Introduction to Income Tax
Tax is a financial charge levied by the government on income, goods, and services. Tax is derived from the Latin word ‘Taxo’. Taxes are utilized by the government for the welfare of the people. In India, Introduction to Income Tax was first done in 1860 by Sir James Wilson to meet the military losses. After various amendments and revisions, the present Income Tax Act, 1961 is in force.
What is an Income Tax Return (ITR)?
The filing of Income Tax is called an Income Tax Return (ITR). Income Tax is a tax that is levied by the Central Government department that is Income Tax Department of India. This is the tax that is charged on the income earned during a financial year by earning individuals, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), Businesses, Companies, etc.
As per the Government tax structure, there are two types of taxes, that is, Direct & Indirect Taxes. Income Tax is one of the direct taxes which is levied by the government for managing & maintaining public utility services such as Infrastructure, Healthcare, Education, Agricultural needs, and other government schemes. As this tax is for public utility, it is amended in the whole country. One has to file this tax at the end of every financial year (1st April present year to 31st March succeeding year). The tax filing is carried out with the help of the Income Tax Form (which is already fixed by the Government).
Due to huge diversity in the businesses and Indian settled abroad, the Government of India has set clear guidelines to make the process easy for everyone. Depending upon the tax category in which one falls, one has to file ITR accordingly. There are 7 categories of ITR forms, which are named as, ITR 1 to ITR 7.
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Is it mandatory to file ITR?
Yes, it is mandatory to file ITR given the circumstances if one meets the criteria. As per the Government set guidelines, if one’s gross income (that is, income before deduction) is more than Rs.2,50,000 needs to file ITR.
Tax filing for individuals who don’t meet the above criteria are
- When an individual has a bank deposit (irrespective of Bank) having an aggregate amount which is exceeding Rs. 1 crore.
- If any individual has incurred travel expenditure for him/herself or any other person exceeding Rs. 2 Lakh to travel to a foreign country.
- If an individual has incurred expenditure aggregate exceeding Rs. 1 lakh on consuming electricity.
- And if the individual is, Resident or Ordinary Resident in India during a particular financial year is required to file a tax return (even his/her gross income is below the basic exemption limit) given that he/she owns assets, have a bank account or any signing authority/ beneficiary interest in an entity outside India.
Apart from the above-listed criteria, individuals who claim refunds under DTAA choose to file a tax return. The benefits of filing taxes also lie in the fact that one gets to obtain a loan, visa, and other related documents a bit easier.
Brief information about Income Tax exemption with respect to Indian Residents, Age and Gross Income is-
<60 Years : 2,50,000
60 – 80 : 3,00,000
>80 Years : 5,00,000
Different types of ITR Forms
There are 7 types of Income Tax Return (ITR) forms. This is done as per Government classification.
Due to the current digital scenario, one has the flexibility to file forms both online and offline. Individuals can check the status of their Income Tax filing from the official website. During the time of filing one has to verify additional forms, that is, Form 26AS & another deduction document for the successful completion of the process. One will receive a confirmation message on their registered e-mail address and mobile number (linked with PAN) after successful completion.
|ITR Forms||Class of Taxpayer|
|ITR Form 1||Salaried Individuals|
|ITR Form 2||HUFs and individuals with income from sources other than business and profession|
|ITR Form 3||HUFs with income from business or profession|
|ITR Form 4||Individuals and HUFs with income from house property|
|ITR Form 4S||A special taxation scheme for HUFs u/s 44AD/AE|
|ITR Form 5||AOPs, artificial judiciary entities, Firms, LLPs, and local authorities|
|ITR Form 6||Companies that do not claim exemptions u/s 11 of the IT Act.|
|ITR Form 7||Individuals falling u/s 139(4D), 139(4B), 139(4C)|
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Which ITR Form to file?
Detail information about the ITR form filing criteria are as follows:
|ITR (Forms)||ITR 1||ITR 2||ITR 3||ITR 4||ITR 5||ITR 6||ITR 7|
|Applicability||Indian Resident & HUFs||Individuals & HUFs||Individual, Partner in Firm or HUFs||Individual, Firm or HUFs||LLP or Partnership Firm||Companies||Trusts|
|Exempt Income||Yes (Income from Agri. cannot be greater than Rs. 5000)||Yes||Yes||Yes (Income from Agri. Cannot be greater than Rs. 5000)||Yes||Yes||Yes|
|House Property||Yes (Can only be from one house property)||Yes||Yes||Yes (Can only be from one house property)||Yes||Yes||Yes|
|Business Income||No||No||Yes||Only from Presumptive business income||Yes||Yes||Yes|
Sources of Income
As income can be from many sources, Income Tax Department has categorized Income sources as-
- Income from Salary
- Income from Capital Gains
- Income from House Property
- Income from Business & Profession
- Income from other Sources
This is done because different Income rate has different slab rates. During the filing of Income, Tax one needs to mention their source of income under the above 5 designated categories.
A brief description of Income Categorisation
|Income Heads||Kinds of Income|
|Income from Salary||Wages, salary, pension, gratuity, annuity, EPF and EPS contributions, balance transfer, and annual accretion into a Provident Fund enfranchised by EPFO are all considered Salary Income|
|Income from Other Sources||Interest and dividends are earned from bank deposits, securities, mutual funds, royalty income, race winnings, lottery winnings, gifts received.|
|Capital Gains||Long-term Capital Gains and Short-term Capital Gains earned from sale or transfer of capital assets – house property, Mutual Funds, shares, and stocks. It also includes Long-term Capital Loss and Short-term Capital Loss which are set off against Capital Gains.|
|Income from Business/Profession||Profits or losses from businesses including bonuses, salary, or interest paid to a partner in a firm.|
|Income from House Property||Rent is earned on properties acquired or possessed by the taxpayer but not occupied by him/her. In case no actual rent is received on such a property, notional rent on it is considered under this head.|
Slab Rates for Income Tax
As per the current Government norms, the categorization of Tax Slabs is as follows:
The Income Tax rate levied for General citizens & Foreigners
|Taxable Income||Income Tax Rate||Tax Payable|
|Up to Rs. 250,000||Nil||Nil|
|Within Rs. 2.5 – 5 Lakh||5%||5% of the taxable income|
|Within Rs. 5 – 10 Lakhs||20%||Rs. 12,500 + 20% of taxable income|
|Above Rs. 10 Lakhs||30%||Rs. 112,500 + 30% of taxable income|
The Income Tax rate levied for Senior Citizens (< 60 years)
|Taxable Income||Tax Rate||Payable Tax|
|Up to Rs. 300,000||Nil||Nil|
|Within Rs. 300,000 – 500,000||5%||5% on taxable income|
|Within Rs. 500,000 – 1,000,000||20%||Rs. 10,000 + 20% on taxable income (maximum Rs. 1 Lakh)|
|Above Rs. 1,000,000||30%||Rs. 110,000 + 30% on taxable income|
The Income Tax rate levied for Super Senior Citizens (> 80 years)
|Taxable Income||Tax Rate||Payable Tax|
|Up to Rs. 500,000||Nil||Nil|
|Within Rs. 500,000 – 1,000,000||20%||20% on taxable income (maximum Rs. 100,000)|
|Above Rs. 1,000,000||30%||
Rs. 100,000 + 30% on taxable income
Income Tax Returns on Capital Gains
Capital Gain is considered to be handled separately, the taxation process is carried out differently during Income Tax Return filing.
With the help of the below table, you can understand the Tax Rate Structure.
|Criteria||Short-term Capital Gains||
Long-term Capital Gains
|Sale or transfer of securities||
|Amount more than Rs. 100,000 is taxed at 10%|
|Sale or transfer of capital assets other than securities||
Added to taxable income & Taxed as per the Slab Rate
The holding period of a capital asset determines whether the capital gain is for a short period or a long period.
- In the case of Property (House or Land), if it’s with an individual for more than 24 months then it is considered to be long-term capital gain. A period below 2 years is not considered to be long-term.
- In the case of Fixed Income Instruments such as Debts Funds, Unlisted Equity Shares & Funds, Debt-oriented Hybrid funds the holding period which is 36 months or more is considered to be long-term.
- Finally, the Equity Funds, Equity Shares, and Equity-Oriented Instruments whose holding period are 12 months are considered to be long-term.
Remember that taxation on the first two are done after indexation and before 2018 all these capital gains were not considered while filing an Income Tax return.
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