Filing your income tax might sound complicated and you’re probably thinking you’re better off leaving it to your Chartered Accountant! Even if you do – and we advise that you do leave such things to experts – it’s always helpful to be bare-minimum knowledgeable about it.
Let’s go through income tax jargon, it’ll only take a few minutes…
1. Financial Year (FY)
When it comes to taxes, a “financial year” begins on 1st April and ends on 31st March of the next year. The income you earn during any financial year is only taxed in the next financial year. For example, since you only know exactly how much you made in the last 12 months (i.e. FY 17-18) at the end of the day on 31st March 2018, the IT Department gives you until 31st July 2018 to file your returns for the previous FY.
2. Assessment Year (AY)
The year following the financial year, in which the income is taxed, is called “assessment year”. For example: Income earned in Financial Year 2017-2018 (i.e. 1st April 2017 to 31st March 2018) will be taxed/assessed in Assessment Year 2018-2019 (i.e. 1st April 2018 to 31st March 2019).
3. Permanent Account Number (PAN)
This is the 10-digit number given by the IT Department to all taxpayers (whether they’re an individual or business) to identify them. PAN is a must for all tax-related transactions.
4. Tax (deduction & collection) Account Number (TAN)
Just how PAN is for tax payers, TAN is for tax deductors. This is also a 10-digit number given by the IT Department to individuals/businesses who themselves deduct taxes from payments made to others to pay it directly to the government. For example, your company that deducts taxes on your behalf (e.g. TDS) from your salary has a TAN.
5. Tax Deducted at Source (TDS)
Tax deducted by an individual or business (i.e. the source) from payments made to you is TDS. This TDS is paid directly to the government on your behalf so that the burden of paying tax all at once doesn’t fall on you, the taxpayer. TDS can be cut from any income:
- TDS on Salary: Above a certain annual income bracket, TDS is cut by your employer before paying you your salary. The details of this TDS is on Form-16, which your company will issue to you annually.
- TDS on Non Salary: This is the TDS on any other payments apart from salary made to you like TDS on income from interest, commission, consultation fees, freelancer charges etc. These details will be present in Form 16A, issued quarterly by the person making the deduction. Example: Your bank will issue form 16A if TDS is done on interest income.
#6. Advance Tax: If someone knows beforehand that their tax liability for a financial year will be more than Rs. 10,000 then they’re supposed to pay the tax in instalments instead of a lumpsum at the end. This is called as advance tax and it has to be paid before the following deadlines:
- Not less than 15% of the tax liability on or before 15th June
- Not less than 45% of the tax liability after reducing tax already paid on or before 15th September
- Not less than 75% of the tax liability after reducing tax already paid on or before 15th December
- The remaining tax liability on or before 15th March
#7. Self-assessment: Calculating your remaining tax liability after TDS and advance tax paid by you at the end of the financial year is self-assessment tax.
#8. Forms 16,Form 16a and 26AS:
- Form 16: This form consists details such as your salary, the tax deducted on it and the tax paid on it by your employer. This is issued yearly.
- Form 16A: This form consists of details of tax deducted on non-salary payments like interest, commission etc. done by your bank or company. Form 16A is issued quarterly.
- Form 26 AS a.k.a the Tax credit statement: This is a computer generated form issued by the IT department showing all tax details such as taxes deducted at source, tax collected at source, taxes paid, any refunds, any tax defaults and any high value transactions associated with you. It’s an important form because only if these details tally with other information you provided will you receive any tax credit due to you. You can cross check details of form 16 and 16A here and it can be accessed from the IT website using your PAN.
#9. Sources of Income: For calculating your tax liabilty you need to add up your income from all these 5 sources:
- Income from salary: The money you receive from your employer
- Income from house property: The money you get from rent on any of your properties. Remember if you’re paying interest on a housing loan you can claim tax deductions on it.
- Income from business or profession: The profits or losses you make from a business venture needs to be reported too as income. This is not to be confused with corporate tax which is taxes paid by a business on the total sales made by it.
- Income from capital gains: The gains you make by selling any asset like mutual funds, shares, property etc. will come under this income head.
- Income from other sources: Money from other sources like interest, lotteries, dividends etc. any income not under the above 4 sources.
#10. ITR Forms:
While filing income tax returns each taxpayer or assesee has to fill an ITR form. These forms differ depending on your source of income. Example: Salaried professionals whose total income from salary, house property and other sources is less than Rs. 50 lakh have to fill ITR 1. You can read more about the other forms here.
#11. ITR V form:
This is like a verification receipt issued by the IT department to acknowledge that you’ve filed your income tax returns. You’ll need to print this form out, sign it in blue and send it to the to the central processing Unit in Bangalore by post within 4 months of filing your tax return electronically. Once this is done you’ll get a confirmation email and your process of filing ITR will be complete.
#12. Deductions: After calculating your income from all sources subtract the amount invested in tax saving investments i.e investments made under section 80 and the remaining amount will be taxed depending on the income tax slab it falls under. This amount is called as a deduction because it reduces your taxable income.
Sum of All heads of Income = Gross Income
Gross Income Less Deductions = Taxable Income
The more you make use of the deductions allowed, the lower your tax shall be.
#13. Exemptions for salaried people: You might have noticed that your salary on your is divided into many parts ( Basic, house rent allowance, medical expenses etc.) out of these few parts are fully taxable (like Basic) while few are partially taxable (HRA, LTA etc.) The partially taxable parts are the ones on which you can claim tax exemptions.
#14. Income tax slabs: After calculating the total income from all sources and making necessary deductions you can ascertain which tax slab you fall under. These slabs differ every year as announced by the government in the Budget.
For FY 2018-2019 i.e. the income you earn from 1st April, 2018 to 31st March 2018 the tax slabs are the same as FY 2017-2018 and instead of the previous 3% cess a 4% cess will be added.
Now that the basic tax terms are covered you can finally have that ‘taxing’ conversation with your CA! Comment below and let us know if we’ve missed on any other important terms.