All you need to know about Income Tax in India
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All you need to know about Income Tax in India

  • Highlights

  • Income tax is a direct tax levied on your income

  • Calculate your taxable income using the income tax slabs

  • E-filing your income tax adds to convenience

  • Save judiciously to claim exemptions on your income tax

Filing income taxes is an important responsibility for every citizen as it helps you declare and register your income with the government. A thorough ITR will also increase your chances of getting an affordable loan and will also help with your visa application.
 

Much like every other country in the world, India has her own set of income tax rules complying with the Income Tax Act, 1961. Knowing the fundamentals of these rules will help you understand income tax laws better and will fetch you more convenience as a tax payer. So, take an in-depth look into income tax protocols here.

An introduction to Income Tax

 

What is Income Tax in India?

Income tax was levied for the purpose of social welfare in India. It is believed that the foundations for income tax were laid using references from the Manu Smriti and Arthashastra. The present taxation system is said to be similar in many ways to the tax administration prevalent in the Mauryan empire. The first Income Tax Act on 24th July 1860 was imposed on royalty and the British. The act ended in 1865 and was reintroduced in 1867. After various tax acts and laws being imposed, India currently follows the Income Tax Act, 1961.
This Act was brought into action from 1 April, 1962. Income tax is adirect tax and every individual or businesses receiving or generating income is liable to pay taxes to the government. You are eligible to pay an amount as tax corresponding to your income tax slab.
 

Why is Income Taxlevied?

The government uses funds accumulated via your taxes to build and develop the infrastructure of the country. Income tax is also used as a means to even out the wealth among the population of India.It is every citizen’s duty to pay income tax as applicable i.e., file income tax returns based on your income and pay tax as per your tax slab. Income tax was first issued in order for the authorities of the country to be able to give back to the people in the form of progress, perks, and provisions. The goal behind collecting income tax remains the same today. Filing timely returns will also help you claim deductions under income tax based on your savings, investments, and asset purchases.

How and when Income Tax is levied?

Every individual and entity pays tax based onvarying principlesas per profile and income. For instance, NRIs are taxed only on income accrued or earned. On the other hand, if you are salaried, then you will be taxed on your salary and as a business owner you are will taxed on your business income. As a housewife with no regular income you will have to pay TDS on your savings such as FDs and then file income tax showing nil income to get a refund on your deductions.
So, based on your category and income you will have to file a return and pay income tax once every financial year. In India income tax filing happens after 31st March, the end of a financial year. As as individual you need to file your IT returns before 31st July of the second year subsequent to the financial year for which you are filing the tax. This deadline is extended to before 30th September for a business. However, you can pay advance taxes to get refunds and rebates as rewards.

How to Calculate Income Tax

You can calculate your income tax based on your slab.

What are the Income Tax slabs?

Income tax slabs in India for residents under 60 years of age are as follows:
- Income up to Rs.2,50,000 is not taxed. - Tax rate for income between Rs.2,50,001–Rs.5,00,000 is 5% of total income (after deduction of Rs.2,50,000) + 4% Cess.
- Tax rate for income between Rs.5,00,001–Rs.10,00,000 is 20% or total income (after deduction of Rs.5,00,000) + Rs.12,500+ 4% Cess.
- Tax rate for income above Rs.10,00,000 is Rs.1,12,500 + 30% of total income (after deduction of Rs.10,00,000) +4% Cess.

The tax rate applicable for individuals between the years of 60-80 is as follows:

- Income up to Rs.3,00,000 is not taxed
- Tax rate for income between Rs.3,00,001–Rs.5,00,000 is 5% of total income (after deduction of Rs.3,00,000) + 4% cess.
- Tax rate of income between Rs.5,00,001–Rs.10,00,000 is Rs.10,000 + 20% of total income (after deduction of Rs.5,00,000) + cess.
- Tax rate for income above Rs.10,00,000 is Rs.1,10,000 + 30% of total income (after deduction of Rs.10,00,000 + 4% cess.

The tax rate applicable for individuals above 80 years of age are as follows:

- Income up to Rs.5,00,000 is not taxed
- The tax rate for income between Rs.5,00,001-Rs.10,00,000 is 20% of total income (after deducting Rs.5,00,000) + 4% cess.
- The tax rate for income above Rs.10,00,000 is Rs.1,00,000 + 30% of total income (after deduction of Rs.10,00,000 +4% cess.

How to calculate Income Tax on your salary

In order to calculate the taxes applicable on your salary, you will have to first find out the income tax slab corresponding to your income. Once you have determined this, you will know how much to pay as tax. Then comes the role of your savings, assets, and investments based on which you will get income tax exemptions.
If you earn Rs.3,00,000 per annum for example, then your taxable income is Rs.50,000, owing to the fact that your income falls into the Rs.2,50,001–Rs.5,00,000 income tax slab. You will be taxed 5% on Rs.50,000, i.e. Rs.2500 + 4% cess (tax on tax). This means your total tax liability on your annual income will be Rs.2600. Here, you can also mention all your savings, payments towards your home loan, assets, and investment to get income tax exemptions under several Sections including the most significant Section 80 C.
Post the evaluation of your tax amount corresponding to your savings you will get your final income tax obligation amount. Remember to also claim deductions under income tax in case you have already paid TDS on your maturing savings and for your salary to the employer. Also include taxable salary from your previous employer in your income tax return, in case you have changed jobs within the same financial year.

Income Tax Deductions

You can get exemptions from income tax when filing your returns in various ways.

What are deductions under income tax?

Tax deductions will save you from paying excess tax. Deductions help you to bring down your overall taxable in come based on your investment portfolio. For example, if you want to claim deductions based on health insurance premiums, you need to have an active health insurance plan in the first place.
Another example is tax deductions on home rent. This is not applicable for those who already own a home and can only be claimed by you if you have an HRA component in your salary composition and you are staying in a rented home. The government allows you to claim tax deductions based on many such categories and components to ease your financial burden as a taxpayer.

What are the common/basic Income Tax deductions that I can claim?

- You can claim deductions on investments under Section 80C of Income Tax Act, 1961
- You can claim tax deductions on business expenses
- You can claim tax deduction for registration fees and stamp duty on the property you purchase
- You can claim deductions on premium payments made towards life insurance policies
- You can claim deductions on preventive health checks
- You can claim deductions on educational fees for up to 2 children’s education

Being a part of a HUF (Hindu Undivided Family) makes you eligible to claim deductions from your taxable income up to a maximum of Rs.1.50 lakh. Deductions for certain expenses may vary based on other affecting factors. There are also other tax benefits that you can claim such as exemptions on your first home purchase based on the home loan interest and principal, claim deductions for you and your spouse in case you apply jointly for a home loan, deductions on interest up to Rs.10,000 earned in your savings account, deduction on your taxable income corresponding to the interest repayment towards an educational loan, and you can also get a deduction on your taxable income in case you make donations to charitable organisation.

How much deduction can I claim on my Income Tax?

In a case you have paid excess taxes, you can claim tax deductions in order to get an income tax refund. The maximum amount that you can claim as deduction will differ according to the proof of savings or investments you furnish. Claiming deductions under Section 80 C for example, has a maximum cap of Rs.1,50,000.

On the other hand, you can claim an extra Rs.50,000 paid towards your home loan interest under Section 24 of the Income Tax Act, provided you are a first-time homeowner. This is why it is important to know the categories and sections under which you are eligible to claim a deduction in advance. This will help you plan your finances better, and you will have the entire year to adjust your folio in this regard.

How can you calculate Income Tax for pensioners?

Pension is a monthly provisions set up by your organisation after retirement. This provides you a source of regular income post retirement. The amount you get as pension will vary according to the terms set by your organisation. Pension falls under salary taxation. This means that you will have to declare the annual pension amount under the head of salary in your ITR form. Pension can either be paid on a monthly basis (uncommuted) or in a lump sum amount (commuted). Uncommuted pensions are liable to be taxed. Pension is mainly taxed when the amount falls above your exemption limit. Individuals that receive pension from a government organisation are exempted from paying taxes. In case you receive pension from a nationalised bank, then it is likely that the bank will deduct a TDS on the amount.
Income tax for pensioners will depend on all these factors and primarily will be decided by the organisation you have worked in. You can use an income tax calculator available on the website of the Income Tax Department to make this calculation easier.

How can you calculate Income Tax for pensioners?

Pension is a monthly provisions set up by your organisation after retirement. This provides you a source of regular income post retirement. The amount you get as pension will vary according to the terms set by your organisation. Pension falls under salary taxation. This means that you will have to declare the annual pension amount under the head of salary in your ITR form. Pension can either be paid on a monthly basis (uncommuted) or in a lump sum amount (commuted). Uncommuted pensions are liable to be taxed. Pension is mainly taxed when the amount falls above your exemption limit. Individuals that receive pension from a government organisation are exempted from paying taxes. In case you receive pension from a nationalised bank, then it is likely that the bank will deduct a TDS on the amount.
Income tax for pensioners will depend on all these factors and primarily will be decided by the organisation you have worked in. You can use an income tax calculator available on the website of the Income Tax Department to make this calculation easier.

Filing Income Tax

 

What are Income Tax returns?

An income tax return (ITR) is a form that you will use to file your taxes. As a salaried person, or a professional drawing a monthly income you are required to fill this form and submit it to the Income Tax department for evaluation.
Even businesses and enterprises are required to file their ITR every year. Once you are done with your income tax return filing you can submit the ITR and claim your refund. This refund is generally is auto-debited to your account with the Income Tax Department within 3 months on successful verification of your claim. While e-filing your income tax a login ID and password will be activated in your name. You can use these credentials to track the income tax refund status. However, failing to pay taxes will incur penalties.

How do I file my taxes?

You can file your income tax online. To do so, you can either fill the ITR 1 form directly online orlog on to the income tax official website, download the required forms, and then fill and upload the same by completing the process of e-filing your income tax.

To file your income tax offline you can follow these simple steps:

- Log on to for registration
- Use you PAN (permanent account number) as your user ID.
- View Form 26AS (tax credit statement) to ensure figures are the same as in your Income tax Form 16 or the form suitable to your profession/income.
- Select the right financial year by clicking on income tax return forms.
- Download the applicable ITR form keeping your taxable amount in mind.
- Open excel utility and fill out the form as per the details mentioned in Income Tax Form 16.
- Click calculate tax option to check tax payable.
- Choose pay tax option to proceed to challan details.
- Review all entered details and click validate options to confirm accurate entry.
- After generating a XML file, save the same to your computer.
- You can then upload this XML file by selecting upload return option on the portal.
- You will need to digital signature for income tax return submission.
- ITR Verification (ITR-V), which is the acknowledgment form, will be available for download once the above procedures are complete.
- Sign this form using only blue ink after taking a printout of the same.
- Courier the form within the next 120 days to the following address: Income-Tax Department-CPC, Post Bag No. 1, Electronic City Post Office, Bangalore, 560 100. Remember to it through ordinary post
 

What documents do I need to file my taxes?

You will require the following documents while filing your taxes:
- Pan card number
- Bank account information
- Receipts of rent (if you are claiming HRA exemption on income tax)
- Income tax form 16or any other forms based on your nature of job and income
- Pay slips
- Address of property, details of co-owners including share amount and pan details, date of construction completed, home loan interest certificate, name of tenant if any and rental income (if you are reporting house property income)
In addition, you may also be required to submit certain documents under these conditions:
If you are reporting capital gains
- Statement of stock trading and purchase details if income is acquired by selling of shares.
- Documents of purchase price, capital gain details and details of registration if property is sold.
- Documents with all details of mutual funds including statement, purchase and sale of debt fund, SIPs, equity, etc.
If you are reporting other income
- Bank account statement in case of interest income on funds in your saving account.
- Documents showing interest income from corporate bonds or tax saving bonds.
- Documents showing income earned from post office deposit.

How do I link my Aadhaar to my Income Tax returns?

You can link your Aadhaar account to income tax returnseasily by following these 3 steps:
- Use your PAN card number to login to the Income Tax Department’s e-filing website.
- A pop-up window will give you the option of linking your Aadhaar card to verify your returns.
- Provide the required details to receive an OTP on your Aadhaar-linked mobile number and email ID.
- Enter the correct OTP and your Aadhaar account will automatically get validated and linked.

Planning Your Taxes

 

How do I plan my taxes?

You can plan your taxes by in advance by estimating your income in a given financial year and all the expenses you will incur or investments you will make that will help you get deductions. To do this, you need to have a thorough understanding of the tax clauses. You can also consult a CA or financial planner to help you do this effectively.

What are the best income tax-saving schemes or avenues of investment?

Here are a few investments that will help you claim deductions up to Rs.1,50,000 from your taxable income under section 80C of Income Tax Act.
- Employee Provident Fund
- 5-year Post Office Time Deposit
- National Savings Certificate
- Sukanya Samriddhi Scheme
- NABARD Rural Bonds
- Public Provident Fund
- Equity Linked Savings Scheme
- Infrastructure Bonds
- Senior Citizens Savings Scheme
- Unit Linked Insurance Plan
- 5-year Tax Saving Bank Fixed Deposit
- Voluntary Provident Fund

Can a loan help me save tax?

Taking a loan will help you avail many tax benefits; here are a few for you to consider.
- You can claim deductions for repayment of principal amount on your home loan - You can claim deductions for car loans taken for business purposes, provided the purchase is made in the name of your business
- You can claim deductions of up to Rs.2 lakh on personal loans or loans against property taken to purchase, construct or renovate a home
- You can claim deductions for interest charged on an educational loan with a tenor of up to 8 years.
- You can claim from Rs.30,000 to Rs.2 lakh on the interest paid on home loans. You can claim up to Rs.2 lakh if the construction of the property has been completed within 3 years of taking the loan. If not, your deduction will be limited to Rs.30,000. You can also claim Rs.30,000 per year for a home loan taken for renovation or repair of residential property.

Defaulting on Income Tax

 

What happens if I miss the date to file my taxes?

Tax returns for one financial year must be filed before 31st July of the second year subsequent to the financial year for which you are filing the tax. This is applicable for you if you as an individual filing your return, whereas you have to file before 30th September if you are filing returns for your business. If you file taxes after the due date, it will be considered as a belated return. Filing a belated return means that you can miss out on certain benefits. If you file your taxes after the due date you can face loss of interest in refunds. Even filing one day after the due date will mean a loss of interest for at least 4 months. Delayed filing can also restrict carrying forward of losses. You will also face a penal interest of 1% per month from the due date until the actual date of filing. Additionally, you may be prosecuted if your unpaid tax amount exceeds Rs.3,000. The maximum late charge for late filing can go up to Rs.10,000.

What are the penalties for defaulting on income tax?

Defaulting on income tax or tax evasion is considered as a criminal offense. Apart from incurring heavy fines, you can also be imprisoned for evasion of taxes. Tax evasion or defaulting on taxes include: not filing income tax returns, mismatched details in Form 26AS, wrong PAN details, evading taxes by concealing income, disregarding the income tax notice and avoiding self-assessed tax. The penalty for misreporting your income can go unto 200% of the taxes payable. Under reported income you can incur a tax penalty of 50% of the tax payable.

Can someone else file my taxes in my name?

It has become considerably easier to file your own taxes using the e-filing income tax system but you can also hire a CA, personal accountant, or trained tax consultants to file taxes in your name. This will help you sort your queries faster and will allow you to have a systematic approach to your filing process. In the case of your demise, your legal heir has the right to file your taxes provided you have taxable income to report during the financial year of and up to your death.
Though it may seem complicated, filing your income tax is actually easy. Filing regular taxes allows you to screen your income as per your expenditure, so that you can save more. So, be methodical and weigh your deductions to reduce your tax liability.

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