Not As Taxing As It Seems - A Guide To Filing Income Tax

Welcome to Broken Legalese, a blog that seeks to explain legal concepts of everyday relevance to people untrained in the law in as simple and straightforward a manner as possible. That’s the position of the law, minus unnecessary case names and avoidably complex words like “notwithstanding”, “encumbrance”, and “arbitrability”.

As one of my professors once quoted in class, “There are two things that are absolutely certain in life: Death, and Tax.”

With the Financial Year 2018-2019 having just drawn to a close, income tax filing season is beginning to set in. This post will be a short guide on how you can file your taxes, what you’ll need, and to a limited degree – how you can save on the tax you have to pay. No, having an accountant is not absolutely necessary to being able to file your taxes. It’s quite easy, and anyone can do it!

Step 1: Understanding some of the terms involved:

The law of income tax is riddled with terms otherwise foreign to us. “Exemption”, “Deduction”, the list really does go on. Here are some of the terms that you should understand before filing your taxes:

1.     Financial Year (FY): A financial year (also called a “Fiscal Year”) is a period of one calendar year, beginning on 1^st April of every year, and ending on 31^st March of the following year. The reason for this is another story altogether, all you need to remember is that a new FY begins every April 1^st, which means that (at the time this post was written) we’ve just entered the FY 2019-2020, and finished the FY 2018-2019.
2.     Assessment Year (AY): An assessment year is the year following the FY, where your income in the FY that just passed is assessed and taxed. Which means that for any present FY, the AY is the next year. For example, as I said above, we’ve just entered the FY 2019-2020, but are also currently in the AY 2018-2019. Basically the term “assessment year” denotes the FY for which income tax is assessed in that calendar year. Therefore, 1^st April 2019 – 31^st March 2020 is the period in which your income for 1^st April 2018 – 31^st March 2019 is assessed, hence it is both the FY 2019-2020, and AY 2018-2019.

Note: These two types of years run parallel to each other, which means that for any FY, the AY that’s currently in will be the same as the previous FY.

A natural question to ask at this stage would be, “Why do income tax returns have AY attached to them?” The answer to this is because income for any given FY (say FY 2018-2019) is taxed in the next year (that is, the AY 2018-2019, which corresponds with the FY 2019-2020), the tax return forms have a year attached to them to denote which year’s income they pertain to.

3.     Income: Your income is the net value of the money you receive as earnings in a FY, including your salary, rental income, interest income, and others, minus any tax exempt income (see below). There are five broad types of income under the Income Tax Act:

1. Salary Income: This one's kind of self-explanatory. Salary income is the income you earn by way of salary (for non-self-employed people).
2. Income from House Property: Let's say you own multiple houses. Since you can't live in more than one house at once, you decide to rent out your other house to a tenant. The income you receive by way of rent would be your income from house property.
3. Profits and Gains of Business or Profession: If you're a business owner or a freelancer, your earnings would be taxed under this section, if you earned them from your business or from practicing your profession.
4. Capital Gains: Do you trade on the stock market? If you do, then any income you make from this trading would be classified as a capital gain. Apart from just stock markets, any capital asset (significant pieces of property such as land, property, cars, artwork, etc.) when sold would give you a capital gain, which would be taxed as such.
5. Income from Other Sources: This section is sort of like a catch-all net for any source of income that isn't covered in the other sections. For example, if you received a gift from someone who isn't exempted (more on that later), or lent money to a friend and were paid back with interest, or made money by way of interest on a Fixed Deposit all of these incomes would be taxed under this heading.

4.     Taxable Income: Your taxable income is the income you’ve earned during a FY, on which taxes are levied. The reason there’s a different term for this as opposed to just “income”, is because your taxable income will be equal to or less than your income, since your income is subject to deductibles (see below).

5.     Exemptions: Any income that is exempt from income tax is not considered to be a part of your income for that FY.

6.     Deductions: Anything that is tax deductible is initially counted towards your taxable income, and then subtracted from it to reduce the taxable income overall.

• To better understand the (very relevant) difference between an exemption and a deduction, let’s consider an example: 
• In a given FY, you receive an income of Rs. 1,00,000 from salary, Rs. 5,000 from agricultural related activities, and donated Rs. 1,000 to a certain charitable organization (more on this when we get to deductions). 
• Your taxable income is Rs. 1,00,000, since agricultural related income is tax exempt and therefore not counted in your taxable income at all. 
• Apart from this, because you have donated to a specific charitable organization, your donation is tax deductible, which means you don’t have to include it in your taxable income. 
• You therefore reduce your taxable income by Rs. 1,000, and your taxable income is now Rs. 99,000. 
• The difference here is important because many different tax deductible expenses and incomes (such as spending on healthcare) have limits to which you can deduct from your taxable income. 
• So in the example above, if you had spent another Rs. 50,000 on healthcare, you are allowed to deduct a maximum of Rs. 40,000 from your taxable income, which would now be Rs. 59,000, and not Rs. 49,000.

7.     Resident: Someone who is resident in India (for tax purposes) is anyone who has been present in India for at least 182 days or more in a FY, or 60 days or more in a FY and 365 days or more during the previous 4 FY. Note that your tax residency is entirely independent of your citizenship status, so even a citizen of another country who fulfills these criteria will be considered a tax resident of India. It is entirely possible for a person to be a tax resident of multiple countries, depending on their circumstances and the tax laws of the applicable countries.

Step 2: Sign in to the Income Tax Department e-Filing Page:

1.     In order to make the system of filing taxes user-friendlier, the Income Tax Department has come out with an online filing system, where users can file their own income taxes online. If you’re a first time taxpayer (like me!), register and sign in to the Income Tax Department website using your PAN Number.

The link is available here.

2.     Click on “e-File” > “Income Tax Return”

3.     You’ll find that your PAN number has already been entered into the appropriate field for you. Next select your assessment year (as we discussed above).

4.     Select the ITR Form Number that applies to you. I’ve compiled a table on which ITR form applies to which persons for your convenience.

Form Number	Applicable To
ITR-1	Income under Rs. 50 lakh, from: -       Salary/Pension -       One House -       Other Sources
ITR-2	Income over 50 lakh, from: -       Everything in ITR-1 -       Capital Gains -       Partnership Firm Income -       Foreign Income -       Agricultural Income over Rs. 5,000
ITR-3	Income from: -       Everything in ITR-2 -       Business Income

 Note: There are 4 more types of ITR Forms, but the information in this post is intended mainly for the ones I’ve listed above.

5.     In “Filing Type”, select “Original/Revised Return”.

6.     In “Submission Mode”, select “Prepare and Submit Online”. Select any auto-fill options you may wish to apply to your form, and then click “Continue”.
Before you begin filling in the form in the next step, here are a couple of things to keep handy to speed up the process:

• Your bank statements for the last FY, with all your income marked clearly for ease of reference.
• Your PAN Card.
• Any and all TDS (Tax Deduction at Source - more on that later) certificates you've received over the last FY.
• Any and all Section 80G certificates (Donations to Charitable Organizations - more on this also later) you've received as acknowledgement of charitable donations over the last year.

Step 3: Filling in the Income Tax Return Form

Note: Keep saving your draft regularly to avoid losing information in case you get logged out.

A.   General Information: Proceed to fill in your details (name, address, employer type, etc.)

B.    Computation of Income and Tax: This Section is where you will enter in your various sources and respective amounts of income. As you will see, there’s a separate part of this page devoted to Deductions and computation of your Total Taxable Income, where you can enter in the amounts of your various deductibles (we’ll get to this in a bit, so don’t worry about it if you’re not sure what all is deductible from your taxable income just yet). The system will automatically deduct it from your taxable income, so you don’t worry about the math either! Once this is done, the last part of the page will show you the amount of tax you are liable to pay.

Note: You’ll see that the deductions column corresponding to Section 80G (Charitable Donations) is greyed out. Don’t worry, this is normal. The last part of the form is for filling in details of your charitable donations. (Donate generously, everyone!)

C.     Tax Details: Most employers tend to deduct a standard 10% of one’s salary before disbursing the amount to their employees. This is called TDS (“Tax Deduction at Source”), and is sort of an advance tax that you pay to the government. (Why the amount is 10% and not 20% or 30% is a longer and not very necessary explanation). If your employer has deducted TDS from your salary, enter the details of this deduction here (you’ll find the information you need on the TDS certificate that they would have given you after the deduction). This TDS amount will be automatically subtracted from the tax liability that the system calculated for you in Part B.

D.   Taxes Paid and Verification: This page is mostly automated, and will show you a brief summary of greyed out text boxes that are a result of the calculations from the data you’ve already entered. There’s another part of this page where you can enter any exempt incomes you’ve earned (you’ll find the categories provided for you on the page or in the drop down box right under it). Enter the amounts (for compliance purposes only). Before verifying and submitting your form, make sure you’ve entered the charitable donations information (see the next step).

E.    Donations under Section 80G (of the Income Tax Act) – on this page you can enter the details of any charitable donations you’ve made to an organization registered and authorized to give you an 80G certificate. These amounts are deductible from your total taxable income, so you won’t have to pay tax on these amounts. Enter the details of the organization you donated to (available on the 80G Certificate you would have received after donation) in the appropriate category, and then go back and verify and submit your form. Make sure you complete the e-verification process as soon as possible!

And that’s it! Below, we’ll be discussing some other common questions people may have when filing income taxes, including tax refunds, delayed payments, and deductibles.

Tax Refunds

Every year, the government prescribes tax brackets for income tax. Essentially, people with differing incomes have to pay different tax rates on different portions of their income. For example, the tax bracket as it currently is in India for resident non-senior citizens is as follows:

Taxable Income Range (in INR)	Rate of Tax Payable
0 – 2,50,000	0%
2,50,001 – 5,00,000	5% of total income exceeding 2,50,000 + 4% cess
5,00,001 – 10,00,000	12,500 + 20% of total income exceeding 5,00,000 + 4% cess
10,00,000+	1,12,500 + 30% of total income exceeding 10,00,000 + 4% cess

As I already described above, employers deduct a standard 10% TDS before disbursing salaries. In the event that the TDS that has been deducted for you is less than the tax you’re liable to pay as per the table above, you are eligible for a tax refund, where you’ll get the excess amount from the amount that has been already deducted as TDS sent back to your bank account.

Delayed Payments

Another question that can be asked is, “What if I get paid in one FY for something that I did in the previous FY? Which AY should I include that income in?”

Income is deemed to have been earned at the time the act for which it was earned is carried out. This means that if you worked in March 2019 and were paid in April 2019, your income will be taxable as if it had accrued in the previous FY (i.e., FY 2018-2019).

In cases where the payment is for work spread across financial years (such as a lumpsum payment for two years work, or a job that started in March 2019 and ended in April 2019 for which you were paid in May 2019), you should pro-rate the payment evenly across the different FYs to correspond to the work done in each of these years respectively.

For example, if you were paid Rs. 1,00,000 for a job that took lasted from 10^th March 2019 till April 7^th 2019, then count Rs. 75,000 of that income in the FY 2018-2019, and Rs. 25,000 of it in the FY 2019-2020.

Deductibles

As we discussed earlier, deductibles are expenses or incomes that you can deduct from your total taxable income, to reduce the amount of income tax that you have to pay (see the table under Tax Refunds). The Income Tax Act provides a long list of exemptions. The most common of them are listed in a table below, along with the limits on each of them, for your reference.

Section Type of investment, expense or income Permissible limit 80C PPF, EPF, Bank FD's, NSC, LIC premium, tuition fees Upto Rs. 1,50,000 (across 80C, 80CCC and 80CCD) 80CCC Pension funds Upto Rs. 1,50,000 (across 80C, 80CCC and 80CCD) 80CCD Pension fund initiated by central government Upto Rs. 1,50,000 (across 80C, 80CCC and 80CCD) 80TTA Interest on bank savings account Up to Rs. 10,000 per year 80CCG Equity saving schemes 50% of amount invested upto Rs. 25,000 80CCF Long term infrastructure bonds Up to Rs. 20,000 80D Medical insurance premium and health check up Premium up to Rs. 25,000 in case of individuals and up to Rs. 30,000 for senior citizens 80E Interest on repayment of education loan None 80EE Interest on loan payable for residential house property Upto Rs. 50,000 80G General donations of any recognized society Differs with the amount of donation and the society to which you donate 80GGA Donations to scientific research or rural development Depends on amount of donation 80GGB Donations to political parties Depends on amount of donation 80GG Rent paid if Housing Rent Allowance (HRA) is not part of your CTC Rs. 5000 per month or 25% of total income whichever is less

Gifts

Contrary to popular belief, gift tax has not been removed in India. However, there are some things that you should keep in mind when you file gifts you've received under income from other sources:

• Any gift worth (either in cash or kind) over Rs. 50,000 is taxable (subject to a few exceptions, some of which are listed below).
• Gifts received from close relatives (defined to include one's spouse, siblings of self or spouse, parents of self or spouse, siblings of parents of self or spouse, linear ascendants or descendants - i.e., grandparents or higher and grandchildren or lower respectively, and the spouses of any of the relatives just mentioned) of all values at all times are exempt from tax.
• Gifts received by a person on the occasion of their marriage are exempt from tax.
• Gifts received via a will or inheritance or made by someone under the knowledge that the person giving the gift is about to die are exempt from tax.

Well, that's that! You've successfully filed your own income tax returns! If you have any questions or comments, please go ahead and leave them in the comments, and I'll do my best to revert back to you as soon as I can. :)