The law states that if one has an income, he or she must pay income tax, and that goes for business entities too. This means that if you hold a regular paying job, your employer will deduct this tax amount from your pay and deposit it with the tax authorities. This is called “tax deducted at source” or TDS, and your play slip likely reflects it already. Businesses pay something called the “advance tax”.
But if you think that your liability/responsibility ends with the TDS, you are mistaken. The law also states that any individual or business receiving income in a financial year must file income-tax returns (ITR). The ITR must be filed by a specific date. For instance, this year, you have to file your ITRs by September 30th, 2021. (This time, because of the pandemic, the government has given you numerous extensions, the latest being the deadline stretched to the next year. In normal circumstances, you would have had to file your tax returns this year itself)
What are tax returns or ITR?
The ITR is a declaration by the taxpayer in a specified form about the details of their income, savings, and taxes paid if any, in a financial year. It should also include income from tax returns filed in previous years. As per income-tax laws, it is mandatory for a resident in India to file an ITR if their total income during the financial year exceeds the basic exemption limit (More on this below).
Income denotes the gross income from salary, wages, fees, pension, dividends, interest and rent earnings from investments (long-term and short-term capital gains) or even earnings from foreign assets. Businesses, too, must file ITRs even if they are running at a loss. The ITR statement enables the income-tax department to assess the tax liability of someone residing and earning in the country.
If the authorities find that an individual or a business has paid more tax than what is due, they will return the excess amount. This is called a ‘tax refund’. So, if you don’t file an ITR, you just may end up losing more money. Depending on how late you file your returns, you could have to pay fines of up to Rs. 10,000. However, the converse is true as well; an assessee is liable to pay up any remaining balance if the taxes paid or deducted are less than the due amount. Under-reporting income is a serious offence and is punishable by a penalty of up to 50% of the tax amount due. (The next time you read about ‘tax evasion’, this is what has happened: the person or business has declared income lower than the actual amount to avoid paying more tax).
To understand ITR, it is essential to understand the basics of income tax filing, these being:
The concept of ‘previous year’, ‘financial year’, and ‘assessment year’
The requisite documents
What constitutes ‘income’
What ‘deductions’ imply
How payable tax is calculated
The actual filing process
Financial year
People often confuse between ‘financial year’ and ‘assessment year’.
Financial Year: This is the period between April 1 of one year and March 31 of the next year – a period of 12 months – and often denoted by the acronym FY (as in FY 2019-20). When you are taxed on your income, it is for earnings during this period. The financial year is calendar based and cannot be extended. However, the government can extend the tax payment deadline in exceptional situations.
Assessment Year: This refers to the next financial year. So, the ITRs you file this year -- i.e. the ‘assessment year’ -- relates to your income in the last financial year – the ‘previous financial year’– which is the 12-month period from April 1, 2019, to March 31, 2020.
Documents required
The income-tax department has seven ITR forms, known as ITR-1, ITR-2 etc. If you are a salaried person, the first two of these – i.e. ITR-1 and ITR-2 – are what would concern you. If you run a proprietorship or are a professional, ITR-3 is for you.
ITR-1 pertains to individuals with an annual income less than Rs 50 lakh via pension or salary and earnings from one residential property. Details of your rent earnings will have to be furnished.
ITR-2 is for individuals who have an income from capital gains or from two or more house properties, and from foreign sources. It is also for shareholders of private companies, company directors, non-resident Indians (NRIs). In all cases, the income must be more than Rs 50 lakh.
Whichever ITR form is applicable for you, you will need to furnish the following:
Your Permanent Account Number (PAN)
You Aadhaar number (it must be linked with the PAN)
Your banking details (account number, IFSC code, and branch)
To claim deductions, you need the following documents:
Proof of income such as capital gains income and house property income
Details about investments that are liable for deductions (ELSS, health insurance premium, NSC, etc.)
Details of EMI payments on home loans, if any
Interest earned from savings accounts in banks and the post office is taxable. However, you can claim a deduction of up to Rs 10,000 on it under section 80TTA if your age is below 60 years, and of up to Rs 50,000 if you are a senior citizen.
Please note, tax authorities can access your bank account, so make sure your passbook is updated (with interest credited to your account) till March 31, 2020.
Income
As stated at the beginning, if you earn an income in India, you pay tax; this goes for foreigners too. This income can be in the form of salary, pension, interest or capital gains. Even prize money, say from a lottery or winnings at TV programmes like Kaun Banega Crorepati will be taxed.
For a clearer understanding of what constitutes taxable income, the tax authorities have broken down income under five heads, as shown below:
Salary income: This is self-explanatory; income from salary and pension.
Other sources: Income from savings bank account interest, FDs, and prize money.
House property: This pertains to rental income.
Capital gains: Income from the sale of capital assets such as mutual funds, shares, property etc.
Business / Professional income: This pertains to people who are self-employed freelancers, contractors, consultants or run a business. A few examples: life insurance agents, CAs, doctors and lawyers who have their own practice, private tutors etc.
Deductions
The government allows tax exemptions up to Rs 1.5 lakh under Section 80C, 80CCC and 80CCD(1) for the following investments:
Life insurance premium
Equity Linked Savings Scheme (ELSS)
Employee Provident Fund (EPF)
Annuity/ Pension Schemes
Principal payment on home loans
Tuition fees for children
Contribution to PPF Account
Sukanya Samriddhi Account
NSC (National Saving Certificate)
Fixed Deposit (Tax Savings)
Post office time deposits
National Pension Scheme.
This apart, other deductions and allowances for the salaried persons are:
House rent allowance
Standard deduction
Leave Travel Allowance (LTA)
Mobile phone reimbursement
Books and periodicals
Food coupons
Section 80C, 80CCC and 80CCD(1)
Medical Insurance Deduction (Section 80D)
Interest on Home Loan (Section 80C and Section 24)
Education Loans (Section 80E)
Donations (Section 80G)
Savings Account Interest (Section 80TTA)
Additional Deduction for Interest on Home Loan (Sections 80EE, 80TTA)
Relocation allowance
Joining Bonus
Cab/Transport allowance
Health club allowance
Gift vouchers
Reimbursement of medical expenses incurred outside India.
Calculating Tax
The Union budget for 2020 introduced a ‘new tax regime’ that offers concessional tax rates compared to the ‘old tax regime’, but with fewer exemptions and deductions. Consequently, it needs less documentation, making it easier to file ITR returns.
You can opt for either regime when filing your returns. From FY 2020-21, If you choose the old one, you will be offered exemption limits as per the rates against each tax slab shown below:
Income of up to Rs 2.5 lakh – No tax (this is for people under the age of 60 years; for those between 60-80 years, the exemption is up to Rs 3 lakh, and up to Rs 5 lakh for people aged above 80 years).
Income of between Rs 2.5 lakh and Rs 5 lakh – Tax to be paid is 5% of the taxable income;
Income between Rs 5 lakh and Rs 10 lakhs – Tax to be paid is Rs 12,500 + 20% of the taxable income;
Income above Rs 10 lakh – Tax to be paid is Rs Rs 12,500 + 30% of the taxable income.
Income between Rs 7.5 lakh and Rs 10 lakh – Tax to be paid is Rs 12,500 + 20% of the taxable income;
Income between Rs 10 lakh and Rs 12.5 lakh- Tax to be paid is Rs 12,500 + 30% of the old tax regime;
Income above Rs 12.5 lakh and Rs 15 lakh – Tax to be paid is Rs Rs 12,500 + 30% of the taxable income.
Under the old tax regime, apart from these basic exemption limits, you can also claim tax exemptions such as HRA and LTA explained in the section on ‘incomes’.
However, if you opt for the new concessional tax regime, you do not get any tax exemptions and deductions (except for section 80CCD(2), which relates to the National Pension Scheme).
Also, under the new concessional tax regime, the basic exemption limit will be a standardised Rs 2.5 lakh irrespective of your age – i.e. whether you are a senior citizen or not. However, you can claim a rebate under Section 87A if you earn up to Rs 5 lakh. This means that your effective tax liability in this case would be zero.
Ordinarily, you do not have to file tax returns if your annual income is less than the exemption limit. However, you are mandatorily required to do so under special circumstances, for instance, if you have travelled abroad during the financial year in question.
Filing online
Contrary to the apprehension of many people, filing your income tax returns online is quite simple; you can e-file IT returns from the comforts of your home.
If you are an HDFC Bank customer, you can e-file with three easy steps, as shown below:
STEP 1: Log in to NetBanking using your NetBanking ID and password
STEP 2: Click on the ‘Offers’ tab
STEP 3: Click on the banner ‘Free e-filing of Income Tax’ and proceed with the filing.
Read more on tax on interest income here.
Calculate the returns on Tax saving fixed deposits with FD Calculator.
You can save tax by investing in tax saving fixed deposit.
* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.