Albert Einstein once said that the hardest thing in the world to understand is income tax. This genius, who cracked the most difficult problems in physics, believed that filing tax is a philosopher's job.
Agreed, filing tax does looks baffling. But complexities diminish when you get to know a few basic rules.
The first step is to know whether you are an 'assessee', or a taxpayer in simple words. By definition, an assessee is someone who is liable to pay tax to the government.
These slabs are decided in the Union Budget. At present, there is no income tax for people earning less than Rs 1.5 lakh as annual income.
Above this, the government charges income tax in various slabs depending upon the total money a person earns each year. These slabs range from 10 per cent to 30 per cent of the income, after several deductions.
For starters, you need to have a Permanent Account Number (PAN).
Largely, the Income Tax Act recognises the income earners under seven categories. These include: Individual, Hindu Undivided Family, Association of persons (or body of individuals), Partnership firm, Company, Local authority and Artificial juridical person like idols and deities.
In case of residents, the entire income they would earn through out the world is taxed in India. For non-residents, the tax is levied only on the amount of income they have earned in the country.
Income for a person is classified under five broad categories:
# Income from salaries
# Income from house property
# Income from business or profession
# Income from capital gains
# Income from other sources
For tax purposes, earnings from all these five categories are added and the total amount is considered for taxation. But the law also allows the assesse to adjust losses.
The balance, after deductions, is the net taxable income. Most common deductions are the ones allowed under section 80C. These include contribution to Employers Provident Fund, life insurance premium, Public Provident Fund and National Savings Certificates.
Generally, the tax on income crystallises only on completion of the accounting year called the 'previous year'. However, for ease of collection and regular flow of funds to the government, the Income Tax Act has laid down payment of taxes in advance during the year of earning. There specified installments dates are: September 15, December 15 and March 15 of every year.
Another provision that the government provides is collection of tax at source, on behalf of the tax payer, during the accounting year itself. This is called as tax deducted at source (TDS). If at the time of filing returns, it is found that some balance tax is still payable after deducting advance tax and TDS, the short fall is paid as self assessment tax (for individual tax payers normally the due date is July 31 every year).
This tax is given to IT department using a form called 'challan'. This can be availed from IT department, banks or IT department's website. Taxes can also be paid online. For individual tax payers, the due date is usually July 31.
For the paperwork, a tax payer needs to preserve monthly salary slips and annual salary certificate. This is used to support the taxable salary and show the TDS by the employer. Similarly, other supporting documents too need to be attached to show the transactions.
For instance, bank statement bills for share brokers, purchase and sale of shares, dematerialised account statements and copies of invoices/bills should be attached. Interest on bank deposits, TDS certificates and dividends from companies and mutual funds should also be preserved for verification by the income tax officer. For references in the future, draw up a broad balance sheet that states income and expenditure as well as assets and liabilities.