Income is the most important source of revenue for the Indian Government. But many people who are earning don’t even know how to file income tax. It’s all because of lack of knowledge. But here you are going to learn almost everything about income taxes in India.
What is income tax?
Income tax refers to the tax which people pay directly to the government as per your income or profit. The money collected by the tax is utilized by the government for the development of the country and to pay the employees who are working in central and state government. As now you understand the definition of India’s income tax policy, we can move on to a brief overview.
Income Tax Overview
There is no doubt that Income Tax plays a major role in the revenue of a country. It is established or we should say imposed on the citizens of the country to raise funds so that the development and defense needs of the country are met properly.
The taxes are applicable on almost everything including income, sale, purchase, and property. The taxes collected from the citizens help to run the government embodiment and machinery. Therefore, it is significant that the income tax is handled properly.
In India, income tax was first introduced in 1860 as a result of India trying to get freedom from the British Government. It was implied to overcome the losses the British Government has suffered within the country. The income tax history of India is divided into three periods and every single period has its significance.
1: Phase 1: 1860- 1885
2: Phase 2: 1886- 1914
3: Phase 3: 1914 till this date.
At present, the Income Tax Act of 1961 is applicable in the country. In 1961, the modified Income Tax Act was introduced to the public and after that, the Act has undergone amendments for the betterment of the Government and the citizens.
Who are the taxpayers?
As the income tax of India policy is pretty complicated, you need to learn as much as possible. For starters, we will discuss the taxpayers.
A Tax Payer is the person or individual subjected to pay a tax. Every taxpayer has an identification number which is used as a reference number and issued by the government to every single citizen of the country. Generally, a taxpayer is an individual that is obligated to make payments to the municipal or government taxation agencies. The term taxpayer refers to the workforce of the country who pays the government projects via taxation.
Any Indian citizen, whose age is below 60, is liable to pay income tax when their income exceeds 2.5 lakhs/ year. If the citizen is above 60 and his/her earning is more than 2.5 lakhs then he/she will also have to pay taxes. The following entities are liable to pay taxes if they generate any income:
- Hindu Undivided Family (HUF)
- Body of Individuals (BOI)
- Association of persons (AOP)
- Local Authorities
- Corporate Firms
- All Artificial Juridical Persons
The taxpayers are classified into two categories, i.e. individual and corporation. The categories are further classified into two subcategories to have a better understanding of the system. The Government has a strict policy related to every aspect of Income Tax.
Income Tax Rules
There are so many rules to follow up on the income tax of India. The India income tax act enacted in 1961 helps to apply and enforce the law on the citizens. You cannot read the rules independently, thus they must be read in conjunction with the act. The rules stay in the framework of the Act and it can’t override the provisions defined by the Act.
From April 2019, 5 new rules are added to the Income Tax Act. The latest changes are as below:
- Change in Tax Rebate which was applicable to individuals having an annual income up to 3.5 lakhs. The threshold is now up to Rs. 5 lakhs per annum.
- Change in Standard Deduction limit which is increased from Rs. 40000 to Rs. 50000 for salaried employees.
- Dilution in the concept of deemed to be let out property. This means that only one property is considered as self-occupied and the rest ones will be taxable.
- Capital gains on the sale of residential house property which was exempted before the latest amendment.
- Increase in the TDS limit on interest earned from banks. Before the latest amendment, the amount was only Rs. 10000 and now it is increased to Rs. 40000.
The list of rules of the Income Tax Act of India is big enough to discuss it for a whole day. The rules are simply designed so that the government and the individuals both don’t have to suffer from losses due to the incapability of the other. Every year, new rules were added and the old ones are modified so that the taxpayers won’t feel like the government is stealing their money in the name of growth and development. And over the last few years, the number of taxpayers has increased which means the changes are having a good impact.
Type of taxes in India
As per categorized by the Government of India, taxes are of following types:
1. Direct Tax
This type of tax is paid directed by the individuals and it is imposed on wealth, income, gift, etc. It is paid directly by the individual to the Government without the involvement of any intermediate. Various type of tax included in this category is listed below:
- Banking Cash Transaction
- Corporate Tax
- Capital Gains Tax
- Double Tax Avoidance Treaty
- Fringe Benefit Tax
- Securities Transaction Tax
- Personal Income Tax
- Tax Incentives
2. Indirect Tax
The tax which is passed on by the taxpayer to someone else, then it is considered an indirect tax. This tax is levied on particular services and goods. It is not related to any particular organization or an individual. It is paid to the income tax department by the services who work under the manufacturing and delivery services. Import and trading services also lie in this range.
- Anti Dumping Duty
- Custom Duty
- Excise Duty
- Sales Tax
- Value Added Tax or V.A.T.
The Indian Government has an entire website as “India income tax online” for filing of income taxes. You just have to determine the income tax rate applicable on your income and then learn how to pay the tax.
How is income tax collected?
The Government collects the tax via three channels. All these channels are explained briefly for your help.
TDS exists to help the government with the taxes throughout the year. There is a table that describes how the tax is deducted under different circumstances.
- The employer cuts TDS according to the information available about the employee. The deduction is based on CTC which is calculated according to the knowledge of the employer about the employee.
- That’s why the employees have to provide investment proof to the employer.
- The Banks don’t have an idea if you are working in a company or have a fixed income, that’s why they deduct a standard 10% tax before they give away any interest.
- Make sure banks have your PAN number and they deduct 20% tax if they don’t have it.
- A person who is receiving an income of specified nature in the form of salary, interest, commission, rent, professional income, etc.
2. Advance Tax
The self-employed people have to do the calculation by themselves and then they pay the government periodically as it suits them such as quarterly. The due date is on or before:
- 15th June
- 15th September
- 15th December
- 15th March
After every quarter, the advance tax payable amount increases by 15%, 45%, 75%, and 100%. To calculate the tax, the steps followed are given below:
- Add all the invoices received by you including the future payments that you will be received till March 31 to get an estimate of the taxable income.
- Deduct the expenses related to your business directly and the investments you made under Section 80C.
- Calculate your tax liability for the year.
- Reduce the tax already deducted from your tax liability.
- If the tax payable remain is greater than Rs. 10000, you will have to pay advance taxes according to the rates.
- You can also use the India income tax calculator to determine the income tax reliability.
3. Self Assessment Tax
When you are filing for India income tax return, you need to find out whether you have to pay additional tax or not. The proper way to think about this tax would be:
- If you are paying tax for the financial year after the deadline has ended, you will have to pay the self-assessment tax.
- If you are paying enough tax during the financial year, you will have to pay the advance tax.
The good thing related to these taxes is that TDS is deducted by the payer himself and remitted to the government. Thus, the employee doesn’t have to worry about it. As a result, the taxpayer has nothing to worry about this part of the tax liability. In light of advance tax and self-assessment tax, they can be discharged using an online portal with Challan 280.
What are income tax returns?
Now talking about Income Tax Returns, it is a form where the taxpayer discloses the details of his income, claims the deduction applicable along with the exemptions and taxes that are payable. Every single individual who has a source of income, regular or irregular, they are obligated to file income tax returns.
There are prescribed forms through which the income earned by a person and the tax paid is refunded by the government.
The different categories of the income tax return form are given below:
- ITR Form 1: A person who has regular income as salary or pension or residential property or any other sources.
- ITR Form 2: This form is for the individuals that come under the Hindu Undivided Families and have any other income source apart from the Profits earned from business or profession.
- ITR Form 3: This form is for the Hindu Undivided Families that fall into the section where the families earn income from profits and gains of the Business or Profession.
- ITR Form 4S: This form is called SUGAM, another form for HUF and the individuals who want to opt out for this taxation scheme as per section 44 AD/AE.
- ITR Form 4: For the Hindu Undivided Families and the individuals who are professionals or proprietors.
- ITR Form 5: This form is used by the LLPs, Firms, BOIs, artificial judiciary, local authorities, and AOPs.
- ITR Form 6: The companies that claim to have no exemptions as per section 11 of the Income Tax Act can use this form.
- ITR Form 7: The individuals who are required to file returns as per Section 139 (4A), 139 (4D), 139(4C), and 139(4B) can use this form.
- ITR Form V: This ITR form acknowledges the income tax that is already filed.
India income tax return filing isn’t a complicated task. You just have to gather up the important facets of the process. The return filing is done online so that everything can be more systematic and easy. There are few exceptions in the return filing scheme as:
- Taxpayers aged 80 and above don’t need to file the tax return online
- Taxpayers who have income less than 5 lakhs also don’t need to claim the refund online.
For the rest of the taxpayers, online filing is mandatory. The E-filing is a better alternative for the filing of income tax. India income tax return verification form is available on the government website and you are just one click away from it.