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Income Tax Basics

 

Benjamin Franklin once said, “The only thing certain in life, are death and taxes”.  However much we want to run away from it, there is no escape.

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Taxes have to be levied by Governments or an Authority, for running central amenities, which may otherwise not be remunerative and also for a balanced economic and social growth intended to removing disparity in income and general well being of citizens at large.

Taxes are of primarily of two types:

> Direct Tax and

> Indirect Tax.

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Direct taxes are those which the taxpayers pay directly as a function of their income and wealth (Income Tax, Wealth Tax, etc.).

Indirect tax is a tax on product or service, the incidence of which is borne by the consumers who ultimately consumes the product or service. The major source of indirect taxes is Excise Duty, Custom Duty, Sales Tax, Service Tax among others.

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In this article we will concentrate on a form of direct taxes which is Income Tax.

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The Department

Income tax plays an important role in the Indian Revenue System. The power of levying income tax lies with the Central Government of India (GoI).

For income tax management, the country has been divided into various zones, then into sub zones, circles and finally divided into wards. The Income Tax Department (ITD) comes under the Central Board of Direct Taxes (CBDT) which is a part of  Department of  Revenue in the Ministry of Finance (MoF). The Finance Minister heads the MoF, under whom is the Chairman of Central Board of Direct Taxes. There is no fixed tenure of chairman, but average tenure till now has been about two years.

 

The Chairman of the CBDT is also an ex-officio Special Secretary to Government of India. In addition, CBDT has six members, who are ex-officio Additional Secretaries to Government of India.

> Member (Income Tax)

> Member (Legislation and Computerization)

> Member (Revenue)

> Member (Personnel & Vigilance)

> Member (Investigation)

> Member (Audit & Judicial)

The Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), whose members constitute the top management of Income Tax Department.

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Income Tax

As a citizen, we are required to pay taxes on the income that we earn. This percentage of tax that needs to be paid is proposed each year during the Budget followed by enactment in the Finance Bill every year.

 

The tax slabs are progressive, i.e. the higher the income the more the income tax. This has been done on a sociological prerogative, where in the disparity of income can possibly be reduced, the poor will not be burdened unnecessarily and also as a source of revenue for the government as a contribution of the individual towards the development of the Country. Our law originally did not give us the right to ask where the money collected as taxes goes but with the coming of the information age and subsequent Right to Information has changed this dramatically and the Government has been made more accountable for the taxes collected.

 

Statutory laws also allows for NIL taxes for people earning less than a bare minimum as per respective tax slabs.

 

The income earned during the year needs to be declared in the following year to the Government and any due taxes need to be paid off to the Government. This exercise is done on an annual basis. This statement of earnings, taxes paid or to be paid, among others is called the Income Tax Return (ITR).

 

Filing of Income Tax Returns is a legal obligation of every Individual or an HUF (Hindu Undivided Family) whose total income for the previous year has exceeded the maximum amount that is not chargeable for income tax under the provisions of the I.T Act, 1961. However there may be certain exceptions to this and there may be an obligation to file your annual returns even otherwise. It is best to check with a qualified and experienced consultant.

 

Hence, it is advisable that even if you do not have taxable income you should file your tax returns every year as this is one of the basic tenets to maintain tax and financial hygiene other than a statutory requirement.

 

The Financial Year (FY) in India starts every year on 1st April an ends on 31st March the next year. Hence a FY 2000-2001 denotes the period between 1April 2000 to 31st March 2001.

The tax returns are required to be filed by 31st July (in general) of the following the FY which is called the Assessment Year (AY).

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All individual tax payers (Assesses) are categorized as per the following 3 categories

> Individuals (Below 60 years) & HUFs

> Senior Citizens (Above 60 years but below 80 years)

> Very Senior Citizens (Above 80 years)

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The tax slabs for the Financial Year 2013 – 2014 and the respective Annual Year is as follows:

Individuals and HUFs

I. Individual (other than II and III below) and HUF

 

Income Slabs

Income Tax Rate

i.

Where the total income does not exceed Rs. 2,00,000/-.

NIL

ii.

Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/-.

10% of amount by which the total income exceeds Rs. 2,00,000/-

iii.

Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.

Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-.

iv.

Where the total income exceeds Rs. 10,00,000/-.

Rs. 130,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Education Cess: 3% of the Income-tax.

II. Individual resident who is of the age of 60 years or more but below the age of 80 years at any time during the previous year

 

Income Slabs

Income Tax Rate

i.

Where the total income does not exceed Rs. 2,50,000/-.

NIL

ii.

Where the total income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-

10% of the amount by which the total income exceeds Rs. 2,50,000/-.

iii.

Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-

Rs. 25,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-.

iv.

Where the total income exceeds Rs. 10,00,000/-

Rs. 125,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Education Cess: 3% of the Income-tax.

III. Individual resident who is of the age of 80 years or more at any time during the previous year

 

Income Slabs

Income Tax Rate

i.

Where the total income does not exceed Rs. 5,00,000/-.

NIL

ii.

Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-

20% of the amount by which the total income exceeds Rs. 5,00,000/-.

iii.

Where the total income exceeds Rs. 10,00,000/-

Rs. 100,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Education Cess: 3% of the Income-tax.

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Tax Returns

For filing your ITR every year you will need some details which will be available from some specific documents. Hence you should keep the following documents when filing income tax returns every year.

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It is fruitless to go to the war front without proper arms and ammunition. Hence, it is always advisable to keep all the documents required for preparation of the income even after the ITR has been submitted as you may require it later, in-case the tax authorities ask for them. Some common documents that may be required by an individual for preparing the returns are:

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> PAN Card: Required for details such as PAN Number, Father’s Name etc to be filled in the ITR.

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> Form No. 16 (received from the employer): This will help to know your income from salary and tax deducted by your employer from your salary income.

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> Form No. 16A (received from all non salary payers who have deducted tax): You will first have to get this form collected from the parties who have deducted tax while making payment to you during the year, like banks, investment houses or companies where you have worked on a consultant basis, parties to whom you have given loan, tenant to whom you have rented your property, et cetera.

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> Bank Statement: This will give an idea about all the transactions (Credit and Debit) income earned during the year and investments and expenditure incurred. This assures that no part of income is left out and you do not miss out any eligible deductions.

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> Details of Property: If you have bought or sold some property during the year, you will need details of the same moreover if you have any rent received the details are also required and receipts of municipal tax paid during the year. In addition to this, if you have taken this property through a loan, do carry the loan details and a copy of certificate of interest paid during the year.

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> Tax Saving Investments: Details of any tax saving investments done, like insurance, medi-claim, PPF etc are require to enable you to take tax benefits for the same.

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> Capital Gains: You will also need purchase/sale details corresponding to the investments made during the year. In case of a large number of transactions, it is advisable that you prepare a statement of sale and corresponding purchase of these investments and arrive at the amount of profit or loss, before actually calculating your taxable income.

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> Tax Payments: Details of any taxes paid by you or anyone else on your behalf is required if you have made tax payment during the year and to take the benefit of the same.

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This is the new era in which awareness popularly known as information exchange has led to more people paying taxes and managing the same. Hence we should all maintain good tax hygiene by first being aware where we stand, and then make sure that we are on the right side of the law.

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