It’s that time of the year again when you must be preparing to file your Income Tax Returns. While some have got used to the drill over the years, there are many who will be entering the process for the first time.
If you have earned an income in the last financial year (April 1, 2016 to March 31, 2017), you are liable to pay income tax as per the law. This tax is levied directly on your aggregate taxable income earned during a financial year.
The income tax return is an official statement which shows your total income earned from all sources, your tax deductions under various headers of the Income Tax Act, and your final tax liability.
To understand filing of income tax returns, there are some common terms you must understand.
Financial year (FY) – Financial year refers to the 12-month period starting from April 1 of a year till March 31 of the following year.
Previous year (PY) – Previous year refers to the financial year for which you pay taxes. It is also called tax year. For example, if you have earned income between April 1, 2016 and March 31, 2017, 2016-17 is called your previous year.
Assessment year (AY) – Assessment year is the year in which you file taxes for the previous year. So, for the income earned in the previous year 2016-17, the assessment year would be 2017-18.
Gross income – It is your aggregate income in a financial year.
Taxable income – Standard deductions are deductions made from the gross income to arrive at the taxable income.
Tax liability – There is an income tax slab which specifies the tax rate applicable for different levels of income. Here is the tax slab for the financial year 2016-17 which is applicable for tax-payers up to 60 years of age in the assessment year 2017-18.
The table also includes changes that the Government of India made in the tax slab for the current year, payable next year:
|Income Tax Rate for AY 2017-18
|Income Tax Rate for AY 2018-19
|Up to Rs. 2.5 lakh
|Rs. 2.5 lakhs to Rs. 5 lakhs
|Rs. 5 lakhs to Rs. 10 lakhs
|Rs. 10 lakhs and above
Moreover, a 2% Education Cess, 1% Secondary and Higher Education Cess are payable on the taxable income if it exceeds Rs. 2.5 lakhs. A surcharge of 15% is charged for AY 2017-18 if the income exceeds Rs.1 crore. For the AY 2018-19, surcharge of 10% is payable if income is between Rs. 50 lakh and Rs. 1 crore and a surcharge of 15% is payable for income exceeding Rs. 1 crore.
When to file ITR?
As it is evident from the above tax-slabs, tax is payable only when the taxable income (your income minus tax savings) exceeds Rs. 2.5 lakhs in a given financial year.
What if your income is below Rs. 2.5 lakh? Do you still need to file ITR?
Well, you do. Filing of ITR becomes necessary if you earn any income even if it is not taxable.
Why you need to file ITR?
Here are the typical situations under which you must file your returns.
- If you’ve earned an income in India in the previous financial year.
- When you need to reclaim excess taxes paid through tax deducted at source (TDS), you should file an ITR. You can claim deductions for the TDS already paid, if your income is taxable. On the other hand, if your income is not taxable and you have paid TDS, you need to file an ITR to claim a refund of the tax paid.
- Some countries insist on seeing your tax returns in case you want to apply for their visa. Some countries also insist on your ITR when your child wants to apply for an education visa. Foreign universities also often insist on producing parents’ ITR before admissions.
- If you’re taking a loan, the lending institution or the bank insists on seeing your tax returns for the last one to three years. This helps the lender assess your income levels.
Remember: Paying taxes is your legal duty and if you are filing the wrong details in your returns or are avoiding your tax payment, the taxman is watching you closely. You could be penalised for late filings, too. So avoid the delay and file your returns correctly by July 31.
(The writer is CEO, BankBazaar.com)