An income tax is a tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.
Apart from funding the activities of the government, taxes also act as a fiscal stabilizer 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. 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 slabs. These Income Tax rates are revised every year during the budget.
Income tax 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. For the Financial Year 2016-17, the Income Tax deadlines are as follows:-
In order to file your income tax return you first need to collect all the information required to file it. The next important step is to compute your total taxable income. After this, final tax payable or refundable is calculated by applying the applicable tax rates in force and then deducting taxes already paid by way of TDS/TCS or Advance tax from the tax due amount arrived at.
Income from salary is the income or remuneration received by an individual for services he is rendering or a contract undertaken by him. This clause essentially assimilates the remuneration received by a person for the services provided by him under the contract of employment.
This amount of remuneration will be considered as income for the purposes of Income Tax Act only if there is an Employer and employee relationship between the person who is making the payment and the person who is receiving the payment.
Income from house property is defined as the income earned from a property by the assesse. House property includes the building itself and any land attached to the building. Property refers to any building (house, office building, warehouse, factory, hall, shop, auditorium, etc.) and/or any land attached to the building (compound, garage, garden, car parking space, playground, gymkhana, etc.). There are many intricacies and types of house property which is calculated in different ways. Taxability may not necessarily be on actual rent or income received. If the property is not let out, the tax will be charged on the potential income the property is capable of yielding.
Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax under the head capital gains. The gain can be on account or short- and long-term gains. A capital gain arises only when a capital asset is transferred. Which means if the asset transferred is not a capital asset; it will not be covered under the head capital gains. Profits or gains arising in the previous year in which the transfer took place shall be considered as income of the previous year and chargeable to income tax under the head Capital Gains and the concept of indexation shall apply, if applicable.
Income chargeable to tax is computed after deducting the following:
The following expenses are not allowable:-
First, classify your source of income. The source of income can be divided into five categories:
Calculate the taxable income under each category mentioned above. Whatever you earn, a part of that is not calculated as taxable income, we call it "exemption". The benefit of exemption amount varies from person to person. Analyze the exemptions each category enjoys. The sum total of all taxable incomes is called the gross total income.
Taxation for capital gains or loss is calculated differently and therefore not included in this total.
Certain kind of investments, such as insurance premiums or principal amounts on home loans, gives you the benefit of deductions. Read sections 80C to 80U to know what kind of investments or contributions you should make to avail the deductions benefit. You can also make investment in tax-saving ELSS funds. Calculate the amount you have invested under sections 80C to 80U and then deduct it from gross total income calculated in Step 2. The amount you will get is your net taxable income.
Calculate your tax amount by applying the appropriate tax rate to the net taxable income. Tax rate slab changes from time to time. Refer to the tax slab given for FY18-19 and reduce the rebate and relief amount from net taxable income. The amount you get is the final tax liability.
Government collects taxes beforehand in the form of TDS (tax deducted at source) and advance taxes. For salaried individuals, the TDS is deducted by the employer and deposited on behalf of employees. Professionals or businessmen pay advance tax to the government themselves, usually every quarter.
The TDS and advance taxes are calculated on the basis of projected income and hence there is a difference in exact tax liability and the TDS/ advance tax amount. In case TDS or advance tax amount is higher, an individual can file for tax refund. If not, then individual must pay the difference amount.
Last updated on 14-09-2020