Understanding Income Tax Returns in India
We have two types of taxes in India – Direct Tax and Indirect tax.
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 for Individuals
01
02
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
03
ITR – 3
ITR – 3 – For individuals and HUF with income from profits of a business or profession.
04
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.
ITR Forms for Non-Individuals
01
ITR – 5
Entities other than,- (i) individual, (ii) HUF, (iii) company and (iv) person filing Form ITR-7
02
ITR – 6
All companies except those that claim tax exemption as per Section 11
03
ITR – 7
Persons incl. companies required to furnish returns under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) only
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.
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