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Basics of Income Tax Return

In this article we shall try to understand about Income Tax return? What it is? Why is it needed? How does Income Tax Department track the various transactions?

What is income tax return?


Income tax return is a prescribed form through which the particulars of income earned by a person in a financial year and taxes paid on such income is communicated to the Income tax department after the end of the Financial year. Declaring the income earned : means that you are informing the income tax department of the actual amount earned under various heads such as salary, interest, house rent, capital gain / loss etc. Declaring taxes: you pay your tax dues in any of the following ways namely, Tax Deducted at Source, Advance tax or Self-assessment tax. Paying the entire tax liability means that you have paid the tax due to you for an assessment year. This also needs to be declared in the Income tax return.

Time period covered by Income Tax Return


Income Tax returns covers the period from April 1 to March 31 of next year unlike the calendar year which starts on January 1 and ends on December 31. This period of April 1 to March 31 of the next year is called as Financial year (FY) . As per the Income Tax Act, income earned in a financial year (FY) is taxed in the next Financial Year. FY to which the income belongs is called the Previous year (PY) and the FY in which the income is taxed is called the Assessment year (AY). Ex:The income earned during FY 2011-12 will be assessed for tax in the FY 2012-13. Here, FY 2011-12 is called Previous Year and FY 2012-13 is called Assessment Year or AY. Income Tax return needs to be filed within a due date (there are rules/penalties for what if return is filed late or not filed etc). For example 31st Jul is last date for submission of return for Individuals.

Income
Income Tax return is on income earned. But what is income? Usually Income is associated with salary. But as per Income tax Department Income has a broader meaning. It is broadly defined as the increase in the amount of wealth associated with a person, family, company, trust etc during a fixed period of time. So the regular income from salary or income from business is considered as income. But also income from sale of house, rented house, interest from investment in Fixed Deposits or Mutual Funds (Debt, Equity) or Stocks is also considered as income. Income is classified into various categories such as: 1. Income from Salary 2. Income from House Property

3. Income from Profits and Gains of Business or Profession 4. Income from Capital Gains 5. Income from other Sources

Tax and Tax Deducted at Source


Taxes in India are levied by the Central and the state governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council. Taxes imposed on citizens of India can be broadly classified into two categories: 1. Direct Taxes : Direct taxes are those taxes which we pay directly to the government. Ex:Income Tax is example of direct tax . 2. Indirect Taxes : Indirect taxes are those taxes which we do not pay directly to the government but indirectly. For example when we purchase any product we pay VAT and other taxes levied on it, about which we do not know much as most of the times it is sold to us as including all taxes and levies. Service tax is paid on the services provided e.g. renting, telecom service, internet service, cargo service Wikipedia:TaxationInIndia and IndiaStudyChannel:What different types taxes cover the various kind of taxes in detail Tax deducted at Source or TDS is a certain percentage deducted at the time of payments of various kind such as salary, commission, rent, interest on dividends etc and deducted amount is remitted to the Government account. The concept of TDS envisages the principle of pay as you earn. It ensures regular inflow of cash resources to the Government. This withheld amount can be adjusted against tax due. The person/organization deducting the tax is called as Deductor while the person from whom the tax is deducted is called Deductee. Bemoneyaware:Basics of Tax Deducted at Source covers TDS in detail. Some features of TDS are: Details of TDS are updated in Form 26AS Different TDS rates apply for different kind of income. For example:10% tax is deducted if interest on Fixed Deposit increases 10,000. Or 30% is TDS cut for Lottery or crossword puzzle or card game or other game of any sort. Request for TDS not be deducted. In some cases one can request for TDS not be deducted. For ex: For dividends, interest and mutualfund income only Self declaration in Forms 15G and 15H can be filed by the deductee if his income doesnt exceed the amount chargeable to tax. If Tax is not deducted at Source i.e TDS has not been cut at times it does not mean that one is not required to pay tax. For example in case of interest on recurring deposit or saving account with banks and society, TDS is not cut but one is required to pay interest on it.

If more Tax has been deducted for ex: TDS deducted for Fixed Deposit but person is not eligible to pay income tax. In such a case one can file income tax return and ask for Refund. If TDS is cut you still may have tax liability: General presumption is that, if TDS has been recovered, then there is no further tax liability that needs to be paid. Take case of Ramesh,Ajay, Vijay, Suresh , all men below 60 years of age. They have made fixed deposit for the same amount and earn Rs 25,000 as interest income. Bank deducts TDS at the rate of 10% if interest on Fixed Deposit in year is more than Rs 10,000 unless told not to do so by filling form 15H . In our example lets say Bank deducted TDS at 10% which turns out to be 2500. Heads Salary Bank FD interest TDS deducted by Bank(at 10%) TDS applicable Tax due Ramesh 1,20,000 25,000 2,500 0 -2500 Ajay 4,20,000 25,000 2,500 10% i.e 2500 0 Vijay 7,20,000 25,000 2,500 20% 5000 2500 Suresh 12,50,000 25,000 2,500 30% 7500 5000

Ramesh, Ajay & Vijay, Suresh fall in different tax slabs and tax on interest from Fixed Deposit is at normal rate based on income slabs, hence tax liability of each is different. As bank has deducted at uniform rate of 10% Vijay and Suresh still have to pay tax. While Ramesh has paid more tax and he needs to claim it back by filing in income tax return. But how does the income tax department know your income, tax deducted? Its not because Uske jasso chaoorn taraf phele hain (its spies are everywhere). Its because of a 10 digit alphanumeric number, issued in the form of a laminated card by the Income Tax Department of India called as PAN.

PAN Number
The Permanent account number or PAN has grown in importance and is today a vital part of any financial transaction. The tax department allots the PAN to an individual,HUF, company, etc. for the purpose of identification and links and tracks various documents and information regarding taxes and financial transactions, such as loans, investments, buying and selling real estate and other business activities of taxpayers. PAN, as the name suggests, is a permanent number and does notchange. Obtaining/possessing more than one PAN is against the law and may attract a penalty upto Rs.10,000. PAN is similar to the Social Security Number issued in the United States. Any tax-payer who receives any sum or income or amount from which tax has been deducted must provide the PAN to the person/organisation that has deducted tax at source as per Section 139(5A). Taxguru:PAN Meaning, Significance, who can apply & Procedure covers PAN in detail.

Saving Tax : Deductions


One can save tax by making investments in tax saving schemes such as Public Provident Fund (PPF), Tax saving Fixed Deposit, Equity Linked Saving scheme(ELSS), Insurance Policy premium or some bonds such as infrastructure bond which gets declared time to time. One is allowed to choose the tax saving investments but their is limit to how much tax saving one can do by investing in each tax saving investment. These tax saving are called as deductions and are covered under various section 80C to 80U of the Income tax act. Why does income tax support these deductions? The purpose of these deductions is to encourage savings, industrialization and to encourage essential expenditures (ex: Health insurance). One needs to declare these deductions in Income tax return under appropriate section. Income Tax Overview covers deductions in detail. Few deductions with limits and section are given in table below. Code 80C Maximum Limit 1 lakh Schemes Public Provident Fund, Equity Linked Savings schemes (ELSS) of mutual Funds National Savings Certificates, Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Principalrepayment of housing loans,Tuition fees upto 2 children, Post office investments. 80E No Limit Interest paid on educational loan taken for higher education of you, your spouse or children. A salaried employee has an option of declaring these tax saving investments to his employer in the beginning of financial year. In that case Employer includes these deductions and calculates the tax liability of employee and pays TDS accordingly. But if one has missed informing Employer but still has made the tax saving investments then one can still claim it in Income Tax return.

Not everyone pays same tax


Tax levied depends on type of income and also on ones total income, more the income more the tax. For ex: Dividend from stocks or equity mutualfunds are tax free, while income from sale of house is 20% without indexation or 10% with indexation. After a person calculates his income, applies various deductions one gets taxable income. If taxable income is less than the exemption limit specified by the government he does not have to pay any tax. If the taxable income is more than the exemption limit then one has to see which category or Type ex Individual, Hindu Undivided Family (HUF), Firm, Trust etc, does one fall into. For an individual it depends on: Gender (male or female),Age (senior citizen between 60 years to 80 years, women below the age of 60 years ) , Residential status (NRI, NRE).

These income tax range, exemption limit keeps on changing from year to year. For example in Financial year 2002-03 or Assessment Year 2003-04 Basic exemption for men, women and senior citizen was 50,000 only. Tax rates for Resident Indian based on gender and range of income one earns For Financial year 2011-12 or Assessment Year 2012-13 are given below. For income tax rates of earlier years checkout our Income Tax rates Since AY 1992-1993 TAX MEN WOMEN SENIOR CITIZEN(60 80 yrs) Very Senior Citizens(Above 80 years) Basic Exemption 180000 190000 250000 500000 10% tax 180001 to 500000 190001 to 500000 250001 to 500000 20% tax 500001 to 800000 500001 to 800000 500001 to 800000 500001 to 800000 30% tax above 800000 above 800000 above 800000 above 800000 Why file Income Tax Return? Income tax is a tax paid to the central government on personal income. The Income Tax Act, 1961 under Section 139 makes it obligatory upon any person to file return if the persons total income during the year exceeded the amount which is not chargeable to income-tax(also called as the exemption limit). When one files ones tax returns every year, one manages to create a financialrecord with the tax department. This financial / tax history is viewed and used by agencies , such as when one avails any kind of loan (home, personal, vehicle loan etc), when one applies for VISA etc.

If a person who is legally bound to file his return does not file it then Penalty of Rs. 5000 is imposed for nonfiling of return within the assessment year. Interest is also chargeable for non-filing or late filing, under section 234A,BC as explained in article Quoting from incometaxreturnindia:Income_Tax_Queries You can also be prosecuted if the tax payable (net of advance tax and TDS) is above Rs 3,000. You can also be imprisoned for three months to three years, besides being fine. Income Tax Return Forms Different forms are prescribed for filing of returns for different type of taxpayers and nature of income. The forms keep changing because of changes in income tax rules , ex: exemption limit changed. Every year income tax department releases Income Tax Return (ITR) form. Different forms are for different kind of tax payers ex:individual or firm, based on kind of income earned ex:from salary or business or profession. Details of forms for individuals and Hindu Undivided Family (HUF) are as follows: Form Category Details ITR-1 SAHAJ Individual 1. Income from salary/pension: or 2. Income from one house property(excluding where loss brought forward from previous year): or 3. Income from other sources( excluding winnings from lottery and income from races horses) ITR-2 Individual/HUF Those who can not file Sahaj above as the total income also includes Income from Capital Gains. So sources of income become:1. Income from

salary/pension: or 2. Income from one house property(excluding where loss brought forward from previous year): orTweet 1 1 Like 0 3. Income from other sources( excluding winnings from lottery and income from races horses) 4.Income from Capital Gains. They should not have Income from Business or Profession. ITR-3 Individual/HUF Being partners in firms and not carrying out business or profession under any proprietorship. ITR-4S SUGAM Individual/HUF It is applicable for small businessmen and professionals covered under presumptive taxation. They derive business income which is computed in accordance with special provisions referred to in section 44AD and section 44AE of the Act. ITR-4 Individual/HUF Carry out any business or professional activity in addition to having sources of income applicable to ITR-3 i.e Not covered in ITR 1 to 4S mentioned above and deriving income from a proprietory business or profession Forms for the year 2012-13 can be downloaded from Income tax website:NEW RETURN FORMS FOR ASSESSMENT YEAR 2012-13. Filing Income Tax Return Based on kind of tax-payer (ex:Individual or Hindu Undivided Family), kind of income earned(salary or from

business) one needs to fill the appropriate income tax form. One needs to compute the income tax, check if tax /refund is due, pay due tax and file the return. Income tax returned can be filed online or through filling physicalform and submitting it. Income tax overview explains process in detail. This article explained Income Tax return. What it is? Why is it needed? How does Income Tax Department track the various transactions? What are Different kinds of income, taxes? How can one save tax? Why different kinds of ITR? How to file ITR?