How To Do Your Taxes?

Brief Introduction

The term “Tax” comes to mind instantly if the person is a citizen of India and has a source of income. What is this “Tax”? Tax is the main source of revenue to the Government of India, controlled and governed within the Income Tax Act, 1961 (I-T Act). It is a mandatory financial levy imposed by the Government to fund various expenditures. The IT Act was introduced by the Government of India in 1961.

Categories Of Taxes

While there are various types of taxes in India, they all come under two categories:

1. Direct Tax - The tax directly paid to the Government calculated on the income or profit e.g. Income Tax deducted from salary every month in the form of Tax Deducted at Source (TDS).
2. Indirect Tax - The tax levied on goods and services collected by someone else and later paid to the Government e.g. Goods and Services Tax (GST)

Taxes in India fall under three jurisdiction namely Central Government, State Government and Local Government.

Types of Taxes

There are various types of taxes such as:

1. Income Tax - If total income (after deducting all expenses) exceeds the income tax limit
2. GST - All indirect taxes have been consolidated and converted into Goods Service Tax.
3. Cess - It is a tax on tax often imposed by the government for particular purposes such as education and health.
4. STCG - Short-Term Capital Gains Tax is applicable to Capital assets (including share and real estate) if they are held for less than 1 year.
5. LTCG - The Long-term Capital Gains Tax is applicable if the Capital assets are kept for more than 1 year in case of share and 3 years in case of real estate.
6. STT - Security Transaction Tax is applicable on every stock exchange transaction.
7. Stamp Duty for Home - It is levied on the house-purchase transactions needing documentation.
8. Professional Tax - This is levied by the state government on income only on professionals.
9. Dividend Distribution Tax - This law is applicable to the companies which are paying dividends to their investors.
10. Municipal Tax - This is also known as the property tax, applicable to the owner of the property, imposed by Municipal Corporation.

This is still not the exhaustive list of all the types of taxes. This article focuses on Income Tax, thus let us explore and demystify the particular tax in detail.

Income Tax for Individuals

While talking about individual income tax, it is applicable to various sources of income such as Salary Income, Business Income, Income from House and Interest. The income tax limit is set to Rs. 2.5 Lacs for earning men and 5 Lacs for earning women. Their excess income than these respective limits would be taxable.

An individual can file an Income Tax Return (ITR) by filling any of the ITR forms such as ITR-1, ITR-2, ITR-3 and ITR-4 based on the criteria of the income.

Criteria for suitable ITR form:

1. ITR-1 or SAHAJ
   • Income below Rs. 50 Lacs from Salary/Pension, Other sources, One House Property.
2. ITR-2
   • Income above Rs. 50 Lacs from Salary/Pension, Other sources, more than One House Property, capital gains, Foreign Income/Asset
   • Director of a company
   • Invested in unlisted equity shares
3. ITR-3
   • Income from Proprietary Business or Profession
   • Presumptive income above Rs. 50 Lacs
   • Director of a company
   • Invested in unlisted equity shares
   • It may include Salary/Pension, Other sources, House Property
   • As a partner in the firm
4. ITR-4
   • Income above Rs. 50 Lacs from more than One House Property, Sources outside India, Foreign Income/Asset
   • Opted for the Presumptive Taxation Scheme
   • Director of a company
   • Invested in unlisted equity shares

Income Tax for Freelancers

Freelancers are self-employed or consultants often working on projects or assignments. Income Tax in India is remunerative for freelancers. The freelancer’s income is categorized under the income head Business and Profession.

Freelancers require Form ITR-4 to file the ITR. Those who opted for the Presumptive Method of taxation would file ITR-4S. As per the “Presumptive Scheme of Taxation”, the income can be declared either as 50% of the total value of services provided or 8% of the total goods sold.

The client usually deducts the TDS when making payments to freelancers. Freelancers can claim the TDS while filing ITR form. If the total taxation amount goes beyond Rs 10,000/- then a freelancer has to pay Advance Tax. The term “Advance Tax” is referred to as taxes at intervals during the financial year rather than paying all at once at the end of the year. A certain interest will be charged on the total amount at the year-end if one fails to pay Advance Tax.

Freelancers can go for Presumptive Taxation method if the annual income is less than Rs 50 Lacs and can skip the task of account auditing. It becomes mandatory to have the Account book audited if the annual income is more than Rs. 1 Crore, else it is not required.

Income Tax for Startups

Startups have to pay Income tax calculated on their earnings and not the sales revenue. Earning (or total profit) is the difference between total expenses to sell the goods/services and depreciation. The government introduced the Presumptive Scheme of Taxation (PST) as it becomes difficult for the startups to keep track of expenses, sales etc.

The taxes apply as similar as income tax for a proprietorship entity or individual, 30% of the income for the partnership or LLP firms and 25% for an Indian company. The ITR4 form should be used to file the income tax returns for the income computed under the PST whereas ITR 3/ ITR 5/ ITR 6/ ITR7 form should be used for computation on revenue, expense and depreciation.

Government has also announced some attractive incentives to encourage Startups such as Startup India.

Conclusion

As a citizen of India, paying taxes is our duty to let the governments do their jobs of various kinds. Taxpayers may be felt overloaded due to the tax burden on their earnings. To provide some relief to them, the Government announces amendments of various kinds from time to time. Taxpayers also need to be aware of these developments to get the benefits and save money.

By: S.B. Jain and Associates