Understanding Income Tax Returns in India
We have two types of taxes in India – Direct Tax and Indirect tax.
Direct Tax is a tax that is calculated directly on your Income e.g. tax on salary etc. Income tax is a Direct Tax.
Indirect Tax is a tax that is indirectly charged. And is put on goods or services. So if you are purchasing a mobile phone or a new suit. Most indirect taxes have now come under Goods and Services Tax (GST).
Income Tax (Direct Tax)
Anyone earning an income above a certain amount is subject to income tax. The income could be from salary, rent, and interest income from savings, income from mutual funds, sale of property or business or professional income. Income tax rates are decided at the start of the financial year in the Union Budget (in the Parliament of India). The tax paid on these incomes is called the income tax.
Income Tax Return
It is simply a Form to be filed with the Income Tax Department. A Form to be filed as a statement of income earned. It is arranged in such a way that calculating tax liability, scheduling tax payments or requesting refunds for the overpayment of taxes has been made convenient for the taxpayers. They must, first, determine the type of Income Tax Return (ITR) Form they need to fill before actually filing their Returns. Which Form is to be filled, depends on the income that the taxpayer earns. Its purpose is to report our income and taxes paid thereon to the government.
Types of ITR
There are up to 8 types of Income Tax Return Forms, currently. We have divided them into 2 parts:
|ITR Forms for Individuals||ITR Forms for Non-Individuals|
|ITR – 1 (Sahaj) – For individuals earning income from salaries, one house property, interest income, agriculture, other sources, etc.||ITR – 5 – Entities other than,- (i) individual, (ii) HUF, (iii) company and (iv) person filing Form ITR-7|
|ITR – 2 – For Individuals and HUFs having income other than from profits and gains of business or profession. It may be from capital gain, lottery or foreign assets, etc.||ITR – 6 – All companies except those that claim tax exemption as per Section 11.|
|ITR – 3 – For individuals and HUF with income from profits of a business or profession.||ITR – 7 – Persons incl. companies required to furnish returns under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) only.|
|ITR – 4 (Sugam) – For Individuals, HUFs and Firms (other than LLP) having presumptive business income tax returns. This is computed under sections 44AD, 44ADA or 44AE.|
Benefits of Filing Income Tax Returns
Many investors have very low or zero tax liability and therefore this section does not have to file returns mandatorily. Even though they have some sort of income occurring.
And there is another section that only file returns when something urgent requirement comes up asking for their last few years of ITR. They approach a nearby CA and file their old tax returns.
There has been low-Income Tax filing Compliance in India. However, in recent years, the Govt. of India has taken some stringent measures to enforce the Income Tax Law by linking various benefits for prompt tax filers.
Advantages of tax filing are, but not limited to:
Processing of Loans & Visa: If you apply for any loans such as a home loan, car loan, etc., the eligibility and quantum of loan would depend on your income. This can be established through filed ITRs. ITR will help your lender to assess your repayment capacity.
If you plan to travel overseas, proof of earning is required. If you are salaried then a certificate from the employer will work. But if you are self-employed then income proof & details need to be submitted.
Claiming Refund: There could be some TDS cut on some investment. And you will have to file the ITR to claim a refund of the same. Or you may have paid excess tax on your income. To get this refund, you must file ITR.
Many salaried individuals don’t file ITR as they think that the tax on their income has already been deducted and they have Form 16. But your employer may have paid more tax on your behalf. Not taking into consideration your actual house rent, children’s school fees, tax-saving investments or insurances. So, the filing of ITR will enable you to get a refund from the IT department.
Carry-forward Losses: As per Income tax rules, losses are allowed to be carried forward and set off against capital gains. But this applies only to those individuals who file ITR in the relevant assessment year. If you have incurred losses for a year and you have earned below the exemption limit. You must file your returns to be able to carry forward the losses you have incurred. And it gets balanced against future gains and income.
The capital losses can be carried forward for 8 consecutive years, as per the IT Act.
Establishing Income in Compensation Cases: Although the Motor Vehicles Act does not make it compulsory to present the ITR while calculating the compensation in case of accidental death or disability, the procedures approved by Delhi High Court mention the need for ITR for self-employed persons.
This helps to establish the income of the person to arrive at appropriate compensation.
Self-Employed Individual Filing for Tenders: Businessmen, consultants, and partners do not get any Form 16. For such self-employed individuals, ITR receipts become an important document. ITR is the only proof of income and tax payment for them, in all sorts of financial transactions. And if they want to take up some contract or tender, they may be asked to show their tax return receipts of the previous 3 to 5 years.
Being a Responsible Citizen: Staying on the right side of law helps. Similarly, keeping the income tax department informed about your income and taxability helps too. This is only possible when you file your ITR. Those who earn less than the prescribed slab of income can file returns voluntarily. Filing returns are a sign that you are a responsible taxpayer.
Different penalties have been directed for various defaults committed by the taxpayer, under the Income Tax Act. Some of them are mandatory and a few are at the consideration of the tax authorities. Given below are the provisions relating to various penalties leviable.
In case an incorrect form has been used to file the returns, then it will be treated as “defective” and the assessee will be asked to file a revised ITR using the correct form.
Now, the taxpayer gets some time to amend the mistake. And the return must be filed within 15 days from the date of receipt of the intimation, as per Section 139(9). This time limit may be extended by the assessing officer (AO) on an application by the assessee. If the defect is not corrected within the stipulated time, then it will be treated as an invalid return. That is the same as not filing a return at all.
Therefore, the person will be facing all the penalties prescribed to not filing ITR. As well as, interest will get charged, u/s 234A, for the delay.
If it is found that the actual income exceeds the income declared by the person. Or when no return has been filed despite income exceeding the basic exemption limit. Penalty at 50% of tax payable on such under-reported income shall be payable.
200% of the tax will get if under-reporting results from misreporting of income.
As per Section 234F of the Income Tax Act, if you file after 31st July (it was extended to 31st August for AY 2019-2020) but before December, a penalty of Rs. 5000 will be levied. For returns filed after December, the penalty will be Rs. 10,000.
However, to provide relief to small taxpayers, the IT department has stated a maximum penalty of only Rs. 1,000 will get levied. The condition is that your total income is less than Rs 5 lakh.
Penalty for Default
In case a demand notice u/s 156, has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax). Then such amount, as per section 220(1), shall be paid within 30 days of the service of the notice at the place and to the person mentioned in the notice. If the taxpayer defaults in payment of any tax due, then apart from other penal provisions, he is treated as an assessee in default. For an assessee in default, the penalty will get levied as decided by the AO. However, the penalty cannot exceed the amount of arrears in tax.
Before penalizing, the taxpayer is given a reasonable opportunity of being heard. No penalty is levied if the taxpayer can prove that the default due to a good and sufficient reason.
Delay in filing the TDS/TCS statement
Every person liable to deduct tax at source is liable to furnish the statement of TDS, as per Section 200(3). It is termed as TDS Return. And every person liable to collect tax at source, as per Section 206C (3), has to file a statement in respect of TCS, i.e. TCS Return.
If a person fails to file the TDS/TCS return on or before the due date prescribed, then he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day of the delay, as per Section 234E. This amount, however, shall not exceed the amount of TDS/TCS. A late TDS/TCS return cannot be filed this late fee.
Penalty in case of income from undisclosed sources
The AO may make an addition to the income of a taxpayer as per Section 68, 69, 69A, 69B, 69C or 69D if the explanation about the nature and source of his income is not satisfactory.
The AO is empowered to levy penalty at the rate of 10% of the tax payable if any addition is made. However, no penalty shall be levied if this income has been disclosed in the ITR and tax paid, u/s 115BBE, on or before the end of the relevant previous year.
Fee for default in furnishing return of income
The taxpayer, who is required to furnish ITR u/s 139 failed to furnish return of income within due date as prescribed under section 139(1) then as per section 234F, he will be liable to pay penalty same as delayed filing.
- 5000 if ITR is filed on or before 31 December of the assessment year.
- 10,000 in any other case.
However, if the total income of the person is less than Rs. 5 lakh then the fee payable shall be Rs. 1000.