The concept of Income Tax System in India
What is Income Tax?
In India, two types of tax are presently executed. These are: When a tax is paid on the income absolutely to the government, then such a tax is referred as Direct Tax. However, the tax imposed on eateries, theatres, e-commerce websites and more, along with the goods and service they provide is referred as an indirect tax. Thereafter, the generated tax money is forwarded to the government. Indirect taxes exist in the form of: However, after the introduction of GST, there exists a unified tax systems.
- Direct Tax
- Indirect Tax
- Service tax
- Value added tax or VAT
GST does not demand multiple tax returns. As a result, a person engaged in more than one business is not required to file a separate return; rather a single GST return will successfully serve all the purposes. When an individual in India earns or acquires a certain amount of money as salary, then income tax is levied on that income. This clause is applicable to Indians residing abroad as well. The income can be classified as salary, pension or income generated from a savings account, which is collecting 4% interest. In conclusion, the Income Tax Department categorizes income into five divisions:
- Income generated from Salary: In this, the earnings from salary as well as pension are included.
- Income generated from House Property: This denoted to the rental income.
- Income generated from Capital Gains: This includes the earnings from the selling of a capital asset namely, the mutual funds, agricultural land shares, house property and more.
- Income generated from Business or some other Profession: This may include the income generated when the individual is self-employed, works as a freelancer or contractor, or operates a business. In addition, doctors and lawyers who are engaged in self-practice, life insurance agents, and tuition teachers are also included.
- Income generated from Other Sources: This indicates to the income from savings bank account interest, fixed deposits, or from winning a game show.
Tax Rates and Slabs
On the basis of the income of people, taxes are assembled into blocks known as tax brackets or tax slabs. Depending on the tax, the different tax rate is set slab has a different tax rate. There are four tax brackets each with an increasing tax rate.When an individual earns up to Rs.2, 50,000, no tax is applicable. When income earned is between Rs.2.5 lakhs and Rs.5 lakhs, then 5% tax is imposed on the income. When income earned is between Rs.5 lakhs and Rs.10 lakhs then 20% tax is imposed on the income. In short, Rs.12,500+ 20% of income above Rs. 5 lakhs. For income beyond, 30% tax is applicable, i.e., Rs.1,12,500+ 30% of income above Rs.10 lakhs Please note that the above-mentioned income tax slab is meant for taxpayers of 2017-18 who are under 60 years.
- Earning up to 5 lakhs.
- Earning something a mid 5 lakhs and 10 lakhs.
- Individuals who earn more than 10 lakhs annually.
Types of Income Tax Return
There are various income tax return types, namely Individuals, who are salaried employees having, one house property and other sources like interest and so on, choose ITR 1 (SAHAJ), for filing their tax return. Income Tax Form ITR 4 is used by proprietorship firms. This type is suitable for individuals and Hindu Undivided Families earning from a proprietary business. However, Income Tax Form ITR 5 is used by most partnership firms. Companies such as private limited company, public limited company and other for-profit companies choose Income Tax Form ITR 6. Political parties along with news agencies, universities, and other entities in receipt of income from property held in trust for charitable or religious purposes resort to Income Tax Form ITR 7. However, income tax return filing is more of an obligation, precisely a legal one. Additionally fulfilling this obligation can benefit in various situations. For instance, one can claim higher insurance cover, or avail home or personal loans and so on. This legal obligation can also benefit the taxpayer while visa and immigration processing.
- ITR 1 (SAHAJ)
- ITR 4, ITR 5
- ITR 6
- ITR 7
Documents needed for filing Income Tax Return
When filing income tax return several documents are needed.
- As per Income Tax Department, salaried employees require Form No.16 to be issued by the tax payer’s employer summarizing their income from salary and tax deducted at source.
- Additionally, there is Form No 16A which is issued by all the payers who have deducted tax during their transaction with the taxpayer. It also demands account statements of all the accounts operated through the year.
- Moreover, details about a recently purchased property or existing property on rent along with details about the rent received and receipts of municipal taxes paid during the year need to be disclosed as well.
- Any documents related to sale & purchase of shares in the existing year is essential for calculating capital gains.
- In the case of advance tax payments, tax challans need to be revealed.
- Finally, documents involving tax implications should also be present for quantifying taxes.
Steps involved while filing Tax Returns
The Income Tax Department assures the taxpayers are provided with all the available options to file their tax returns. In addition to this, a number of modifications were made by the authorities. The primary one being linking PAN with Aadhar made compulsory. The returns will be processed by the income tax department only after the two ID proofs are linked and verified. Henceforth, “The concept of Income Tax System in India” enlightens taxpayers to file tax return themselves. The password of e-filing account should be securely kept in case it has been created by the organization recruited by the taxpayer.
- Firstly, the return can be filed in a paper form.
- Secondly, in this digital age, IT returns can be filed electronically with a digital signature.
- Thereafter, this electronically filed and then duly signed Form ITR-V must be submitted in a bar-coded paper format.