Know About What is Tax in India

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The government of each country needs funding to assist it in executing its required functions and duties. These include the operation of public institutions, the growth of the country's infrastructure, and the funding of public welfare programs and schemes. In return for delivering these services, the government raises the money it needs by taxing its people. 

To make this process successful, each country has a proper tax procedure laid down by its government. India, with its broad distribution of income earners and sources of income, is no different. 

People are taxed in proportion to their economic conditions, thus promoting social and economic equality. The value of taxes for the government is that they are an automatic mechanism that goes hand in hand with the purchasing and selling of goods and services around the nation. 

Taxes are also useful in regulating inflation, as any adjustment in their rates will monitor demand and supply in the economy. Hence, every earning member of our country must pay taxes in one form or the other. 

What are the two main types of taxes?

There are majorly two sources of revenue for the government. Let us have a look at them-

Income tax

Income tax is a kind of tax levied by governments on income generated by companies and individuals within their jurisdiction. Taxpayers are required by statute to file an annual income tax return to assess their tax obligations. Personal income tax is a form of income tax imposed on wages, salaries, and other forms of income of every individual. 

Company income taxes apply to companies, associations, small businesses, and self-employed persons. Many countries employ a progressive income tax scheme in which higher-income earners pay a higher tax rate than their lower-income counterparts.

Corporate tax

Corporate tax is a tax levied on the net profit of a company taxed at the level of an entity in a specific jurisdiction. The base for corporate tax is usually the net profit of the financial statements with adjustments. It can be described in great detail within the tax structure of each country. 

The tax may have an alternative basis, such as properties, payroll, or income measured in an alternative manner. Many countries exclude certain types of business events or transactions from income taxes. Some countries provide a mechanism for groups of associated companies to profit from losses, loans, or other products of all members of the company.

How can you pay your income taxes?

You can follow the steps below to pay your taxes easily. After payment of the taxes, you are also required to declare the tax paid.

Step 1: Select Challan 280

Go to the Income Tax Information Network and click on 'Proceed' under the Challenge 280 option.

Step 2: Enter your details.

For individuals who pay tax:

  • Step 1: Pick the income tax (0021) (Other than Companies)
  • Step 2: Pick the payment form correctly from the following:
  1. (100) Advance taxes
  2. (102) Surcharge
  3. (106) Tax on distributed income
  4. (107) Tax on distributed revenue
  5. (300) Tax on self-assessment
  6. (400) Daily assessment tax
  • Step 3: Select 'Self-assessment fee' if you have any taxes payable when filing your income tax return.
  • Step 4: Pick the mode of payment that you want to choose. Two types of payment are available – Net Banking or Debit Card.
  • Step 5: Pick the required Year of Assessment (AY). 
  • Step 6: Enter your full address
  • Step 7: Enter Captcha in the given space and press 'Proceed.'

Step 3: Double-check details

Double-check the details shown, and you will have to submit your request to the bank. Then you'll be guided to the payment page of your bank.

Step 4: Check your receipt (Challan 280)

After completion of the transaction, you will get a tax receipt on the next screen, where you can see the specifics of the payment. You can see the BSR code and the Challan serial number on the right side of the challan.

Step 5: Declaring the taxes paid

You need to include this detail on your income tax report after you have made the tax payment. To update this information select the "Self Tax Payments" tab and enter the BSR code and challan number.

What are the previous year and the assessment year?

To understand the tax system of India well, we need to understand the concept of the previous year and assessment year. 

Assessment Year

As the name suggests, the Year of Assessment is the year in which the person's income is measured, i.e., checked and taxed. The word 'person' here refers to the man, Hindu Undivided Family (HUF), Association of Persons (AOP)/Individual Body (BOI), Partnership Firm, Local Authority, Corporation, or any artificial legal person. In the Income Tax Act, 1961, the word 'year of assessment' is described under section 2 of subsection 9, which defines it as a 12-month period beginning on 1 April of each year. 

Previous Year

The previous year shall reflect the financial year immediately preceding the assessment year. It is the year in which an individual or company receives income that becomes taxable in the assessment year. The word 'previous year' is specified in section 3 of the Income Tax Act, 1961. The previous year was a span of 12 months. Still, it can be less than that, as in the case of a newly formed company, the previous year can be less than 12 months, beginning from the start of the business and finishing on 31 March of that financial year. 

Understanding your salary

In understanding tax, it is also essential to understand the break-up of your salary to understand the part that is taxable. Let us go through the various components of the salary any employee receives.

CTC

The overall amount that an organization spends (directly or indirectly) on an employee is CTC or Cost to Company. The CTC shall contain monthly components such as standard pay, different allowances, refunds, etc., and annual components such as gratuity, annual variable pay, annual bonus, etc.

Basic salary

The basic salary is the primary income of the individual. It is a fixed component of the compensation plan.

Gross Pay

Gross salary is determined by adding up one's basic pay and allowances before deducting taxes and other deductions.

Net salary or household salary

Net pay or take-home pay is received after deduction of source income tax (TDS) and other deductions as per the applicable company policy.

Allowances

The payments earned by the employee for meeting the service requirements are allowances. Allowances are given in addition to the basic salary and vary from company to company.

Repayments

Occasionally, workers are entitled to various reimbursements, such as medical care, telephone bills, newspaper bills, etc. The sum shall not be paid in the wages but shall be refunded upon submission of the bills.

Employers Provident Fund/EPF or Provident Fund

A Provident fund is a contribution from both the employer and the employee every month, the lump sum of which serves as an employee's retirement insurance scheme.

Public Provident Fund (PPF)

PPF is a voluntary contribution from the employee and is entirely managed by the employee. The employer has little to do with the account of the PPF. This figure is not included in the CTC or the payslips, but if the employee presents it as a tax saving investment, it will be shown on Form 16.

Gratuity

Gratuity is the portion of the compensation that the employee earns from the employer for the services provided by the employee when he or she leaves the job.

What is the income on which you pay tax? 

Income taxes are assessed based on the source of income. The following are the five primary heads of income from which the taxes are deducted.

Salary 

The taxable compensation that all workers earn from their employers is categorized under this heading.

Capital Gains Revenue

The tax on capital gains applies to profits from the selling of capital assets owned by the tax assessor. Capital assets apply to buildings, land, shares, equities, bonds, jewelry, etc.

Home Property Revenue

Income Tax is imposed on house property if the owner leases the house.

Company income (profits)

As per Sections 30 to 43D of the Income Tax Act, profits received by companies or by the provision of professional services shall be considered taxable at the rate applicable.

Profits from Other Sources 

Income from sources other than the four above is categorised under this heading. It includes things like gifts, lottery, dividends, and so on.

What is TDS?

The concept of TDS has been implemented to collect tax from the very source of income. According to this concept, an individual (deductor) liable to make payment to any other person (deductee) shall deduct tax at source and transfer it to the Central Government. The deductee from whose income tax was deducted at source will be entitled to claim a refund of the amount so deducted based on the form 26AS or the TDS certificate provided by the deductor.

How to calculate payable tax?

Step 1: Calculation of gross income

Calculate your gross sales. Next, delete the exemptions on the components of the wage. The significant exemptions you get are the HRA and LTA Rent Allowance. Subsequently, subtract the standard deduction to arrive at the net salary number. Next, you need to include the income you may have earned from other sources. The number you get is your gross income.

Step 2: Calculating taxable income

Get the net taxable income by excluding the deductions. Tax deductions allow you to further minimize your taxable income by investing, saving, or spending on those products. The first is the standard deduction of INR 50,000. Next, subtract investment and qualifying expenditure under Section 80. By removing all qualifying deductions from the gross taxable profits, you can arrive at the total income you have to pay tax based on your tax slab.

What are the different income tax slabs? 

The tax slab according to which you pay taxes will depend on whether you choose the old tax regime or the new one. The tax slabs for both the regimes are as follows:

Annual Income 

Old Tax Rate

New Tax Rate

Up to INR 2.5 Lakhs

Nil

Nil

INR 2.5 lakhs to INR 5 lakhs

5%

5%

INR 5 lakhs to INR 7.5 lakhs

20%

10%

INR 7.5 lakhs to INR 10 lakhs

20%

15%

INR 10 lakhs to INR 12.5 lakhs

30%

20%

INR 12.5 lakhs to INR 15 lakhs

30%

25%

Over INR 15 lakhs

30%

30%

How should you file your return of income?

Collect the necessary documents, such as the TDS certificate (Form 16/16A), the capital gains declaration.

Download and study Form 26AS, which includes all the specifics of the tax that has been deducted from your wages and deposited against your PAN.

If the amounts shown in the TDS certificates (Form-16, Form-16A, etc.) and Form 26AS do not fit, then you must take the matter up with your deductor to correct the errors.

Verification is the last step of the ITR filing process. There are six ways to review your ITR. Out of this, five are electronic methods, and one is physical verification.

After the return has been verified, either by e-verification or by physical means, the income tax department will start processing the tax return to ensure that all the details you have entered are correct in compliance with the Income Tax Act and also cross-check the details you have entered with the other information available.

What are the documents you need to attach along with your return of income?

Let us look at all the general documents/details that will be needed to carry out the task of filing the returns:-

Number of PAN

The Aadhaar Number

All details of the bank account of the assessor;

TDS certificate (Form 16, Form 16A, Form 26AS, etc.);

Tax Payment challans

Investment proof (Investments and deductions that can be claimed under section 80C, 80D, 80E, 80TTA, etc.)

Conclusion 

Taxes are an important instrument that contribute to the country’s growth and are paid by every citizen in some form. There are majorly two sources of revenue for the government income tax and corporate tax. Income taxes are assessed based on the source of income. Income Tax can be paid through online portals and it can also be used to file the ITR. 

Not all of our income is taxable. The tax slab we use depends on the tax regime we follow. Having gone through the basic tax structure of India, the importance of paying tax on time cannot be stressed enough. It is a prerequisite to being a good citizen.

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