What is Income Tax ?

Taxes in India can be categorized as direct and indirect taxes. Direct tax is a tax you pay on your income directly to the government. Indirect tax is a tax that somebody else collects on your behalf and pays to the government eg restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail. This tax is, in turn, passed down to the government. Direct Taxes are broadly classified as :

• Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed
• Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India

Indirect taxes take many forms: service tax on restaurant bills and movie tickets, value-added tax or VAT on goods such as clothes and electronics. Goods and services tax, which has recently been introduced is a unified tax that has replaced all the indirect taxes that business owners have to deal with.

Everyone who earns or gets an income in India is subject to income tax. (Yes, be it a resident or a non-resident of India ). Income could be salary, pension or could be from a savings account that’s quietly accumulating a 4% interest. Even, winners of ‘Kaun Banega Crorepati’ have to pay tax on their prize money. For simpler classification, the Income Tax Department breaks down income into five heads:

Taxpayers in India, for the purpose of income tax include:

• Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
• Firms
• Companies

What is Income Tax Return?

Income Tax Return or ITR is the process of filing your tax returns at the end of a financial year.  A form that is used to declare the net tax liability, claiming of tax deductions, and to report the gross taxable income is called Income Tax Returns. It is mandatory for individuals who earn a certain amount of money to file ITR. Firms or companies, Hindu Undivided Families (HUFs), and self-employed or salaried individuals must file ITR to the Income Tax Department. Income tax filing can be defined as the procedure by which ITR is filed. The process by which taxpayers file their returns online is called e-filing or ITR filing and it can be completed on the Income Tax Department website.

Filing Returns is Mandatory

• The Income Tax Department is responsible for activities related to the taxation process.
• At the end of the financial year, every tax payer has to declare his income to the Income Tax Department in a form prescribed by the Govt. of India.
• It is mandatory for individuals and entities earning income in India to file a return, irrespective of the tax being deducted at source.
• This ITR (Income Tax Return Form) summarizes income earned in a particular financial year.
• The income can be from business, salary, pension, income from housing property, or even income from capital gains.

Avoiding Penalties

• By filing the ITR form (Income Tax Return form) you inform the government about your earnings and the tax paid on it.
• When you file the Income Tax Return, it is a proof of the income on which you have paid the tax.
• As per the Income Tax Act, it is mandatory to file ITR every year.
• Not filing Income Tax Returns can have serious implications. The IT Department may consider you as a tax defaulter.
• It can attract penalties from the Income Tax Department.
• If you have paid more tax than required, the excess amount paid by you will be refunded.

Advantages of Filing Income Tax Return (ITR)

Tax returns should be filed by an individual who has a taxable income. If you are below 60 years of age and have an income up to ₹ 2.5 lakhs, you are exempted from paying income tax. It has been seen that many salaried individuals are under the impression that their employer has deducted tax at source and hence their liability is over. Filing IT returns and income tax payment are two separate obligations. Even if you do not have a tax liability, you should file your income tax returns. There are several advantages of filing tax returns:

• Facilitates easy processing of loans
• For VISA processing, return filing is mandatory
• Quick registration of immovable properties is possible
• A credit card will not be issued by the bank till an applicant files his returns regularly
• Filing income tax returns helps set up a record with the Income Tax Department

Filing Income Tax Returns

According to the Income Tax Act, it is mandatory to file income tax returns if:

• If your gross total income is over ₹ 2,50,000 in a financial year. This limit exceeds to ₹ 3,00,000 for senior citizens and ₹ 5,00,000 for citizens who are above 80 years.
• You exist as a company irrespective of whether you witness a loss or profit.
• You look forward to claiming an income tax refund.
• Filing income tax return is mandatory if you are a resident of India and you have assets outside India.
• If you receive income from a property held under a trust for religious and charitable purposes, a research association, a political party, educational institution, news agency, medical or educational institution.
• In case of NRIs, income earned in India is taxable.

Anupama Singh

anupama@startupsolicitors.com