Understanding Income Tax in India


Income tax refers to the tax levied by the government for the purpose of financing its various operations. There are two types of taxes, direct and indirect. While Income Tax is a direct tax, VAT, service tax, excise and the latest one to subsume all these taxes Goods and Services Tax (GST) are all indirect taxes. Apart from funding the activities of the government, taxes also act as a fiscal stabiliser that aid in distributing wealth evenly among the population. Furthermore, taxes are instrumental in cushioning the effects of economic cycles. The payment of Income Tax in India is made according to the provisions made under the Income Tax Act.

Types of Income Tax

We can divide Income Tax into three categories depending upon who pays it and when it’s paid.

  • TDS
  • Advance Tax
  • Self-assessment Tax

Tax Deducted at Source

Any Income Tax deducted and paid on behalf of the taxpayer by any other person (who is a source of income for the taxpayer) liable to do so as per the I-T laws is called TDS. It is a measure by the Income Tax Department for ensuring timely payment of Income Tax.

Advance Tax

Businessmen and professionals need to pay Income Tax on their own in four instalments throughout the financial year in which they earn income. The taxpayers need to pay Advance Tax as per the following table:

Due Date Advance tax Payable
On or before 15th June 15% of estimated Advance Tax
On or before 15th September 45% of estimated Advance Tax
On or before 15th December 75% of estimated Advance Tax
On or before 15th March 100% of estimated Advance Tax

Self-assessment Tax

Self-assessment Tax means any balance tax paid by the taxpayer on the assessed income after taking Advance Tax and TDS into account.

Sources of Income

According to the Indian Income Tax laws, income from the following sources is deemed taxable:

 

The sum of income from all the sources above is calculated according to the provisions of Income Tax Act. The tax rates in India vary according to the earnings of an individual and are referred to as Income Tax slab rates. These Income Tax rates are revised every year during the budget.

Income tax in India is calculated on an annual basis. It is levied on the income earned in the previous year which is also known as the Assessment Year. In the eyes of the law, the Financial Year begins on the 1st of April in a given year and ends on the 31st of March of the following year.

Income Tax Return Filing Due Dates

For the Financial Year 2017-18 (AY 18-19), the Income Tax Return Filing due dates are as follows:-

Income Tax Filing for Salaried Individuals

Salaried individuals can file their income tax returns basis their Form 16. Most of their income details are mentioned in their Form 16 issued by their employers. Our guide on Form 16 will help you understand all about the importance and filing with the help of Form 16.

Documents required for Income Tax Filing

There are different documents required for income tax filing that need to be kept ready before you file your taxes. These include Form 16, Form 16A, investment receipts and proofs. Read our guide on document checklist that will help you be ready to file taxes.

Income Tax Slab

Indian Income tax laws, tax individuals per different slab rates of income. The basic exemption limit is Rs 2,50,000. Income tax department charges different tax slabs at the rates ranging from 10% up to 30%. Our guide on income tax slab will explain these in detail. You can easily estimate your tax liability by using our tax calculator and know how much taxes you owe to the government.

Tax Calculator FY 2017-18

Exceptions to the Income Tax Slabs

Capital gains are not taxed as per the Income Tax slab mentioned above:

Type of capital asset Holding period Tax rate
Equity mutual funds > 12 months = LTCG Exempt
< 12 months = STCG 15%
Debt mutual funds > 36 months = LTCG 20%
< 36 months = STCG As per slab rate
Shares (STT paid) > 12 months = LTCG Exempt
< 12 months = STCG 15%
Shares (STT unpaid) > 12 months = LTCG 20%
< 12 months = STCG As per slab rate
FMPs > 36 months = LTCG 20%
< 36 months = STCG As per slab rate
House property > 24 months = LTCG 20%
< 24 months = STCG As per slab rate

According to the latest Finance Act 2018, any capital gains from equity shares exceeding Rs 1 lakh will be charged to a LTCG tax of 10%. To read all such budget changes please refer our detailed blog on Changes in Income Tax laws – AY 2019-20.

Income Tax Returns (ITR)

Tax returns are a statement of your earnings from various sources of income that include the tax liability, details of tax paid, and other refunds that are eligible to receive from the government. Our guide on Which ITR to File will help you choose the correct ITR form for tax filing.

Form ITR-1

ITR 1 is to be filed by individuals with income less than Rs 50 lakh from:

  • Salary/ pension; or
  • Income from one house property (excluding cases where there is brought forward loss or loss to be carried forward from previous year); or
  • Income from other sources (excluding winning from lottery and income from race horses, income taxable under section 115BBDA or Income of the nature referred to in section 115BBE).

Form ITR-2

ITR 2 is to be filed by an individual or a Hindu Undivided Family (HUF)

  • who is not eligible to file Sahaj (ITR-1) and
  • who is not having any income under the head “profits or gains of business or profession”.

Form ITR-3

ITR 3 Form is to be used by an individual or a Hindu Undivided Family

  • who is having income under the head “profits or gains of business or profession” and
  • who is not eligible to file Sugam (ITR-4).

Form ITR-4

ITR 4 Form is to be used by an individual / HUF / Partnership Firm whose total income includes:

  • Business income where such income is computed in accordance with special provisions referred to in section 44AD and section 44AE of the Act for computation of business income; or
  • Income from Profession where such income is computed in accordance with special provisions referred to in sections 44ADA; or
  • Salary/ Pension; or
  • Income from One House Property (excluding cases where loss is brought forward from previous years); or
  • Income from Other Sources (excluding Winning from Lottery and Income from Race Horses).

Form ITR-5

ITR 5 form can be used by a person being:

  • a Firm,
  • an LLP – Limited Liability Partnership
  • an AOP – Association of Persons
  • a BOI – Body of Individuals
  • an Artificial juridical person referred to in section 2(31)(vii)
  • the Persons referred to in section 160(1)(iii) or section 160(1)(iv)
  • a Cooperative society
  • a Registered societies
  • a Local authority

Form ITR-6

ITR 6 can be used by:

  • a company, other than a company claiming exemption under section 11

Form ITR-7

ITR 7 Form can be used by persons including companies who are required to furnish return under:

  • section 139(4A) or
  • section 139(4B) or
  • section 139(4C) or
  • section 139(4D) or
  • section 139(4E) or
  • section 139(4F).

Claiming Refund of Taxes Paid

You are eligible for refunds to be claimed from the tax department in case you have paid excess taxes. These can be claimed on filing your tax returns. Once you have claimed a refund, you need to keep checking the status of your refund to make sure that your refunds are credited to your account in time. Our guide on tax refund will help you understand different statuses of refund and know your refund status.

Late Filing of Income Tax Returns

It is necessary to file the income tax returns before the deadline to avoid a penalty for non-filing of tax returns. Our guide on penalties and late filing fees will help you understand the different charges levied by the government.

Income Tax Filing Procedure

With the introduction of e-Filing, Income Tax Returns have become simpler and convenient. You can e-File Income Tax Returns from the comfort of your home or office at any hour of the day. You can follow these simple steps to e-File Income Tax Returns online. You can read the entire procedure in our guide to ‘e-filing income tax returns on incometaxindiaefiling.gov.in’.

Income Tax Deductions

The government provides tax benefits in the form of tax deductions which are designed in a way to encourage investment habits and ease financial burden. Therefore, one can get tax deduction on various education, health and house related expenses as well as through investment in various tax saving investment options.

Education

Two types of educational expenses can also help you save taxes:

 

Home ownership

Buying a house is a big financial expense for most of us. Therefore, we depend upon home loan from financial institutions to support this expenditure. However, there are various tax benefits provided to the home buyers by the government:

  • Principal repayment of home loan [Section 80C]
  • Interest paid on home loan [Section 24]
  • Additional tax benefit for first time home buyers [Section 80EE]

 

Home renting

Not everyone can afford to own a house so it is common for people to opt for a rented accommodation. You can get tax benefit on this basic expense.

 

Health

Health and medical expenses are a necessity of life. We often spend money on medicines while health and medical insurance have become a necessity. Therefore, keeping this financial burden in mind, the government has designed a number of tax benefits for the taxpayers:

  • Medical insurance premium [Section 80D]
  • Preventive health check-up and other medical expenses [Section 80D]
  • Medical expenses on your disability [Section 80U]
  • Medical expenses on a disabled dependent [Section 80DD]
  • Medical expenses on specified diseases [Section 80DDB]

Tax Saving Instruments

Saving and growing your money through investment is a good habit. The Income Tax Department promotes this by providing lucrative deductions on many investment instruments that are used for tax exemptions under the various sections of the Income Tax Act. Investing in tax saving instruments is an apt way to boost your wealth and save taxes concurrently.

List of tax saving instruments eligible for tax deduction u/s 80C: 

 

List of other tax saving investments: 

  • Certain pension funds [Section 80C, 80CCC, 80CCD]
  • National Pension Scheme [Section 80CCD]
  • Interest from banks and post offices [Section 80TTA, 80TTB]

Donations and Charity

Many of us like to donate money for one or the other noble cause. Many such donations qualify for tax deductions.

Tax Saving Opportunities for Businesses

Government also provides a number of Income Tax benefits to the businesses on the basis of nature of business, location, etc.

  • Industrial activities [Section 80-IA, 80-IAB]
  • Hotels, shops, multiplex theatres, cold storage plants, housing project, scientific research and development [Section 80-IB]
  • Businesses operating in special states [Section 80-IC]
  • Hotels and convention centres in specified areas [Section 80-ID]
  • Establishments in the North-East India [Section 80-IE]
  • Businesses of processing / treating and collecting bio-degradable wastes to produce biological products like bio-fertilisers, bio-pesticides, biogas, etc. [Section 80JJA]
  • Factories [Section 80JJAA]
  • Scheduled banks having offshore banking units in SEZs, entities of International Financial Services Centres and banks which have been established outside India [Section 80LA]
  • Cooperative societies [Section 80P]

Frequently Asked Questions on Tax Deduction

  • How to claim tax deductions?

    Easiest way for the salaried taxpayers to claim tax deduction is through declaring their investments & expenses to the employer. You need to inform your employer about your planned investments at the beginning of the financial year to save taxes. Then you need to submit proofs of investment 2-3 months before the end of the financial year. You can ask your employer for the exact time period for submitting proofs.

 

  • Which investment option to choose under section 80c?

    Under section 80c, you will find several tax saving investment options. Each investment comes with a different tax impact, ROI, lock-in period etc. Hence, you must choose the investment plan which best suits your financial goals based on above mentioned factors.

 

  • How to save tax beyond section 80C?

    Other than section 80C, there are various other tax saving opportunities. By buying medical insurance and making charitable donations, you can easily save taxes. You also get tax deduction on education loan and home loan repayment.

Tax Glossary

Form 26AS

This document is an annual tax summary maintained by the Income Tax Department which contains details of Income Tax paid by you in an year. You can obtain Form 26AS from the TRACES website. It can help you in filling taxes

Form 16

This is the record of tax deducted and paid from your salary to the Income Tax Department on your behalf by your employer. It is also known as a Salary Certificate because it also contains details of the salary received by you. It is a very useful document for filing return.

Investment declaration Form 12BB

Form 12BB is a standard form prescribed by the government for salaried taxpayers to declare their investments to avoid TDS deduction by the employer.

Form 16A

This form is also similar to Form 16. It is also a tax record of tax deducted and paid on your behalf but here the deductor is not your employer. Form 16A is generally issued to you by entities like a bank that’s deducting TDS on your interest income or a company deducting tax on your income from a freelance service.

Form 16B

This is a certificate of TDS deduction issued by the buyer of a house property to the seller.

Form 26QB

Form 26QB is to be filed by the buyer of a house property where the sale consideration was exceeding or equal to Rs 50 lakh. The buyer deducts TDS at the rate of 1% of the sale consideration and submits it to the government’s account by filling Form 26AS

ITR-V

It is a one page document acknowledgement issued by the Income Tax Department after you have e-filed your tax. ITR-V needs to be downloaded from the e-filing portal of the government or your registered email ID, signed and sent to the Central Processing Centre of the I-T department.

Challan 280

This is a challan-cum-form used by the taxpayers to pay taxes due online on the TIN NSDL website while filing their tax returns.

Difference between Assessment Year and Financial Year

For tax purposes, Financial Year is the year in which you earn income and pay tax while Assessment Year is the year in which you file return for the Financial Year.

How H&R Block can help you?

Saving taxes and e-filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. You can either use our intuitive tax filing platform to easily file your tax return or let our tax experts file it for you. We have a team of in-house tax experts who can file your income tax returns accurately while giving you maximum tax benefits.

e-File your tax returns with ease and convenience with H&R Block

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