Understanding Income Tax Returns (ITR) and How To File Them

In the previous chapter, we understood the basics of income tax. In this chapter, we will decode income tax returns.

An Income Tax Return  (ITR) is a form that taxpayers use to report their income, expenses, deductions, and taxes payable to the government.  Filing an ITR is important as it is a legal obligation for individuals whose income exceeds the basic exemption limit. It helps in documenting financial history, which is useful for loan or visa applications, and ensures compliance with tax laws. Filing returns also allows you to claim refunds on taxes already paid if they've overpaid during the financial year.

In this chapter, we'll examine how to handle income tax in India. We'll cover how to determine your tax bracket, claim deductions to save money and file your taxes correctly. We'll also discuss advance tax: what it is, when to pay it, and how to get any tax refund you're owed. This guide is here to make the process straightforward and help you meet your tax duties without stress.

Tax Brackets and Deductions

In India, understanding the nuances of tax brackets and deductions is important for effective tax planning. The country's tax system offers two regimes – the old and the new – each with its distinct tax brackets and rates. 

The old regime features a progressive tax rate, increasing with income, but allows for a wide range of deductions and exemptions. These deductions, under sections such as 80C, for investments in Public Provident Fund (PPF), Employee Provident Fund (EPF), life insurance premiums, and tuition fees, and 80D, for health insurance premiums, help in reducing taxable income significantly.

In contrast, the new tax regime, introduced in the 2020 budget, offers lower tax rates but foregoes most deductions and exemptions. This regime was designed to simplify the tax filing process, making it more straightforward but potentially leading to higher taxable income for those who previously benefited from significant deductions. The choice between the two regimes depends on individual financial situations and the potential benefits from the deductions under the old regime.

If you are a taxpayer, you must strategically decide which regime to opt for, as this choice directly impacts your take-home income and savings. For instance, individuals with substantial investments that qualify for deductions under the old regime might find it more beneficial than switching to the new regime with lower rates but fewer deductions. Conversely, those with minimal deductions may prefer the simplicity and lower rates of the new regime.

Moreover, understanding “common deductions” like those under Section 80C, which has a limit of ₹1.5 lakh per annum, can lead to substantial tax savings. 

Common deductions under the Indian Income Tax Act include investments in Provident Funds (PF), Public Provident Funds (PPF), life insurance premiums, home loan principal repayment under Section 80C, medical insurance premiums under Section 80D, interest on education loans under Section 80E, and donations to charitable organisations under Section 80G. Section 80D further complements savings by offering deductions for medical insurance premiums for families and parents, enhancing the scope for reducing taxable income.

These deductions are designed to encourage savings, investment, and social welfare activities, allowing taxpayers to reduce their taxable income and, consequently, their tax liability. 

Understanding these tax brackets and deductions makes it easy to have a thorough understanding of both tax regimes and the various sections under which deductions are allowed. Making an informed choice between the old and new tax regimes while maximising deductions is essential for efficient tax planning and savings. This decision should be based on a detailed analysis of one's income, investments, and potential for deductions. 

 Income Tax Declaration and Proof of Investments

The income tax declaration and proof of investments are key components in the process of tax filing, particularly for those looking to avail themselves of deductions under various sections like 80C, 80D, among others. This procedure allows taxpayers to reduce their taxable income by claiming deductions for specific investments and expenses.

Income Tax Declaration

The declaration process typically occurs at the beginning of the financial year, when you inform your employer about the investments you plan to make that year, which are eligible for tax deductions. This step is crucial because it enables your employer to consider these investments while calculating your taxable income and, thus, deduct tax (TDS) accordingly each month. 

Common declarations to share with your employer, as we discussed above, can include investments in Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), life insurance premiums, and principal repayment on home loans under Section 80C, health insurance premiums under Section 80D, and education loan interest under Section 80E.

Proof of Investments

Towards the end of the financial year, typically in January or February, you must submit proof of these investments to your employer. This evidence can be in the form of receipts, statements, or certificates that validate your claims. 

For instance, if you've declared an investment in a PPF, the passbook entries or bank statements showing these transactions serve as proof. Similarly, premium receipts for life insurance, tuition receipts for children's education, and loan statements for home loan interest deductions are necessary to substantiate your claims.

Importance of Timely Submission

Timely submission of investment proofs is critical. Failure to submit these proofs within the deadlines can lead to a higher TDS deduction by your employer, as they would calculate your taxes without considering these deductions. 

However, even if you miss providing proof to your employer in time, you can still claim these deductions while filing your ITR directly with the Income Tax Department.

Online Declaration and E-Verification

With advancements in technology, many organisations now allow online declarations and submission of digital proofs, streamlining the process. The Income Tax Department also encourages e-verification of ITRs, making the entire process quicker and more efficient.

Tax Filing and Payment

Filing income tax returns (ITR) online, known as e-filing, is a streamlined process designed for efficiency and accessibility. Here's a breakdown to understand this process:

• Preparation: Gather all necessary documents, including PAN, Aadhaar, bank statements, investment proofs, TDS certificates, and details of income from various sources.
• Choosing the Right ITR Form: Select the appropriate ITR form based on your income sources. For instance, salaried individuals typically file ITR-1 or ITR-2, while those with business income might need ITR-3 or ITR-4. The Income Tax Department's website provides guidance on which form suits different income scenarios.
• Registration: If you're a first-time user, register on the Income Tax e-Filing website using your PAN, which will act as your user ID.
• Filing the Returns: Log in and choose the assessment year for which you're filing returns. Fill in the details as prompted by the chosen ITR form. You can either enter details manually or upload a pre-filled form available on the portal, which fetches key personal and financial information to simplify the process.
• Verifying Income Details: Carefully enter all sources of income, including salaries, interest income, capital gains, and income from house property, among others. Ensure accuracy to avoid discrepancies and potential legal issues.
• Claiming Deductions: Declare investments and expenditures eligible for deductions under sections like 80C, 80D, etc., to reduce your taxable income. Supporting documents should be kept handy, although not required to be uploaded at the time of filing.
• Tax Calculation and Payment: The portal automatically calculates your tax liability based on the provided information. If you owe taxes, make the payment online through the designated payment gateways. Conversely, if you've overpaid, you'll be eligible for a refund.
• E-Verify: Once the ITR is submitted, it must be verified electronically via Aadhaar OTP, EVC through your bank account, or by sending a signed ITR-V form to the designated CPC in Bangalore within 120 days of filing.
• Acknowledgement: After successful verification, you'll receive an acknowledgement from the IT Department confirming your submission.
• Tracking and Refunds: You can track the status of your return and refund (if applicable) on the e-filing website.

This process underscores the government's commitment to simplifying tax compliance. This also makes it imperative for taxpayers to familiarise themselves with e-filing procedures and requirements. Proper preparation, understanding of the correct forms to use, and timely submission can ensure a smooth tax filing experience.

Advance Tax 

Advance tax is meant for individuals whose tax liability exceeds ₹10,000 in a financial year. It applies to salaried, freelancers, and businesses. Payments are divided into instalments: 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15. 

For example, a freelancer estimating an annual income of ₹5 lakh, with a tax liability after deductions of ₹30,000, must pay advance tax. They'd pay ₹4,500 by June 15, ₹13,500 by September 15, ₹22,500 by December 15, and the full ₹30,000 by March 15. Missing these deadlines can lead to interest penalties, so timely payments to avoid additional charges are encouraged.

Calculating advance tax involves estimating total income, applying current tax rates, and deducting TDS. Failure to adhere to these dates can result in interest penalties under sections 234B and 234C of the Income Tax Act.

Refund

A taxpayer becomes eligible for a refund when their total tax payment exceeds their actual tax liability. This overpayment can happen through excess Tax Deducted at Source (TDS), paying more advance tax than required, or claiming deductions for investments not considered at the time of TDS. 

For example, if an individual's employer deducts TDS based on the estimated income but the individual later invests in eligible tax-saving schemes, this can result in excess tax paid, leading to a refund.

To claim this refund, the taxpayer must file an accurate income tax return detailing all income and the taxes already paid. The Income Tax Department then processes this return, and if it determines that a refund is due, the amount is directly credited to the bank account specified by the taxpayer. Taxpayers can track the status of their refunds through the e-filing portal, getting updates on whether the refund has been processed and dispatched or if additional information is required.

An example of this could be a taxpayer with a TDS of ₹30,000 deducted by their employer but is eligible for deductions of ₹50,000 under Section 80C, which were not declared. If, after calculating their total taxable income and considering the deductions, their total tax liability comes to ₹20,000, they would be eligible for a refund of the ₹10,000 overpaid.

Bottom Line 

In wrapping up this chapter on income tax in India, it's clear that understanding the intricacies of tax brackets, deductions, filing processes, and the nuances of advance tax and refunds is not just about compliance—it's about making informed decisions that can lead to significant financial benefits. 

By staying informed and proactive in managing taxes, taxpayers can not only fulfil their legal obligations but also optimise their financial health. This chapter aims to empower you with the knowledge to walk through the extensive domain of tax management confidently. Stay tuned for the next chapter on tax planning and tax-saving strategies.