Theme: Income Tax

Income tax is a tax levied by the Government of India on the income of every person. The Income Tax Act, 1961, covers legal provisions regarding the collection of income tax. ​ There are some important points you will need to keep in mind to understand income tax, such as:

Persons filing Tax

It is mandatory for every person to pay income tax. Income tax law defines the term ‘person’^{(( Section 2(31), Income Tax Act, 1961))} to include individuals, Hindu Undivided Family etc. Read more here.

Calculating Taxable Income

​​The Income Tax Department taxes you based on your income from categories such as income from salaries etc. The total income calculated from these heads is called the gross total income. It is from this amount that deductions are made. Read more here.

Entities and Income exempt from Tax

Certain entities as well as certain kinds of income are exempt from tax. In other words, income tax will not be charged to such entities and incomes. Some examples include agricultural income, income for scholarships for higher education etc. Read more here.

Deductions with respect to tax

A deduction is an expense that is subtracted from an individual’s gross total income to reduce the amount which is going to be taxed. Deductions can be less than, more than or equal to the amount of income. If the amount deductible is more than the amount of income, then the resulting amount will be taken as a loss while calculating taxes.^{(( Section 80A, Section – 80AA, Section – 80AB, Section – 80AC, Section 80B, Section 80C, Section 80CC, Section 80CCA, Section – 80CCB of the Income Tax Act, 1961))} Some of the deductions for individuals include income from a loan taken for house property, income from loans taken for higher education etc. Read more here.

Tax Collection

Taxes are collected by the Government through:

Banks in India

Taxpayers can voluntarily pay income tax by going to designated banks. For example, taxpayers can pay advance tax and self-assessment tax in authorized bank branches such as ICICI Bank, HDFC Bank, Syndicate Bank, Allahabad Bank, State Bank of India, etc.

Taxes deducted at source [TDS]

When tax is collected from the very source of income of the person receiving income, it is known as ‘taxes deducted at source’ or TDS.^{(( Tax Deducted At Source, Income Tax Department, available at https://www.incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx For example, if you are a professional earning a retainership fee in a company, a certain amount may be deducted by your company as tax when it is given to you. The company will deposit the deducted money to the government. The person whose tax has been deducted at source will get a Form 26AS or TDS Certificate. This will be given to the person by the entity or person deducting the tax. For example,  XYZ Company will deduct an amount for tax before giving Aman his monthly salary, and provide Aman with the TDS Certificate.}

Taxes collected at source [TCS]

Tax collected at source (TCS)((Section 206C, Income Tax Act, 1961))

is the tax payable by a seller, which he collects from the buyer at the time of sale. For example, in a parking area of a shopping mall, along with the parking fee, the mall will charge a tax amount for a parking lot. Some other instances where sellers collect TCS are for liquor, while selling a motor vehicle, jewellery, etc.

It is mandatory for a taxpayer to have a PAN Card as well as an Aadhar Card while filing taxes.

The Income Tax Department taxes you based on your income from the categories given below^{(( Section 14, Income Tax Act, 1961))}. Gross total income is the total income calculated based on these categories. It is from this amount that deductions are made.

Income from Salary 

Income from salary is taxable in India. Salaried income which is taxable consists of:

• Salary due from the employer (including a former employer) to the taxpayer during the previous year. The salary will be taxed even if it has not yet been paid.
• Salary paid by the employer (including the former employer) to the taxpayer during the previous year, before it became due. For example, if the employer pays the salary for a project in advance.
• Any arrears or pending salary paid by the employer (including the former employer) to the taxpayer during the previous year. This happens only if tax was not charged to this amount in an earlier year.

The following break-ups within your salary are fully taxable:

Income from Capital Gains

Income from capital gains^{(( Capital Gains, Income Tax Department, available at https://www.incometaxindia.gov.in/Tutorials/15-%20LTCG.pdf. is charged only in the following conditions: There should be a capital asset((Section 2(14),Income Tax Act, 1961))}. In other words, this refers to any property held by a taxpayer.

• During the previous year, the capital asset is transferred by the taxpayer.
• There should be profits or gains as a result of transfer. Read more here to understand which transactions are not considered to be “transferred” by the taxpayer.

Some transactions not taxed are:

• Distribution of assets^{(( Section 46(1), Income Tax Act, 1961))} in a company to the shareholders at the time of liquidation
• Distribution of capital assets ^{(( Section 47(1), Income Tax Act, 1961))}on a partition of a Hindu Undivided Family

Income from House Property 

A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between a commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. This includes property you own. Income from house property is taxable if:^{(( Section 22, Income Tax Act, 1961))}

• The house property should consist of any building or land attached with it
• The taxpayer should be the owner of the property
• Business or profession is not carried on by the taxpayer in the house property

Income from Business and Profession 

Remuneration, bonus or commission received by a partner from the firm or anyone working independently in a business or profession, is not taxable as ‘Income from Salaries’. Rather, it would be taxable as ‘Income from a Business or Profession’ ^{(( Section 17, Income Tax Act, 1961))}. Tax is charged  on the following from a business or profession^{(( Section 28, Income Tax Act, 1961;Section 41, Income Tax Act, 1961; Section 43 , Income Tax Act, 1961))}:

• Any compensation or other payment owed to or received by any specified person.
• Income derived from a trade, profession or any specific services performed for its members, like an income made by a contractor.
• Cash assistance (by whatever name it is called) received or receivable by any person against exports under any scheme of Government of India.
• Value of any benefits arising from a business or a profession.
• Interest, salary, bonus, commission or remuneration owed to or received by a partner from partnership firm.

Read more examples on which income is charged here.

Income from Other Sources 

Any income which is not chargeable to tax under any other heads of income, but which is not to be excluded from the total income, is chargeable to tax under the head “Income from Other Sources”.^{(( Section 56, Income Tax Act, 1961))} Some examples of these are:

• Dividends
• Income from winning lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any form or nature.

The following amounts fall under the head “income from other sources”. Amounts not taxed under the head of ‘Profits and Gains from Business or Profession’, fall under this category. This is applicable only if

• Any money received by an employer from his employees as a contribution towards PF (Provident Fund), ESI (Employee State Insurance), Superannuation Fund, etc.
• Interest on securities
• Income from machinery, plant or furniture belonging to taxpayer and let on hire
• Composite rental income from letting of plant, machinery or furniture with buildings
• Any sum received under Keyman Insurance Policy (including bonus)

The rates of income-tax and corporate taxes are available in the Finance Act passed by the Parliament every year. You can also check your tax liability and calculate the amount of income tax you have to pay by using the free online tax calculator available at the Income Tax Department website.

The Budget 2020 has given taxpayers the option to choose between:

• existing income tax regime with applicable income tax exemptions and deductions or
• a new tax regime with slashed income tax rates and new income tax slabs, but no tax exemptions and deductions.

Given below are the income tax rates  for individuals:

Old/existing tax rates

 

New reduced tax rates^{(( The Finance Act, 2020 (Rates applicable from April 1, 2020))}

 

Income Tax for Senior Citizens

Senior Citizens are those who are above the age of 60 years or more during the previous year.

 

Income tax for Super Senior Citizens

Super senior citizens are those who are above the age of 80 during the previous year (year in which income is earned)

Read more on income tax rates for a partnership firm, Hindu Undivided Family,  etc.

It is mandatory for every person to pay Income-tax. Income tax law defines the term ‘person’^{(( Section 2(31), Income Tax Act, 1961))} to include:

• Individual. For example, a salaried employee etc.
• Hindu Undivided Families (HUF). For example, a HUF including the joint family of Mr Rakesh, Mrs Rakesh and their sons pays tax as a separate entity.
• Association of persons or body of individuals. For example, a housing cooperative society.
• Firms. For example, a firm called TaxMann & Co-owned by Mr Rakesh and Mrs Rakesh.
• LLPs. For example, ABC LLP. In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence.
• Companies. For example, ABC Ltd., XYZ Ltd.
• Local authority and any artificial juridical person not covered under any of the above. For example, University and Institutions, Municipal Corporations, etc.

Thus, from the definition of the term ‘person’, it can be observed that, apart from a natural person, i.e., an individual, other artificial entities like a company, HUF, etc. are liable to pay Income-tax. All association of persons, body of individuals, local authority, artificial juridical person will have to pay income tax even if they were formed with or without the objective of earning a profit, or income. ^{(( Exception to Section 2(31), Income Tax Act, 1961))} However, certain institutions or entities in India do not have to pay tax under the law. Read here to find out more.

An Income Tax Return (ITR) is a form through which the details of income earned by a person in a financial year, and taxes paid on such income are communicated to the Income Tax Department.

Depending on the nature and status of income, different ITR forms are prescribed for different classes of taxpayers.^{(( Rule 12, Income Tax Rules, 1962))} Every taxpayer has to file tax returns under one specific ITR form only, and you have to choose the ITR form applicable to you. Filing the wrong ITR form will be considered as incorrect and defective.

Income Tax Forms

ITR forms can be downloaded on the Income Tax Department website. You will receive an Acknowledgement Form from the Income Tax Department when the data of the Return of Income in Forms ITR-1 (SAHAJ), ITR-2, ITR-3, ITR4 (SUGAM), ITR-5, ITR-6, ITR-7, is both filed and verified.

ITR-1 (SAHAJ)

Individuals residing in India having a total income of up to 50 lakh have to file this ITR Form. You are a resident if you have lived^{(( Section 6, Income Tax Act, 1961))}:

• in India for at least 182 days in the previous year
• in India for at least 365 days in the four years before the previous year, and in India for at least sixty days in the previous year

You have to fill this form when the source of the income is from your:

• Salary or pension
• One house property
• Other sources like interest etc. (not including lottery winnings, income from race horses etc.)
• Agricultural income up to Rs 5,000

If you are a person who is not residing in India, or a director in a company,^{(( ITR-1, Income Tax Department website, available at https://www.incometaxindia.gov.in/forms/income-tax%20rules/2020/itr1_english.pdf))} or a person who has income from any source outside India, the ITR-1 form is not applicable.

ITR-2

This form is applicable to:

• An individual to whom ITR-1 does not apply, or
• A Hindu Undivided Family (HUF) whose total income does not include profits and gains of a business or profession.^{(( Rule 12(1)(c), Income Tax Rules, 1962))}

For example, if Rama is a director in a company, then she will have to file tax returns under ITR-2, because she is not covered under ITR-1. Further, you have to fill this form when the source of the income is from your:

• Capital gains
• More than one house property
• Foreign income/foreign assets

ITR-3

This form is only applicable to:

• An individual or a Hindu Undivided Family (HUF) to whom forms ITR-1, ITR-2, and ITR-4 are not applicable, and
• Whose income comes from profits and gains of a business or profession.

For instance, if Shyam is a partner at a firm and earns more than Rs 50 lakh annually, then he will have to file ITR-3.

ITR-4 (SUGAM)

This form is applicable to individuals, HUFs and firms (excluding Limited Liability Partnerships) residing in India who have a total yearly income of up to Rs 50 lakh.

ITR-4 is applicable when the source of the income is:

• Business¹
• Profession ^{(( Section 44ADA, Income Tax Act, 1961))}
• Salary or pension
• One house property
• Other sources like interest etc. (not including lottery winnings and income from racehorses)

Further, a person who is not residing in India or a director of a company need not fill this ITR-4 Form.

ITR-5

This form is applicable to the following:

• Firm
• LLP (Limited Liability Partnership)
• Association of Persons/Body of Individuals
• Artificial Juridical Person ^{(( Section 2(31)(vii), Income Tax Act, 1961))}
• Local authority^{(( Section 2(31)(vi), Income Tax Act, 1961))}
• Representative assessee. A representative assessee could be an agent of a non-resident, the guardian of a minor/person of unsound mind, a trustee etc. who is authorised to receive or manage income on behalf of another person. ^{(( Section 160(1), Income Tax Act, 1961))}
• Cooperative society
• Societies registered under the Societies Registration Act 1860.

It is not applicable^{(( Sections 139(4A, 4B, 4C and 4D), Income Tax Act, 1961))} to individuals, HUF, a company and those persons filing ITR-7.

ITR-6

This form is applicable to companies, other than those companies claiming tax exemption for charitable or religious reasons.^{(( Section 11, Income Tax Act, 1961))} Further, you can find a list of tax-exempted institutions here.

ITR-7

This form is applicable to persons (including companies) such as:

• Every person receiving income from property held under trust, or for charitable or religious purposes ^{(( Section 139(4A), Income Tax Act, 1961))}
• Political parties ^{(( Section 139(4B), Income Tax Act, 1961))}
• News agencies, mutual funds, trade unions etc. ^{(( Section 139(4C), Income Tax Act, 1961))}
• Universities or colleges ^{(( Section 139(4D), Income Tax Act, 1961))}

ITR-Verification Form

You have to fill this form in situations where you have filed the data of the Return of Income in Forms ITR-1 (SAHAJ), ITR-2, ITR-3, ITR-4(SUGAM), ITR-5, ITR-7, but not verified electronically. Read more here.

1. Section 44AD and 44AE, Income Tax Act, 1961 [↩]

You can file the Income Tax Return Form with the Income Tax Department in any of the following ways^{(( What are the different modes of filing income?, FAQs on filing the return of income, https://www.incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs%20on%20filing%20the%20return%20of%20income))}:

• Submitting the return in a paper form (offline) to the income tax office
• Submitting the return electronically under digital signature
• Electronically transmitting the ITR data under electronic verification code
• Electronically transmitting the ITR data, and later submitting the verification of the return

Procedure to file

Income tax returns can be filed manually as well as electronically i.e., e-filing.

Option 1: Manual Filing

For filing returns manually, you need to go to the Income Tax Department’s office to physically file returns. You can locate your nearest tax office here. Ensure that you fill the form completely and provide all the necessary details correctly. ​​​​​​​​​​ITR forms are attachment less forms and, hence, you are not required to attach any document (like proof of investment, TDS certificates, etc. along with the return of income. However, these documents should be kept safely and should be produced before the tax authorities when demanded in situations like assessment, inquiry, etc.

Option 2: Filing Electronically

Electronically filing your tax returns through the Internet or online is an easier process than physically filing returns because you do not need to take an actual print out of the documents. Also, it is a simpler process and can be done for free online through the income tax website.

Electronic filing or e-filing of ITR can happen in two ways: Offline and Online.

In the offline mode, you download the ITR form from the income tax website, fill it offline and then submit it on the website. In the online mode (applicable only for ITR forms 1 and 4), you fill in the form directly online.