. The documents are-

  • Salaried Individual– Form 16, 16A, 26AS, Receipt of Rent for HRA, Payslips, Investment made under Section 80C, 80D, 80E, and 80G.
  • Capital Gains– ELSS, SIPs, Mutual Fund statement, Debt fund, sale and purchase of Equity Funds. Purchase/selling price, details of capital gains, details of registration if any house property is sold. A Statement of capital gains through selling shares and stock trading.
  • House Property– PAN Card details, Property address, Information of co-owner, Certificate of Home Loan interest.
  • Other Sources- Bank details, information of interest received from tax-saving or corporate bonds.

 

Note on Standard Deduction

A standard deduction of Rs.50,000 is available from gross total income. You can claim this tax benefit irrespective of the amount spent on Transport and Medical Allowance.

The tedious process of income tax return filing and claiming deductions has now become much more simplified with the introduction of e-filing. So, being a responsible citizen of India, make sure you fulfil your obligation and file your returns within the due period.

Documents Required to File Income Tax Returns

Many documents are required to be kept ready before filing the Income Tax Return (ITR). These documents vary according to the source of income, as stated below:

  • Salaried individual – Form 16/16A, 26AS, rent receipt paid for HRA, payslips, investments made under Section 80C, 80E, 80D and 80G.
  • Capital gains – ELSS statement, mutual fund statement, sale and purchase of equity/debt funds, purchase/selling price of a house, registration details if any house property is sold, and capital gains statement showing the sale of shares and stock trading.
  • House property – PAN card details, co-owner details, property address and home loan interest certificate.
  • Other sources – Bank FD details and details of interest received from tax-saving or corporate bonds.

​Permanent Account Number: PAN is a ten-digit unique alphanumeric number issued by the Income-tax Department. PAN is issued in the form of a laminated plastic card (commonly known as PAN card). In this part you can gain knowledge about various provisions relating to PAN.

 

E-payment of direct taxes​​: There are two modes of payment of direct taxes (i) physical mode i.e. payment by using the hard copy of the challan at the designated bank; and (ii) e-payment mode i.e. making payment by using the electronic mode. In this part you can gain knowledge about various provisions relating to e-payment of direct taxes.​

Introduction

Earlier, we used to stand in queue for hours to book movie tickets, railway tickets, etc. but now we can relax at our place and perform these tasks using the internet. With the development of technology, the Government has also upgraded itself. Previously, the taxpayers have to wait in long queues at the banks for making the payment of tax, but after the introduction of e-payment facility one can pay tax quite comfortably from any place by using various online payment mode

Mandatory or compulsory e-payment

It is compulsory for the following taxpayers to pay tax using the e-payment mode only. In other words, following persons cannot use the physical mode of payment of tax and have to pay the tax electronically using the e- payment facility:

  • All companies
  • All taxpayers other than company who are liable to get their accounts audited as per section 44AB.

Illustration

The income-tax liability for the financial year 2023-24 of Reliance Ltd. amounted to Rs. 8,40,000. It wants to discharge its tax liability. Advice the company as to the mode of payment of tax.

It is compulsory for a company to pay the income-tax using the e-payment mode only. Hence, Reliance Ltd. has to pay its tax electronically by using various prescribed online mode of payment.

Illustration

Mr. Salman is engaged in the business of trading in food grains. The annual turnover of the business was Rs. 2,84,00,000. He wants to pay advance tax of Rs. 1,84,000. Advice him as to the mode of payment of tax.

**

The turnover of the business of Mr. Salman exceeds Rs. 1,00,00,000 and, hence, as per section 44AB Mr. Salman will be liable to get the accounts audited.

It is compulsory for the following taxpayers to pay tax using the e-payment mode only. In other words, following persons cannot use the physical mode of payment of tax and have to pay the tax electronically using the e- payment facility:

  1. All companies
  2. All taxpayers other than company who are liable to get their accounts audited as per section 44AB.

Mr. Salman is liable to get his accounts audited and, hence, he will be covered by (2) above, and hence he has to pay the advance tax electronically.

Illustration

Mr. Amitabh is engaged in the business of trading in fabrics. The annual turnover of the business amounted to Rs. 84,00,000. Profit for the year amounted to Rs. 8,40,000. He wants to pay his advance tax. Advice him as to the mode of payment of tax.

**

The turnover of the business does not exceed Rs. 1,00,00,000 and, hence, as per section 44AB Mr. Amitabh is not liable to get the accounts audited.

It is compulsory for the following taxpayers to pay tax using the e-payment mode only. In other words, following persons cannot use the physical mode of payment of tax and have to pay the tax electronically using the e- payment facility:

  • All companies
  • All taxpayers other than company who are liable to get their accounts audited as per section 44AB.

Mr. Amitabh is not covered in any of the above discussed categories and, hence, it is not mandatory for him to pay tax electronically. Thus, he can pay tax by physical mode or electronic mode as per his choice. However, e-payment will be easy and will save time and efforts.

Optional e-payment

As discussed earlier, e-payment is mandatory for all companies and all non-corporate taxpayers covered by audit under section 44AB. A person not covered in the mandatory category can voluntarily pay his tax by using the e-payment mode. E-payment saves time and efforts.

Benefits of e-payment

E-payment is time saving, simple, safe and this facility can be used at any time from anywhere.

Requirements for making e-payment

Tax can be paid online using any of the following payment mode:

  1. Net Banking
  2. Debit Card
  3. Credit Card
  4. RTGS/NEFT
  5. UPI

If the taxpayer does not have any of the above mentioned facility, he can make e-payment using account of any other person but the tax should be paid in his name.

If the payment is to be made through a credit card, you need to select the ‘Payment Gateway’ mode option. In such a case, the transaction charges of 0.85% + GST @ 18% shall apply. These transaction charges will be applicable over and above the tax amount in this mode.

Taxes which can be paid electronically

Following direct taxes can be paid using the e-payment mode:

  • Income-tax
  • Equalization Levy
  • Corporate tax (i.e., income-tax paid bya company)
  • Tax deducted at source (TDS)
  • Tax collected at source (TCS)
  • Securities Transaction Tax (STT)
  • Commodities Transaction Tax (CTT)
  • Wealth-tax and other direct taxes like gift tax, expenditure tax, etc.

 

Nature of challan to be used

Mandatory or compulsory e-payment
It is compulsory for the following taxpayers to pay tax using the e-payment mode only. In
other words, following persons cannot use the physical mode of payment of tax and have
to pay the tax electronically using the e- payment facility:
All companies
All taxpayers other than company who are liable to get their accounts audited as per section 44AB.p

How to e-pay tax?

Given below is the step to make e-payment of taxes:
(a) Go to https://www.incometax.gov.in/iec/foportal/
(b) Select ‘e-Pay Tax’ from the quick links
(c) Enter PAN/TAN and mobile number for OTP verification
(d) Enter the OTP received on mobile number and click on continue
(e) Confirm the details of ‘PAN/TAN’ and ‘Name’ and click on continue
(f) Select the appropriate payment, i.e., ‘Income Tax’, ‘Equalisation Levy/ STT/ CTT’ or ‘Fee/
Other Payments’ and click on proceed
(g) Select ‘Assessment Year’ and ‘Type of Payment’ and click on continue
(h) Enter amount of tax, surcharge, cess, etc. (if any)
(i) On click on continue, taxpayer will have a new screen with various option to make
payment, like net banking, debit card, Pay at bank counter, RTGS/NEF and payment
gateway.
(j) Select appropriate mode of payment and click on continue. If taxpayer wishes to make
payment using credit card or UPI, he needs to select ‘Payment Gateway’.
(k) Verify all the details appearing on challan and pay tax.
(l) On successful completion of the transaction, the challan of payment (i.e., receipt of
payment) will be generated and will be displayed on the screen.

Interest Payable by the taxpayer under the Income-tax Act:​​ Under the Income-tax Act, different types of interests are levied for various kinds of delays/defaults. In this part, you can gain knowledge about the provisions of section 234A, 234B and 234C dealing with interest for (i) delay in filing the return of income; (ii) interest for non-payment or short payment of advance tax; and (iii) interest for non-payment or short payment of individual instalment or instalments of advance tax.​

Minimum Alternate Tax and Alternate Minimum Tax​

Initially the concept of Minimum Alternate Tax (MAT) was introduced on companies and progressively it was made applicable to all other taxpayers in the form of Alternate Minimum Tax (AMT). In this part you can gain knowledge about various provisions relating to MAT and AMT.

Tax free incomes Section 10 gives list of incomes which are exempt from tax. In this part you can gain knowledge about various incomes which are exempt from tax under section 10.

Disclaimer: This tax consultancy article is for educational purposes only. It does not constitute personalized tax advice. For specific tax situations, consult a qualified tax professional or contact Qualified Munim Team at qualifiedmunim@gmail.com or +91-74199-00446. Visit www.qualifiedmunim.com. We are not liable for any actions taken based on this information.

Tags :
Advance Tax,Basic Terms of Income Tax you should know,Calculating Tax Payable,Categories of Tax Payers,Documents Required to File Income Tax (ITR) in India,Documents Required to File Income Tax Returns,Note on Standard Deduction,Self-assessment Tax,Standard Deduction,Tax Deducted at Source (TDS),Tax Exemptions,Taxes which can be paid electronically,Understand Your Salary Income/ Head
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