TAXPAYERS GUIDE: INCOME TAX

INTRODUCTION

Income taxation is crucial to both the financial health of our country and the well-being of each and every one of its residents. One type of tax that is imposed by the central government on the money that individuals and businesses make over the course of the financial year is income tax. Tax revenue is used to support the government. These revenues are used by the government for various social courses, infrastructure development, healthcare, education, and subsidies to farmers and the agricultural industry. In order to ensure compliance and take advantage of government-provided tax benefits, taxpayers need to know the income tax handbook.

UNDERSTANDING THE BASICS OF INCOME TAX

There are two primary categories of taxes: indirect taxes and direct taxes. A direct tax is one that is imposed directly on income; income tax is one type of direct tax. The income slab rates in effect for that fiscal year serve as the basis for the tax computation.

Direct Taxes are broadly classified as:

Income Tax: Individuals, Hindu Undivided Families (HUFs), and other taxpayers who do not work for corporations are required to pay this tax on their income. The rate at which this type of income is taxed is set by legislation.
Corporate Tax: The tax paid on the taxable income of the business is shown below. Once more, the income tax rules of India have established a certain tax rate for corporations.

IMPORTANT KEY TERMS:

Financial Year: Another name for the financial year is the previous year. It’s a 12-month cycle that starts in April and runs through March of the following year. Regardless of when you began working, the tax year is set to run from April to March.
Assessment Year: The year after the preceding year is the assessment year. To put it simply, it’s the year you submit your previous year’s return.
Gross Income: the Total amount of money received before deductions.
Net Income: The Total Income after allowable deductions and exemptions.
Taxable Income: The portion of Income that is subject to tax after considering all deductions and exemptions.

INCOME SOURCES AND CLASSIFICATIONS

In addition to your pay, you will also be entitled to interest from the money you save or deposit with banks and other similar institutions. Income can come from a variety of sources. The sources of income on which you will be paying taxes can be split into the following –

- Salary Income – This covers any monetary compensation you may receive for providing services to an organization, such as your salary, allowances, leave encashment, and other benefits.
- Income from House Property – This covers any revenue you would get from renting out a home that you own.
- Income from Capital Gain All revenue resulting from transactions involving capital assets, such as shares or mutual funds, is included under this heading.
- Income from Business or Profession – The money you make from a business or profession that you run in addition to your work is what you will call your business or profession income.

Income from Other Sources – This covers interest from bank deposits, savings account interest, interest from donations, etc.

TAX DEDUCTIONS AND EXEMPTIONS

Understanding and taking advantage of deductions and exemptions can result in significant tax savings. These benefits are essential in lowering taxable income.

You might think of a deduction as a tax advantage that lowers your taxable income. An amount that the Income Tax Department permits you to deduct from your income lowers your tax obligation in the end.

The formula to compute it is:

Total income – gross income.

Net Income – Subtracted Taxes = Refundable Income

Consequently, a larger deduction results in a smaller tax obligation. Section 80 of the Income Tax Act (Sections 80C through 80U) permits deductions.

On the other hand, tax exemptions are those financial exclusions that help lower your taxable income. These exemptions enable you to receive tax breaks, lower your tax rate, or even guarantee that taxes are only due on a portion of your income. Use an example to better understand this.

Assume you have rent to pay for your home. You can now take advantage of a reduction in your House Rent Allowance (HRA), which is mostly determined by your pay. Therefore, a portion of your HRA is subtracted from your gross income for determining your taxable income.

COMMON DEDUCTIONS:

1. Standard Deductions: Standard Deductions are those deductions which is allowed to salaried Individuals.
2. Section 80C: You are allowed to subtract up to Rs 1,50,000 from your gross income under section 80C. Public provident funds, employee provident funds, tax-saving fixed deposits, equity-linked savings plans, and insurance premiums are the investment vehicles that are most often employed under section 80C.
3. Section 80D: Under Section 80D, you can claim deductions for Health Insurance Premium.
4. Home Loan Interest: Whenever you took a loan for building up home, can claim the interest amount as a deduction.

Education Loan Interest: whenever you took a loan for educational purposes, can claim the interest amount as a deduction.

COMMON EXEMPTIONS:

House Rent Allowances: House rent allowances are those which is provided for the salaried individuals and claim these exemptions for expenses which is related to rent.
Travel Allowances: These allowances are exempted as travel allowances for domestic travel purposes.
Agricultural Income: Income generated from Agriculture are fully exempted.

FILING INCOME TAX RETURN ONLINE:

If you have an internet connection, you can now file your taxes while lounging about your house. The Income Tax Department’s pre-approved tax preparation software used for electronic filing has made this feasible. Due to its many advantages, including the following, more and more taxpayers are completing their taxes online:
Getting Refund: In order for your refund to be processed, you must provide your ITR for the relevant financial year if tax was withheld at source from the money that was paid to you.
Verification Proof: Your yearly income serves as the benchmark for determining your eligibility for a loan when you apply. A detailed image of your prior income is provided to the borrower via an ITR form that includes facts about your wages, which provides your application more legitimacy. In a similar vein, tax returns are the most often recognised kind of documentation needed to prove income for visa applications.
Proof of Income: Your insurer may request your ITR when you purchase a term plan in order to determine the amount that will be paid to your nominees in the event of death or incapacity. For the sake of this purpose, the ITR is regarded as an officially verified evidence of income.

WHAT DOCUMENTS DO YOU NEED TO FILE ITR?

In addition to your pay stubs, bank savings account passbook, Aadhar card, and PAN card, you will need the following papers before you begin completing your income tax return in order to streamline the process:
Form 16: It is sent to you by your employer and includes information on the pay they have given you as well as the tax that has been withheld at the source (TDS).
Form 16A: It includes information on TDS withheld from interest earned on fixed or recurring bank deposits.
Form 16B: When you sell a property, TDS is applied to the amount the buyer paid you; the specifics are on this form.
Form 16C: TDS information on the rent your renter paid you is kept on file here.
Form 26AS: Your detailed tax statement is shown on this form in relation to your PAN number. It includes TDS from your bank, employment, or any other company that has paid you. Proof of tax-saving investments, such as deductions allowed by Sections 80C to 80U and includes a life insurance policy or term plan, as well as advance taxes or self-assessment taxes paid, are also included.

TAX PLANNING TIPS:

Availing the benefits of Section 80:

The most popular provision for receiving tax deductions is this one. This section says that an individual is eligible for tax deductions if their annual wage is less than $1,50,000. However, there is also a higher tax deduction available to those who invest in National Pension Scheme accounts.

One pension scheme that encourages employees to save for retirement is the National Pension Plan, or NPS. Given that the return rate is around 12%, this suggests that an investor receives a fair return on their investment.

Investing in ULIPs:

Unit Link Insurance Plans (ULIPs), a type of special insurance plan, are also a tax-saving option. These plans combine investing and life insurance features. A sizeable amount of the money contributed to ULIPs is allocated to a life insurance policy, with the remaining amount going towards an equity-based fund. It is therefore one of the finest tax saving strategies as it allows a person to benefit from tax exemptions and returns while also getting the best of both worlds.

Attaining tax deductions on salaries:

The majority of assets that are eligible for this tax deduction are transient ones. Take a rental property, for instance. A person may claim tax deductions under Section 10(13A) if they are currently paying rent for the home they occupy. This says that if a person has to present receipts for the rent they pay for their residence, they may claim tax deductions for such payments.

HRAs are tax-saving programmers that are typically provided by employers. It is determined by deducting 10% of one’s wage from the actual amount of rent paid. If a person resides in a metro area, they are able to deduct 50% of their wage from taxes.

CONCLUSION:

Income tax may seem complicated, but with the correct information and strategy, taxpayers can handle any issue that comes their way by knowing the fundamentals, making use of all eligible exemptions and deductions, and accurately completing forms when necessary. You can reduce your tax liability and take advantage of the tax reliefs that have already been granted to you by avoiding common mistakes and using proper tax planning. The key is knowing how to handle all of the issues and make sure that the appropriate reliefs are provided for them, which is where the taxpayer’s income tax guidebook comes into play.

Authored By- Sougata Singha, Amity University Kolkata

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