TAX SERIES :Overview of income tax law from the view point of Salaried employees(Series -1)
To start with, I would like to share the whole view of Income-tax law applicable for salaried employees for AY 21-22 (FY 20-21) in a few series which a layman can understand
Paying your income tax for the first time is a critical task for any citizen. Furthermore, the process can be too daunting and tedious for a first-timer and some of the terms tend to go right over the head.
This needn’t be so. Many may skip the filing of the income tax return as they may not know the advantages of filing of it and there is a common misconception that it is a complicated process. Continue reading to understand the advantages and clear out your misconceptions.
Advantages of Filing your Income Tax Return(ITR)
01.Claim a tax refund
02.Carry forward of losses
In case you are carrying out a business or a profession and incurred any losses you will be able to carry forward losses to subsequent years only when the return is filed within the due date
03.Easy loan approval
Filing the ITR helps individuals when they have to apply for a housing loan. All major banks can ask for a copy of the tax returns for the last three years Unlike earlier days, if you skip filing your return within the stipulated time limit, you can't file it after the end of the assessment year.
04.Income and Address Proof
An income Tax return can be used as home or address proof
05.Quick Visa Processing
06.Buying a life cover insurance policy.
Most term insurance providers are known to grant coverage that can go as much as 20 times the amount of your annual income. Your income tax returns can be submitted as income proofs for availing of the policy.
Hence it is advisable for every person whose income from any source exceeds ₹2,50,000/- to file the ITR
Are you excited to know more about income tax?
Happy Reading...
In this series, I would like to draw your attention to the following basic contents.
01.What is income tax and how is it different from indirect(GST) tax?
02.Who is required to pay income tax?
03.If an employee's salary is above 2,50,000/- and below 5,00,000/-,will there be any tax?
04.Difference between Previous Year, Financial Year, Assessment Year?
05.At what rates income earned in the FY will be taxable and which Budget will be applicable?
06.What is TDS and why is it deducted from the Salaries?
07.Is there any risk on the part of the Corporates if they have not deducted TDS?
08.How deducting an amount of TDS from their salaries benefit employees?
09.Conclusion
01.What is Income tax and how is it different from indirect tax(GST)?
In simple terms, Income tax means the tax on income directly earned by a person or an individual. For example salaries, Capital gain, etc.
Whereas Indirect tax(GST) means the tax on goods and services where one has to pay tax on the whole price of the Goods( includes profits which were earned by manufacturers or retailers and not by the end customer), hence in GST, the final burden will fall on the end-user.
02.Who is required to pay income tax?
Every person whose income during the Previous Year has exceeded the basic exemption limit is chargeable to tax and can be called an assessee The basic exemption limit varies from individual to individual depends on one's age during the previous year. Hence only when your overall income from all the sources exceeds your applicable basic exemption limit you will be liable to pay income tax and file the return.
03.If an employee's salary is between the basic slab of ₹2,50,000/- and ₹5,00,000/- will there be any tax?
Rebate u/s 87A (click on 87Ato read sec 87A) says if a person's total income does not exceed 5,00,000/- he will get a rebate(discount) of ₹12500/- or 100% of tax payable from his income tax liability.
Hence if a person's total income is up to ₹5,00,000/- he will not get any tax liability but if his total income exceeds the basic exemption limit of ₹2,50,000/- he has to file an income tax return with zero tax payable, if not, the penalty will be levied. However, if your tax liability exceeds ₹5,00,000/- even by ₹1, You are required to pay tax on the whole amount. Hence every person has to perform the tax-saving exercise to make sure that his total is below ₹5,00,000/- to avail of tax benefit u/s 87A
04.Difference between Previous Year, Financial year, and Assessment Year?
While reading the above three points you would have got a doubt that what is a previous year and why to pay tax in the current year for the income earned in the last year. Two keywords that rule the entire income tax are the Previous year and the Assessment Year. These two confuse many people.
The financial year (or Previous Year) starts from 1 April 2020 to 31 Mar 2021
The basic rule over here is Income earned during the previous year will be chargeable to tax in the assessment year.
For eg, Income earned in FY 20-21 is chargeable to tax in AY 21-22 and we will file Income-tax returns in AY 21-22 i.e before the due date 31/7/21 unless otherwise due date got extended. Likewise, income earned in FY 21-22 will be assessed to tax in AY 22-23.
05.At what rates income earned in the FY will be taxable and which Budget will be applicable?
Every year the Union Finance minister releases the budget on 01 Feb(click to see the budget of FY 2021.), which would be applicable for the next Financial year(From April). Income earned during that Financial year will be assessed to tax at those rates in the Assessment Year.
Click here to see the tax rate applicable to you.
Example: For instance, if the Finance minister releases the budget containing updates on rules of income tax on 01 Feb 2020, then these rates would be applicable for income earned during FY 20-21(1 April 2020 -31 March 2021), assessed to tax in AY 21-22 and income tax return shall be filed in AY (21-22) i.e 31/7/2021.
06.What is TDS and why is it Deducted from the Salaries?
As you read in point 5, income earned in the previous year will be taxed in the assessment year. However there is another concept through which government recovers tax on income earned in the previous year, in the previous year itself, this is what is called TDS.
TDS(Click here to get into the TDS Site) is an amount of income tax that will be deducted from your salary.
Central Government imposes responsibility on the companies and assessees who are making payments (ideally called payers or employers) to deduct an amount from the payees(who receive payment, eg., employees) from the amount paid in the previous year itself there on to remit the same to the government. The Basic idea of the Department is to avoid tax evasion by getting the tax payable by a large body of individuals from a few corporates because it is easy for the government to collect taxes from the companies than individuals.
07.Is there any risk on the part of the Corporates if they have not deducted TDS?
Yes, due to the below-mentioned reasons the company stands at high risk if it doesn't deduct TDS.
01.If corporates did not deduct an amount of TDS from the payments that they are making(For eg, salaries), they will not be getting any deduction from their income while computing their tax liability for that relevant year to the extent of 30% of the payments that they are making without deducting TDS.
For eg, Let's say company A Ltd. made a Turnover of ₹ 1.5 crores in FY 20-21, and after deducting all of its expenses(including salaries) it has got a profit of ₹30 lacs. If A Ltd. paid ₹ 10,00,000/- as salaries to their employees who are falling under taxable slabs, without deducting TDS,30% of ₹ 10,00,000/- will get added back to its profits, and income tax will be charged on (30 lacs +30% of 10 lacs=33 lacs). Just because of not deducting TDS, A ltd is paying tax on extra 3 lacs of its income.
02.There will be a levy of interest and penalty to the companies for such non-deduction u/s 201(1A)(click to read section)
1% per month or part of the month on TDS amount for non-deduction
1.5% per month or part of the month on TDS payment for non-payment of TDS deducted.
Hence every company or a business person is obliged to deduct TDS from the payments that they are making for reducing their tax liability and avoiding interest for such non-deduction.
08.How does deducting a number of TDS from their salaries benefit employees?
If an amount of tax has not been deducted from their salaries by their employers, employees will be liable to pay an advance tax(will be discussed in Series -2), if their estimated tax liability(without deducting TDS) exceeds ₹10,000/-.
And if employees have not paid 90% of the advance tax payable before 31 March 2021, there will be a levy of interest u/s 234B and interest u/s 234C @ 1% per month or part of the month on the amount of advance tax short paid or not paid.
Due to this reason, TDS is beneficial to employees.
By this, we can understand that if TDS has not been deducted it would be risky for both employers and employees
To avoid tax evasion by a large number of employees and other payees who shattered around the nook and corner of the world, the Central government has brought into the Act, the beautiful concept called TDS failing which both employers and employees would be penalized in a way directly or indirectly.
09.Conclusion
So, friends, I hope you all enjoyed reading through this series-1
If you find this content and explanation useful, please comment your feedback, raise your queries in the comments section and share with your friends, relatives, and colleagues so that they can get a basic idea of income tax and when they start their employment they can easily get through with all IT compliances.
I will soon release my next series, where I will be continuing my discussion on TDS, FORM 16, and 26AS.
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Thank you,
pls provide gmail also
ReplyDeletenanibalu149@gmail.com
DeleteSimple and to the point explanation. Waiting for the future posts on the legal ways to reduce tax liability.
ReplyDeleteThanks ajay
ReplyDeletewill be coming with legal ways to reduce tax liability
Very nice content
ReplyDeleteSimple, clean and in detail
ReplyDeleteWell explained! Crisp and clear.
ReplyDeleteAwaiting your next blog.
Income tax is payable by any individual who earns more than a specific sum of money as salary or profit. It is liable only to people earning above a certain minimum limit and people earning less than that are exempted from paying any kind of income tax. Income tax lawyers specialize in computation of income tax and deal with various issues pertaining to standard tax deductions and rebates applicable to individual taxpayers. Every taxpayer has to file income tax returns at the end of a financial year and pay the income tax applicable to them. Income tax returns help taxpayers check whether they have paid the right amount of income tax and maintain a record of it. compare car insurance quotes
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