The Income Tax System in India is governed by the Income Tax Act, 1961. Having a basic understanding of the concepts and terminologies of the Taxation System can help an individual identify their tax liabilities under the law and fulfill them accordingly. First time taxpayers often face a lot of difficulty in identifying whether they have to pay tax, to what extent and how to go about filing their returns. Compiled here are some of the key terms in Income Tax that you should know:
Income Tax is a form of tax that is levied by the Central Government on the annual income of an individual or business. The Income Tax collected transforms into revenue for the Government, who uses it for multiple purposes such as ensuring social security, improving infrastructure and functioning security and governmental agencies among others.
Income Tax Returns (ITR) are an amount that is paid as Tax by individuals or businesses to the Government; ITR is based on the income that is received by taxpayers on an annual basis. Income Tax Returns are furnished through different ‘ITR’ forms. The form that a taxpayer is required to submit depends on various heads that the Taxpayer may fall under. Sources of income are broadly classified into: Income from Salary, Income from House Property, Income from Business or Profession, Income from Capital Gain and Income from Other Sources
Taxpayers furnish their Income Tax Returns to the Income Tax Department on an annual basis. Assessment is the process of calculating the various kinds of income that a Taxpayer has received annually under various heads, in order to ascertain the tax amount payable to the Government after making certain deductions. The various kinds of assessments are Self Assessments, Scrutiny Assessment, Best Judgment Assessment and Income Escaping Assessment.
Assessee refers to any ‘person’ who is liable to pay Income Tax under the Income Tax Act, 1961. Assessees include Individuals, Hindu Undivided Family (HUF), Association of Persons, Body of Individuals, Companies, Limited Liability Partnerships, Local Authorities or any other Artificial Juridical Person that does not fall into any of the other categories. Assessees are required to furnish their Income Tax Returns on an annual basis.
‘Financial Year’ is a term used in Financial and Taxation-oriented reporting to refer to the twelve-month period between 1st April of the current year till 31st March of the subsequent year. This term is used in Governmental finance and budget reporting. The Tax liabilities of Assessees are based on the Income that they have generated over a specific Financial Year.
An Assessment Year is the period between 1st April of the present year till 31st March of the subsequent year which comes after the previous ‘Financial Year’. The Assessment Year is the year in which the Income earned by an Assessee during the Financial Year is taxed and the Income Tax Returns are filed. Example: For the Financial Year 2023-2024, the Assessment Year would be 2024-2025.
The Previous Year is the Financial Year preceding the Assessment Year. For the purposes of Income Tax Return filing, Financial Year and Previous Year are the same.
An Assessee may receive income from multiple sources such as their salary from job, sale of assets, pension, income from businesses, dividends from investments or stocks, other inheritances or gifts; this is known as gross income. The gross income received by an Assessee may not be entirely taxable and they may be subject to further deductions.
The Gross Income of an Assessee is further subjected to multiple deductions and exemptions. The exemptions and deductions available to an Assessee depends on the different kinds of income that the Assessee receieves. The net taxable income determines how much tax an Assessee is liable to pay towards the Government in an Assessment Year.
Deductions under Section 80 of the Income Tax Act, 1961 are amounts that can be reduced from the total gross income of an Assessee. Making deductions on the gross income reduces the Income Tax liability of an Assessee. There are multiple deductions that can be availed by Asseessees under Section 80C, Section 80D, 80E, 80F, 80G of the Income Tax Act, 1961.
Exemptions, like deductions are certain incomes within the gross income of an Assessee that are exempted from being taxed. The key difference between deductions and exemptions is that while the former promises a reduction in the amount that is to be paid by the assessee, the latter completely forgoes certain kinds of income received by the Assessee. Few examples of exemptions are Agricultural Income, Gratuity, Scholarships for education, Income from Life Insurance Policies, House Rent Allowance under Section 10(13A) and Sum received from a life insurance policy under Section 10(10D) and so on and so forth.
Tax Slabs in India categorize Taxpayers into various categories depending upon their income. Different tax slabs have specific ranges within which Taxpayers are grouped based upon their income; the same is directly proportional to the amount that Assessees file in their Income Tax Returns – this methodology is known as a Progressive Tax System. Tax slabs are often revised by Governments in their annual budgets depending on a number of socio-economic factors. In India, the New Tax Regime that was introduced in the Union Budget 2024-2025 with revised slabs is by default, the Tax Regime that is applicable to Assessees. However, taxpayers have the option to choose between the newer or older tax regimes while filing the Income Tax Returns.
Tax Deducted at Source (TDS) is a form of tax that is paid by Taxpayers when making certain kinds of payments. In general terms, the person who receives the income is the one that is liable to pay income tax. But as per TDS mechanism, the person who makes the payment withholds a certain percentage of the full amount as TDS, but the amount withheld by the payer as TDS is added by the payee to his gross income amount and the same is further adjusted against the final tax liability of the payee. Rent, commission, salary, interest on dividends, professional consultation fees etc. are some of the kinds of amounts on which TDS is deducted.
Form 16 is a TDS Certificate containing details of the salary earned by each Taxpayer employee and the amount that was deducted as TDS. A Form 16 is a certificate that is issued by employers before 15th June every year. The TDS Certificate will contain numerous details such as the Name, Address, PAN Number and summary of salary payments and deductions as well. Any salaried employee who falls within the taxable slabs are liable to file Form 16 along with their Income Tax Returns. Much like the ITR, Form 16 serves as additional proof that both the employee and employer maintain financial ethics, boosting the prospects of Taxpayers to avail numerous financial services.
Advance Tax, as the name suggests, requires Taxpayers that have tax liabilities of Rs.10,000 or more to fulfill their tax liabilities at four different times during a Financial Year instead of as a lump-sum once a year. For most salaried employees that have tax liabilities of above Rs.10,000, the TDS that is collected by their employers often cover up the liabilities to individually pay Advance Tax to the Government. In contrast, self-employed professionals or Taxpayers that receive income from sources other than their job, such as dividends from shares or interest from other sources are liable to pay the advance tax if their tax liability is above Rs.10,000.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
