WHAT IS INCOME TAX?

Income tax is a type of tax that the central government charges on the income earned during a financial year by the individuals and businesses. Taxes are sources of revenue for the government. Government utilizes this revenue for developing infrastructure, providing healthcare, education, subsidy to the farmer/agriculture sector and in other government welfare schemes. Taxes are mainly of two types, direct taxes and indirect form of taxes. Tax levied directly on the income earned is called as direct tax, for example Income tax is a direct tax. The tax calculation is based on the income slab rates applicable during that financial year.

DIRECT TAXES ARE BROADLY CLASSIFIED AS:-

WHO SHOULD PAY INCOME TAX? - TYPES OF INCOME TAX PAYERS

Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.

Taxpayers are categorized as below:

Further, Individuals are broadly classified into residents and non-residents.Resident individuals are liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on income earned or accrued in India. The residential status has to be determined separately for tax purposes for every financial year on the basis of the individual tenor of stay in India. Resident Individuals are further classified into below mentioned categories for tax purposes-

WHAT IS INCOME TAX RETURN?

Income Tax Return (ITR) is a form that an individual submits to the Income Tax Department of India to file information about his income and taxes payable during that year. Information filed in an ITR should be applicable for a particular financial year between 1st April to 31st March of the next year.

A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes. In most countries, tax returns must be filed annually for an individual or business with reportable income, including wages, interest, dividends, capital gains, or other profits.

KEY TAKEAWAY:

A tax return is the completion of documentation that calculates an entity’s or individual's income earned with the amount of tax payable to the government, government organizations or to potential taxpayers.

Specific tax forms are intended to be used by taxpayers, or private entities that are required to report information on the tax liabilities together with income earners, businesses and companies. Tax revenue is used by governments to grant sums of money to communities, including military, education, hospitals and infrastructure.

The Income Tax Act, 1961, and the Income Tax Rules, 1962, obligates citizens to file returns with the Income Tax Department at the end of every financial year. These returns should be filed before the specified due date. Every Income Tax Return Form is applicable to a certain section of the Assessees. Only those Forms which are filed by the eligible Assessees are processed by the Income Tax Department of India. It is therefore imperative to know which particular form is appropriate in each case. Income Tax Return Forms vary depending on the criteria of the source of income of the Assessee and the category of the Assessee.

DOCUMENTS REQUIRED FOR INDIVIDUAL INCOME TAX RETURN FILING

FORM 26AS

Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is provided by the Income Tax Department.

It shows details of tax deducted on your behalf by deductors, details on tax deposited by taxpayers and tax refund received in the financial year.

SECTION 80 INVESTMENTS

Section 80C investment documents. Investment made under PPF, NSC, ULIPS, ELSS, LIC qualify for deductions under Section 80C.

DOCUMENTS REQUIRED TO CLAIM THE FOLLOWING EXPENSES AS DEDUCTIONS

Keep these documents at hand to claim the following expenses as deductions –

DOCUMENTS REQUIRED FOR INCOME TAX RETURN FILING

The income tax return you file is an ‘annexure less’ return, i.e. no documents or proofs are required to be attached with the returns. The Income Tax Act specifies obtaining certificates and proofs to claim deductions, which makes it ambiguous for the taxpayers as to whom they must handover those certificates and proofs.

If you earn any kind of income in India, you are liable to pay income tax as per the IT Act. Once the tax is paid, you are also required to file tax returns for the same. If you fail to pay the income tax on time or do not file tax returns, you will be required to pay the penalty. In some cases, it could also result in prosecution.

INCOME TAX AUDIT

Every taxpayer whose turnover is above Rs. 5 Crore in case of businesses and Rs. 50 Lakh in case of professionals is required to get a tax audit done. The taxpayer has to appoint a professional to audit their accounts.

Also, a tax audit is required if there has been a loss of your business and you want to carry forward the loss. A tax audit is necessary even when the profits declared by you is less than 8% (6% on Digital transactions) of the turnover in case of business and 50% of receipts in case of professionals.

Individuals, HUF, and Firms running businesses or providing services can offer their income to tax on a presumptive basis. Turnover up to which presumptive taxation is allowed for businesses is Rs. 2 Crore and for professionals is Rs. 50 Lakh.

A person who maintains books of accounts and declares his profit at actuals is required to get his accounts audited if his turnover exceeds Rs. 1 crore during the previous year. However, if his receipts and payments in cash does not exceed 5% of total receipts and total payments then the limit of turnover for mandatory tax audit is Rs. 5 crore from assessment year 2020-21.

This is as per clause (a) of section 44AB. This clause covers only a person carrying on business. Hence, if a person does not carry on business, he will not be eligible for a higher turnover limit of Rs. 5 crore even if his 100% transactions are in non-cash mode. For example, the higher limit of turnover of Rs. 5 crore will not apply to a person carrying on profession. This is because the audit provisions for a person carrying on profession is covered under clause (b) of section 44AB. For such a person, the turnover/gross receipts limit for tax audit is Rs. 50 Lakh even after the amendment by the Finance Act, 2020.

The higher limit of turnover of Rs. 5 crore also will not apply to a person carrying on business but declaring his profit as per section 44AE or section 44BB or section 44BBB and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business in any previous year.

The first provison to section 44AB states that the provisions of section 44AB shall not apply to a person, who declares profits and gains for the previous year in accordance with the provisions of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed Rs. 2 crore in such previous year.

However, for a person carrying on business and declaring income from business under normal provisions, the turnover limit of Rs. 1 crore is contained in section 44AB(a). Further, there is a limit on the person who can opt for section 44AD being an Individual, HUF and a firm. Only these persons can opt for presumptive taxation income under section 44AD and can declare 8% or 6% of income without maintaining the detailed books of accounts.

A person carrying on profession but is not covered by section 44AA, then he can opt for section 44AD. If such a person does not opt for section 44AD, then as per section 44AB(b), his turnover limit shall be Rs. 50 Lakh and cannot be Rs. 5 crore even if his entire income is in non-cash mode. Section 44AB does make any reference to profession specified or notified under section 44AA. Rather, it covers every profession.

In case of a person who cannot not opt for section 44AD (presumptive taxation scheme), the rules are straight forward.

Confusions and complexities arise when the provisions of section 44AD apply. One should remember that section 44AD is applicable only for an Individual, HUF or a firm (eligible assessee). Others cannot opt for section 44AD.

As income tax can be a significant portion of your income, it is very natural to think about the benefits of income tax and filing returns for the taxpayers.

NATION BUILDING

Taxes is one of the primary sources of income for the government, the money collected in the ex-chequer is used for building infrastructure and other development activities. The government spends the collected money on defence, healthcare, infrastructure, education, and launching various schemes for the masses.

LOAN PROCESSING

Apart from helping the nation, there are also several personal benefits of income tax filing. For instance, if you want to apply for a loan like a personal loan or home loan, you will be required to submit income proof such as your income tax returns. In most cases, a lender will require you to submit ITR of at least three years.

ADDRESS PROOF

Another important benefit of income tax is that the tax assessment documents work as address proof. There are several documents such as passport, visa application, Aadhar card, license, etc. for which you are required to submit address proofs. Standard proofs like ID cards are generally not valid for such documents. Your income tax documents can be used in such cases.

CLAIM TAX DEDUCTIONS

One of the biggest benefits of income tax return is claiming tax deductions. There are several ways in which you can reduce your overall tax liability. If you have made such tax-saving investments but have paid more income tax in the form of TDS, you can claim a refund for the same by filing tax returns.

As you can see, there are several benefits of income tax return filing and paying income tax. Play your role in nation building and experience all the other benefits listed above by understanding your tax liabilities and paying them on time.

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