Income Tax

Income Tax: Overview

A Detailed Guide to Income Tax


Income tax can be defined as the annual tax on income which every individual, corporate firm, local authority, and company has to pay. The tax is calculated on the annual income of a person or entity where the cycle starts from 1st April in a year and ends on 31st March of the next calendar year. You need to be aware of the tax slab under which you fall. The income tax slab rates for financial year 2016-2017 are as follows:
 

Income slabs

General Category

Senior Citizens (60 years and above but below 80 years)

Very senior citizens(above 80 years)

Upto Rs.2,50,000

Nil

Nil

Nil

Rs. 2,50,001 – Rs, 3,00,000

10 percent

Nil

Nil

Rs. 3,00,001 – Rs.5,00,000

10 percent

10 percent

Nil

Rs. 5,00,001 – Rs. 10,00,000

20 percent

20 percent

20 percent

Above Rs.10,00,000

30 percent

30 percent

30 percent


The income tax slabs for business are slightly different:


For co-operative societies:
 

Income tax slabs

Income tax rates

When income is within 10,000

10 percent of the income

When income lies within 10,000 – 20,000

20 percent of the amount which exceeds 10,000

Above 20,000

30 percent of the amount which exceeds 20,000


For firms and domestic companies:
 

Slab rates do not apply in the case of domestic companies, local authorities and firms. A tax of flat 30% is computed on the total income. A surcharge of 5% is levied on domestic companies if their total income exceeds 1 crore.


Filing returns is mandatory
 

The income tax department is responsible for the activities which are related to the taxation process. At the end of the financial year, every tax payer has to declare his income to the Income Tax department in a form which is prescribed by Govt. of India. It is mandatory for the individuals and entities who earn an income to file a return, irrespective of whether tax is deducted at source. This form which is known as ITR (Income tax return form) summarizes income earned in a particular financial year. The income can be from business, salary, pension, income from housing property, or even income from capital gains.


Avoiding penalties
 

By filling the ITR form (Income tax return form) you inform the government how much you have earned, from where you have earned it, and the tax which you have paid on it. When you file the income tax returns, it is a proof of the income on which you have paid the tax. As per the Income Tax Act, it is mandatory to file ITR every year. Not filing income tax returns can have serious implications such as you may be considered one of those who do not want to disclose their income. It can attract penalties from the income tax department. Additionally, if you have paid more tax than was required, you will be refunded with the excess amount which you paid.

Advantages of filing returns

Tax returns should be filed by any individual who has a taxable income. If you are below 60 years of age and have an income up to Rs 2 lakhs you are exempted from paying income tax. It has been seen that many salaried individuals are under the impression that their employer has deducted tax at source and hence their liability is over. Filing IT returns and income tax payment are two separate obligations. Even if you do not have a tax liability, it is advisable that you file your income tax return. There are several advantages of filing tax returns:
 

  • Facilitates easy processing of loans
  • For VISA processing, return filing is mandatory
  • Quick registration of immovable properties is possible
  • A credit card will not be issued by the bank till an applicant files his returns regularly
  • Filing income tax returns helps set up a record with the Income Tax Department

When filing returns is mandatory
 

According to the Income Tax Act, it is mandatory to file income tax returns if:
 

  • If your gross total income is over Rs.2,50,000 in the financial year. This limit exceeds to Rs.3,00,000 for senior citizens and Rs.5,00,000 for citizens who are above 80 years.
  • You exist as a company irrespective of whether you witness a loss or profit.
  • You look forward to claiming an income tax refund.
  • Filing income tax return is mandatory if you are a resident of India and you have assets outside India.
  • If you receive income from a property held under a trust for religious and charitable purposes, a research association, a political party, educational institution, news agency, medical or educational institution
  • In case of NRIs income earned in India is taxable.

E-filing income tax

 For the first time in the year 2006-2007, the e-filing facility was introduced by the Income Tax Department. The benefit of e-filing has been extended to all assesees, however it is mandatory for firms and companies which require statutory audit under section 44AB. At present, a significant section of tax payers are e-filing income tax returns. Gradually, the income tax department hopes to bring all the returns online. You can e-file your income tax returns at https://incometaxindiaefiling.gov.in/. E-filing returns has several advantages, such as you will not have to face the hassle of paperwork and waste time sorting them out. With the click of a mouse you can log in to the secured website and file income tax returns online.

Income tax calculation

Before you make your income tax payments you should have a working knowledge of how income tax is computed. This will make your life simpler. This will not only give you an idea on how much you have to pay but also find out ways in which you can save tax. If you are aware of the income tax slabs, computing the tax amount is easy. The final tax which is payable is calculated by applying the tax rates which are in force and then by deducting the taxes which have been paid through TDS (tax deduction at source).

Income tax deductions

To save the maximum amount of tax, it is necessary that you examine the deductions which have been defined under the different sections of IT Act 1961. You may be aware that certain investment avenues such as National Savings Certificate and Public Provident Fund are eligible for deduction under section 80C of the IT Act 1961. However, most tax payers tend to ignore a range of investment avenues which are eligible for tax concessions. Here is a quick rundown on investments which qualify for deductions under different sections of the Income Tax Act:
 

  • Under section 80C the income tax deductions are:
  1. Tax Saving Mutual Fund
  2. Tax Saving Fixed Deposit
  3. National Savings Certificate
  4. Repayment of the principal on a housing loan
  5. Life insurance policy premium
  6. Equity Oriented Mutual Funds
  7. Contributions made to Employee Provident Fund

Under section 80C, the tax exemption limit is Rs.1.5 lakhs. Under Section 80CCC, contributions to annuity plans such as LIC are considered for tax benefit. The maximum amount which qualifies for deduction is Rs. 1.5 lakhs.
 

  • Interest on savings account qualifies for deduction under section 80TTA.
  • Investment in Rajiv Gandhi Saving Scheme is eligible for deduction under section 80CCG
  • Under Section 80D, if an individual makes a payment for medical insurance premium for his spouse, children or his own self, he can claim income tax deduction for the same. Limit on deductions on the premium for health insurance is an amount of Rs.25,000. For senior citizens the limit has been extended to Rs.30,000. Additionally, preventive health check up costs till Rs.5000 per family qualify for tax deductions.
  • Under Section 80DD, if a family member of the tax payer is disabled, he is allowed deductions. You can claim deductions on up to Rs.75,000 for spending on medical treatments for disabled dependents. They should be suffering from 40% disability.  
  • Under Section 80DDB, a person is allowed deductions if he pays an amount of Rs.40,000 or more on treatment of specific diseases which includes malignant cancers, neurological diseases, chronic renal failure, hematological disorders and AIDS.
  • If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E. However, deductions are not allowed for repayment of the principal amount of the education loan.
  • Under Section 80G, 80GGA, 80GGB, 80GGC if a person has made donations to an approved body during a financial year, he will qualify for deductions.

By now you must have understood that in case of tax deduction, your income tax liabilities will decrease by a specific amount for spending in certain avenues. Tax deductions reduce the amount of income which is subject to tax.


About income tax rebate
 

For a layman, it is not uncommon for confusions to arise among the terms income tax rebate, income tax exemption and income tax deduction. Although all these terms are beneficial to the tax payer, they have different meanings. Income tax rebate includes those items which can be claimed from the total tax payable. Tax deductions and tax exemptions are claimed from the income whereas in case of rebates claims are made from the tax payable. You can claim an Income Tax rebate under section 87A when you file the income tax returns. A rebate will be available if the tax payer is a resident individual who has not crossed the 80 year mark and whose taxable income is Rs.5,00,000 or less. Hindu Undivided Families, companies, trusts, LLP, partnership firms and NRIs are not eligible for tax rebate.


Difference between “deduction” and “exemption”
 

Both tax exemption and tax deduction are tax relief which are extended by the government to the tax payers. If an income is eligible for tax exemption, that particular income will not be liable for taxation. It means that the income is completely tax free and is not included when computing the total taxable income. In case of deductions, initially the income is included when the total income is computed. If you qualify as per the conditions which are provided for a deduction, the income tax deduction will be available to you.  In case of tax deduction, the income tax liability decreases by a specific amount for investing in a particular avenue. In case of deductions, a monetary ceiling may be specified whereas generally there is no limit on exemption.


Useful Income tax exemptions for the salaried
 

As per the Income Tax Act salaried employees are eligible for several income tax exemptions. It is necessary that the salaried employees intimate the employer that he is claiming these exemptions. While deducting the TDS, the employer would then compute the tax on the balance income. Let’s take a look at the tax deductions in details:
 

  • Most employers give their employees a house rent allowance so that they can reside in a good place. As per the income tax Act a portion of the HRA is exempted from the levy of tax. This is one among the most useful exemptions which can be easily claimed.
  • Some employers also give allowance to the employees so that they can go on vacation with their families. A certain part of this amount is exempted from tax provided the vacation was within India.
  • In most cases employees are eligible for leaves when they serve an organization. When they do not claim these leaves, they can encash these leaves. The amount which is received as leave encashment can also be claimed as exemption.
  • Up to a certain limit tax exemption is also given on pensions.
  • At times, some employees opt for a voluntary retirement (VRS) before the age of retirement. In such cases the employer pays out an amount of money to the employee. This amount which is received by the employee in the event of VRS is exempted from levy of tax.
  • Several other allowances such as children education allowance and transport allowance are exempted from tax but only up to a certain limit.

An insight into Tax planning
                                          

As a tax payer you should be aware of the tax planning strategies to minimize the tax payout. Tax planning is a way by which you take the full advantage of deductions, exemptions, reliefs and rebates while strictly following the law. With proper tax planning you can reduce your tax liability and pay lesser tax. It is important that you focus on the sections in which you can save the most.


For long, insurance has been a front-runner among instruments which are considered for tax saving. For young earners who lie in the age bracket of 23 to 30, it is a good idea to get life insurance and health insurance cover. As it is the starting phase of their career, it is the right time to start saving for the future. For tax planning it is best to get in touch with a tax consultant. Tax consultants also known as tax advisers have an understanding of the regulations regarding individual and businesses taxes.


Tax planning without the help of a consultant
                                           

The prime objective of tax planning should be to reduce tax liability. It is every tax payer’s wish that he has the ability to retain maximum part of his earnings than part with it. It would totally be in the interest of the assessee to plan his tax affairs well in advance, avail the exemptions and deductions. If you do the tax planning yourself, it can be both challenging and rewarding. Rewarding, as you have the advantage of choosing a tax saving instrument which best suits your needs. At the same time it is challenging, as a wrong decision would mean that you are stuck with an unsuitable investment for 3 to 5 years, if not more.


Tax planning and auditing in case of a new business
 

If you have set up a new company or a business, it is assumed that you have invested considerable amount of time on tax planning. Tax laws are complex and undergo frequent changes. Hence, you may need the help of tax experts. As a business owner your primary objective would be to grow the firm. Knowing that your financial data is in place will allow you to spend more time on the core business activities. The main purpose of hiring a tax consultant is that they will keep a close eye on the financial data and ensure that you comply with the tax laws. Tax audit is also a vital aspect of any business as it ensures that you are maintaining a clean financial record. It is recommended that you outsource the tax planning and auditing functions to experts who are trained to deliver quality results.


Avoid tax evasion
 

One of the key problems in India is the painfully low numbers of tax payers which indicates that tax evasion takes place at a large scale. Tax evasion is termed as an illegal activity which includes not filing the income tax returns or misrepresenting the tax amount which needs to be paid. Income tax authorities will scrutinize and if they discover that you have deliberately tried to reduce the tax liability, you will be penalized. The penalty can go up to almost three times the amount which has been concealed. Hence, it is best to exercise precaution when filing the income tax return, because if a return is scrutinized for an anomaly, not only will it have a financial impact but will result in mental stress as well.