What is income tax?

As per the Income Tax Act (ITA), any salaried individual in India that earns above a threshold income, whether they are an Indian resident or not, is subject to paying income tax each year. Indian residents are required to pay income tax on their income earned in India as well as what is earned abroad, also known as ‘global income.’ Indian non-residents are only required to pay income tax on the amount they earn as a salary in India, provided it crosses the threshold set by the ITA.

When is Income Tax Applicable?

As the name suggests, the income tax definition suggests that it is deducted on any form of income. However, there are certain exceptions. Income tax is deducted on one’s monthly salary. It is also deducted on the amount saved through a savings plan or retirement plan for those who are receiving monthly, quarterly, or annual annuities. In addition to these two sources of income, Besides these two streams, the Income Tax Department breaks down the income one receives from three additional sources.

Any income earned from renting out your own property to a tenant is taxable as per the ITA. Returns from investing in real estate, mutual funds, and other market-linked asset classes as also taxable. The interest earned by a policyholder on certain fixed instruments like fixed deposits and recurring deposits is also eligible for an income tax deduction. When it comes to the kinds of jobs that are eligible for an Income tax deduction, there include working as a business owner, employee, or freelancer.

What is Income Tax Exempt or Income Tax Deductible?

As per Section 80C and 80D, income tax is not applicable when one invests in ULIPs, life insurance, or term insurance or medical insurance, provided the premiums invested per year do not exceed ₹1.5 lakhs. The amount received at maturity from these instruments is also exempt from taxation as per Section 10D. Secondly, any interest paid on loans that are taken for the purpose of funding one’s education, buying a house, running a business is also tax-exempt.

Fixed deposits where the amount is locked in for more than 5 years are income tax exempt. National Savings Certificate and Public Provident Fund are also tax-free instruments to consider. Finally, if you invest in mutual funds through equity-linked savings schemes (ELSS), you are also exempt from income tax as per Section 80C. However, to avail of these tax benefits, these tax exemptions must be filed in one’s annual income tax returns.

How is Income Tax Paid?

Now that we understand what is income tax, it’s important to learn the three ways in which it is paid by salaried individuals throughout the fiscal year.

  1. Tax deducted at source (TDS): This is a 10–20% deduction at each payout by your employer or bank on your salary, commission, rent, and other payments.
  2. Tax collected at source (TCS): This is the tax that is collected by a seller on a sale of a certain items such as liquor (alcoholic nature),tendu leaves, scrap, toll plaza, parking lot, bullion, jewellery ( worth over five lakhs), (worth over two lakhs), and so on.
  3. Advance tax payments: Any salaried individual in India with an estimated tax-liability of ₹10,000 or more per year must pay advance tax. This is done through tax payment challans present at bank branches authorized to do so by the Income Tax Department.
  4. Self- assessment:If there are any errors in your Form 26AS, you can rectify them by paying the missing taxes before you file returns.

Income Tax Slab for 2020

To know whether you are eligible to pay income tax, and the percentage of your income that is to be taxed, you can refer to the income tax slabs for the current financial year. An income tax slab groups your annual income into brackets. Income tax works on a progressive taxation system. This means that as the amount of income earned increases, the prescribed percentage of tax for that bracket also increases.

Budget 2020 released new tax slabs that taxpayers can opt for from FY 2020-21. However, those who opt to pay taxes as per the latest tax slabs will have to give up certain previous deductions and exemptions. Here are the latest tax slabs which will take effect in 2021:

Income per fiscal year Tax Rate Tax Charged
No Income to ₹2.5 lakhs NA No tax charged.
₹2.5 lakhs to ₹5 lakhs 5% 5% on your taxable income with a ₹12,500 tax rebate under Section 87A.
₹5 lakhs to ₹7 lakhs 10% 10% on your taxable income.
₹7.5 lakhs to  ₹10 lakhs 15% 15% on your taxable income.
₹10 lakhs to ₹12.5 lakhs 20% 20% on your taxable income.
₹12.5 lakhs to ₹15 lakhs 25% 25% on your taxable income.
Above ₹15 lakhs 30% 30% on your taxable income.

Income Tax Returns and How to File Them

If you have invested your money in any of the income tax-deductible or tax-exempt instruments mentioned above, it is crucial that you file your income tax returns (ITR) as follows.

1. Collect all essential documents like capital gains statements,TDS certificates (Form16/16A/16B/16C), interest certificates and salary slips. Ensure your TDS certificates are signed by you and your employer.

2. Download and check your Form 26AS which is your tax passbook showing all your deducted and deposited tax for the current year against your PAN.

3. Correct all errors in your Form 26AS, if any. For instance, if the total amount of deducted from you as per the certificates does not match the amount shown on Form 26AS, reach out to your deductor to rectify the matter.

4. Calculate your total income earned from all taxable sources for the fiscal year.

5. Verify and calculate your tax liability by looking at total taxable income against the income tax slabs for the current year.

6. Deduct the tax that is already paid through advance tax like TCS and TDS during the year from the tax liability you calculated. Add any interest that is payable to you.

7. Once all taxes are paid by you, start the mandatory process of filing ITR. Income Tax Returns can be filed by downloading income tax I-TAX, or other publicly available tax calculating software like Chartered TaxPro TDS Professional in Java utility or Excel. In case taxpayers are eligible to file form ITR-1 and/or form ITR-4 a software is not required as forms can be submitted online.

8. Use the correct form to file your ITR which is specified by the Income Tax Department each year. Your application will be classed as defective if you use the incorrect form.

In conclusion, employ this guide to understand income tax definition and how to file returns. Do note that the income tax department puts out some necessary deadlines which taxpayers must follow each year when filing tax returns. The date of submitting investment proof is earlier than that of filing returns. Hence, keep an eye out for the tax deadlines for the next fiscal year.