Welcome to our Income Tax FAQ section, designed to provide you with clear and concise answers to your most common questions about income tax in India. Whether you’re a salaried employee, a business owner, or an investor, understanding your tax obligations and rights is crucial for compliance and financial planning.
This section covers a wide range of topics, from basic concepts such as tax calculations and filing procedures to more advanced areas like deductions, exemptions, and penalties. We’ve structured the FAQs to guide you through the complexities of the Income Tax Act, 1961, in an easy-to-understand format.
If you are unsure about how to file your return, claim deductions, or understand your tax liabilities, our FAQ section provides practical answers to help you make informed decisions. Please feel free to explore the topics that apply to your situation, and if you need further assistance, don’t hesitate to consult with a tax professional.
What is the origin of the word “tax”?
The word “tax” is derived from the Latin word taxo, meaning “to estimate.” The concept of taxation has existed since early civilization, with ancient societies requiring people to pay a portion of their income, often in goods or services, to tribal leaders or kings in exchange for protection and governance.
What is a tax?
A tax is a financial charge or levy imposed by a government (or its functional equivalent) on individuals or legal entities. Taxes are compulsory and failure to pay or attempt to evade tax obligations is punishable by law. The primary purpose of taxes is to fund government expenditures and public services.
Why are taxes collected?
Taxes are collected primarily to finance government spending and public services. This includes funding for national, regional, and local government operations, infrastructure, social services, and other public expenditures.
What is tax compliance?
Tax compliance refers to the actions and behaviors of taxpayers and the policies that ensure taxpayers pay the correct amount of tax at the right time. It also involves securing appropriate tax allowances, reliefs, and ensuring proper tax reporting and payment.
What is the previous year in terms of tax reporting?
The previous year for taxes is the 12-month period that runs from April 1 of one year to March 31 of the next year.
This means that no matter when you start your job, your tax year will always end on March 31 and a new one begins on April 1. It’s important to keep this in mind when planning your taxes each year.
Example: If you started your job in July 2023, your earnings from July 2023 to March 31, 2024, will be included in the tax year that ends on March 31, 2024. This year will be referred to as previous year or financial year 2023-24
What is an assessment year in relation to filing taxes?
The assessment year is the year following the previous year when you need to file your tax return. For example, if the previous year is 2023-24, then the assessment year is 2024-25.
Example: If you start your job on January 1, 2024, your earnings will be counted in the previous year (2023-24) since it ends on March 31, 2024. You will file your tax return for this period in the assessment year 2024-25.
What are deductions and how do they affect my taxes?
Deductions are amounts you can subtract from your total income, which lowers the amount of income you pay taxes on. This helps reduce the taxes you owe.
How it works:
- Gross Income: This is your total income.
- Taxable Income: This is what you have after subtracting deductions from your gross income.
Formula: Gross Income – Deductions = Taxable Income
The more deductions you use, the less tax you pay. Deductions are listed in Section 80 of the Income Tax Act, ranging from 80C to 80U.
Example: If your gross income is ₹5,00,000 and you have ₹1,00,000 in deductions, your taxable income would be ₹4,00,000 (₹5,00,000 – ₹1,00,000).
What are the different tax regimes in India?
In India, there are two tax systems: the old tax regime and the new tax regime, which were introduced in 2020.
- Old Tax Regime: You can claim a wide range of deductions (Sections 80C to 80U) under certain conditions.
- New Tax Regime: You can only claim a few deductions, such as for rental property (Section 24B) and contributions to the National Pension Scheme (NPS).
Example: If you choose the old tax regime, you might claim various deductions to lower your taxable income. For instance, if your gross income is ₹6,00,000 and you claim ₹2,00,000 in deductions, your taxable income would be ₹4,00,000. In the new regime, if you earn the same ₹6,00,000 but can only claim ₹50,000 in deductions, your taxable income would be ₹5,50,000.
What is TDS (Tax Deducted at Source)?
TDS stands for Tax Deducted at Source. It means that when someone (like an employer or a bank) makes a payment to you, they will deduct some tax before giving you the remaining amount. This helps ensure that taxes are collected as you earn income.
Example: If your taxable income is more than ₹2,50,000 (under the old tax rules) or ₹3,00,000 (under the new tax rules), your employer will deduct TDS based on the tax rate applicable to your income level.
How does TDS work for bank interest?
When you earn interest from a Fixed Deposit in a bank, the bank will also deduct TDS. Generally, the bank deducts 10% for TDS if you provide your Permanent Account Number (PAN). If you don’t provide your PAN, they may deduct 20%.
Example: If you earn ₹50,000 in interest from your Fixed Deposit and you provide your PAN, the bank will deduct ₹5,000 as TDS (10%). If you don’t provide your PAN, they might deduct ₹10,000 (20%).
What is the standard deduction for salaried employees?
The standard deduction is a fixed amount that salaried employees can subtract from their gross salary to reduce their taxable income.
- From 2019-20: The limit was increased to ₹50,000.
- From 2023-24: You can claim this ₹50,000 standard deduction under both the old and new tax systems.
- From 2024-25: If you choose the new tax regime, you can claim a higher standard deduction of ₹75,000. If you opt for the old regime, you can claim ₹50,000.
Example: If your gross salary is ₹6,00,000, under the current rules, you can reduce it by ₹50,000 (or ₹75,000 if under the new regime from 2024-25), making your taxable income ₹5,50,000 (or ₹5,25,000).
Rebate for Resident Individuals (Section 87A)
Section 87A offers a tax rebate for individual residents in India to help reduce their tax burden.
- For those using the New Tax Regime: If your total income is up to ₹7,00,000, you can get a rebate equal to the amount of tax you owe or ₹25,000, whichever is lower.
- For those using the Old Tax Regime: If your total income is up to ₹5,00,000, you can receive a rebate equal to the amount of tax you owe or ₹12,500, whichever is lower.
Income Tax Returns
The Income Tax Department has introduced seven different forms for filing Income Tax Returns (ITR): ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, and ITR-7. Every taxpayer must file their ITR by the due date, which is July 31 of the assessment year.
The type of ITR form you need to use depends on where your income comes from, how much you earn, and your taxpayer category (like individuals, Hindu Undivided Families (HUF), companies, etc.).
What is considered “Income” under the Income Tax Act?
Under the Income Tax Act, the term “Income” encompasses a wide range of earnings. Here are the main types:
- Salary: For salaried individuals, any payments received from an employer—this includes wages, bonuses, allowances (like medical or transport), and benefits (like a company car)—are classified as income.
- Business Profits: For those running a business, the net profits after deducting expenses are considered income.
- Freelance and Professional Earnings: Freelancers and professionals report income from services provided, which could include fees from clients or other earnings related to their profession.
- Rental Income: Any income received from renting out residential or commercial property you own is taxable.
- Capital Gains: Profits made from selling investments or assets, such as stocks, bonds, or real estate, fall under capital gains. These can be short-term or long-term based on how long the asset was held.
- Investment Income: Earnings from interest on savings, dividends from shares, and commissions are also included in your total income.
What are the main categories of income?
The Income Tax Department classifies income into five broad categories:
- Income from Salary: This includes basic salary, allowances, and any perks provided by the employer. The total before deductions but after exemptions is called gross salary.
- Income from House Property: If you own property, any rental income is taxable. If you have a home loan, the interest paid can be deducted from this income.
- Income from Business or Profession: This includes profits from business activities or professional services, calculated after deducting business expenses.
- Income from Capital Gains: Profits from the sale of capital assets are taxed. These gains can be classified as short-term (assets held for less than a year) or long-term (held for over a year).
- Income from Other Sources: This category includes any income not falling under the previous headings, such as interest from bank accounts, winnings from lotteries, or cash prizes.
What are exempt incomes and taxable incomes?
- Exempt Incomes: These are types of income that are not subject to tax, meaning they do not contribute to your total taxable income. An example is the interest earned from a Public Provident Fund (PPF), which is fully exempt.
- Taxable Incomes: This refers to all types of income that are liable for tax, such as salaries, rental income, capital gains, and business profits.
