Know Your Gratuity Benefits And Income Tax Exemption Rules
June, 17th 2016
The IT Act requires that a certain percentage of total payment of dues is withheld as TDS – Tax Deducted at Source. Generally the rate of TDS for professional services is 10%, and this is not just for consultancy or freelance services, TDS is even cut by employers for salaried people while making their monthly payments. It is interesting to note here that in the case of employees, the TDS is cut as per their annual tax liability which is calculated by taking into account an employee’s investments, the tax exemptions he is eligible for, the tax slabs that are likely to be applicable to them among other criteria.
The one thing that all individuals who are earning a salary or consultancy fees need to remember is that having TDS cut from your payment does not imply that you have filed your taxes with the government and that TDS is the same as filing tax returns. Indeed, TDS is only the first step towards being a responsible tax paying citizen but it is only when you file your tax returns that you are clear of all ‘dues’ to the tax department.
There are several benefits to filing tax returns and these far outweigh the perceived stress and paperwork associated with it:
Establishing a financial identity: Filing your tax returns means that you are documenting your income and this is the best proof of income for any individual. Usually individuals are asked to submit at least three years income tax returns when they are applying for a loan, investing in high value insurance policies or even applying for a VISA to a country like the USA.
Refund of taxes: TDS is deducted even when you are not in the taxable bracket as specified by the IT Act. The only way you can claim a refund of the TDS is by filing your tax returns. This also works in the case of employees where the employer has calculated the yearly income while missing out on your tax saving investments and thus you would be eligible for a refund on the TDS cut.
Getting a notice from the IT Department: This is something no one relishes. Getting notices or reminders from the IT department is something one would wish to avoid. Along with a notice for non-filing of returns, you could also be charged a fine of up to Rs 5,000 under section 234. In some cases of delay in filing in returns an interest of 1% per month may also be levied.
Set off losses: The income tax laws have a provision whereby if one suffers capital losses, short or long term, for instance in the case of investing in the stock market, in one financial year, then that loss can be offset against gains in another transaction. One can even carry forward that loss for the next eight consecutive future years and offset it against gains in any of those years. But again, if you have not filed your returns; and that too on time, you cannot avail of this facility.
Filing your taxes is also a necessity to register immovable property in some cities, besides making an individual for several tax exemptions. So while TDS would imply a direct cut from your income, filing your taxes can benefit you directly in the form of tax refunds and even indirectly in providing you with a sound financial identity and documented income proof required for other transactions.