Income Tax Return

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What is Income Tax?

Income tax is a levy imposed on an individual’s yearly earnings. The tax amount levied is contingent upon the total income earned during a fiscal year. Income encompasses more than just salary; it also encompasses income from property ownership, business profits, professional gains (like bonuses), capital gains, and income from various other sources. All individuals subject to taxation must submit their returns on or before the specified deadline.

Income Tax slab under New tax regime for FY 2022-23 & AY 2023-24

Up to Rs.2,50,000Nil
From Rs.5,00,001 to Rs.7,50,0005%
From Rs.5,00,001 to Rs.7,50,00010%
From Rs.7,50,001 to Rs.10,00,00015%
From Rs.10,00,001 to Rs.12,50,00020%
From Rs.12,50,001 to Rs.15,00,00025%
Income above Rs.15,00,00130%

Who is Obligated to Pay Income Tax?

It is compulsory for individuals to submit their Income Tax Returns (ITR) if their gross total income surpasses Rs. 2,50,000 in a fiscal year. This threshold increases to Rs. 3,00,000 for senior citizens and Rs. 5,00,000 for super senior citizens.

The following entities are required to both pay taxes and file their income tax returns:

  1. Artificial Judicial Persons
  2. Corporate Firms
  3. Associations of Persons (AOPs)
  4. Hindu Undivided Families (HUFs)
  5. Companies
  6. Local Authorities
  7. Bodies of Individuals (BOIs)

ITR Types

ITR-1ITR-1 form can be used by Individuals who have less than Rs.50 Lakhs of annual income earned by way of salary or pension and have one house property only.
ITR-2ITR-2 form must be filed by individuals who are NRIs, Directors of Companies, shareholders of private companies or having capital gains income, income from foreign sources, two or more house property, income of more than Rs.50 lakhs.
ITR-3ITR-3 form must be filed by individuals who are professionals or persons who are operating a proprietorship business in India.
ITR-4ITR-4 form can be filed by taxpayers enrolled under the presumptive taxation scheme. To be enrolled for the scheme, the taxpayer must have less than Rs.2 crores of business income or less than Rs.50 lakhs of professional income.
ITR-5ITR-5 form must be filed by partnership firms, LLPs, associations and body of individuals to report their income and computation of tax.
ITR-6ITR-6 form must be filed by companies registered in India.
ITR-7ITR-7 form must be filed by entities claiming exemption as charitable/religions trust, political parties, scientific research insitutions and colleges or universities.

Benefits of Filing Income Tax Returns (ITR):

  • Facilitating Loan and Visa Processing: When applying for loans such as home or car loans, your income plays a vital role in determining your eligibility and loan amount. Filing ITRs helps lenders assess your repayment capacity, making it easier to secure loans or visas.
  • Claiming Tax Refunds: If you’ve had Tax Deducted at Source (TDS) on certain investments or if you’ve overpaid taxes on your income, filing an ITR allows you to claim a refund. It ensures you receive the money you’re owed.
  • Carrying Forward Losses: Income tax regulations permit the carrying forward and offsetting of losses against capital gains, but this privilege is reserved for individuals who file ITRs in the relevant assessment year. If you’ve incurred losses and earned below the exemption limit, filing your returns is necessary to carry forward those losses. Capital losses can be carried forward for up to 8 consecutive years according to the Income Tax Act.
  • Establishing Income in Compensation Cases: Although the Motor Vehicles Act doesn’t mandate presenting ITRs when calculating compensation for accidental death or disability, procedures endorsed by the Delhi High Court often require self-employed individuals to provide their ITRs. This helps determine the person’s income and ensures appropriate compensation.
  • Self-Employed Individuals in Tender Applications: Business owners, consultants, and partners don’t receive Form 16, making ITR receipts a crucial document. For self-employed individuals, ITR serves as the sole proof of income and tax payment in various financial transactions. When bidding for contracts or tenders, they may be asked to present tax return receipts from the past 3 to 5 years.
  • Demonstrating Responsible Citizenship: Staying compliant with tax laws and keeping the income tax department informed about your income and tax liabilities is essential. Filing ITRs is a way to achieve this, even for those earning below the prescribed income threshold. Voluntarily filing returns demonstrates your responsibility as a taxpayer and law-abiding citizen.

Penalties in Income Tax:

The Income Tax Act stipulates various penalties for different defaults committed by taxpayers. Some are mandatory, while others are at the discretion of tax authorities. Here’s an overview of the penalties associated with various provisions:

  • Late Filing:
  1. According to Section 234F of the Income Tax Act, a penalty of Rs. 5,000 is levied if you file your return after July 31 but before December. For returns filed after December, the penalty increases to Rs. 10,000.
  2. However, to ease the burden on small taxpayers, the Income Tax Department imposes a maximum penalty of only Rs. 1,000 if your total income is less than Rs. 5 lakh.
  • Penalty for Default:
  1. If a demand notice under Section 156 is issued to the taxpayer for tax payment (other than advance tax), the amount specified in the notice must be paid within 30 days.
  2. Failure to pay the tax due results in the taxpayer being treated as an assessee in default, and the penalty is determined by the Assessing Officer (AO). The penalty cannot exceed the amount of tax arrears.
  • Delay in filing TDS/TCS Statement:
  1. Individuals responsible for deducting or collecting tax at source must submit TDS and TCS statements.
  2. Failure to file these statements by the due date results in a fee of Rs. 200 for each day of delay, as per Section 234E. However, this fee cannot exceed the amount of TDS/TCS.
  • Penalty for Income from Undisclosed Sources:
  1. If a taxpayer cannot provide a satisfactory explanation for the nature and source of their income under Sections 68, 69, 69A, 69B, 69C, or 69D, the Assessing Officer may add the income to their total.
  2. A penalty of 10% of the tax payable may be imposed if such an addition is made. No penalty is levied if the income has been disclosed in the Income Tax Return (ITR) and tax paid under Section 115BBE before the end of the relevant previous year.
  • Fee for Default in Furnishing Return of Income:
  1. Failure to file an ITR within the prescribed due date under Section 139(1) results in a penalty:
    • Rs. 5,000 if filed on or before December 31 of the assessment year.
    • Rs. 10,000 in any other case.
  2. However, if the total income is less than Rs. 5 lakh, the fee payable is Rs. 1,000.
  • Incorrect Form:
  1. Using the wrong form to file a return renders it “defective.” The taxpayer is required to file a revised ITR using the correct form.
  2. The taxpayer has 15 days from the date of receipt of the intimation to correct the mistake, with the possibility of an extension by the Assessing Officer (AO). Failure to rectify the defect results in the return being treated as invalid, akin to not filing a return at all.
  3. Consequently, the person faces penalties for non-filing of ITR, along with interest charges under Section 234A for the delay.
  • Under-reporting:
  1. Penalties are imposed when actual income exceeds the declared income or when no return is filed despite income exceeding the basic exemption limit:
    • 50% of the tax payable on the under-reported income is levied.
    • A 200% penalty is imposed if under-reporting results from misreporting of income.

What is Section 44AD?

Section 44AD pertains to the presumptive taxation scheme, which benefits small taxpayers with an annual turnover of less than 2 crore. Under this scheme, such taxpayers are exempted from the requirement to maintain detailed books of accounts, and their profits are assumed to be 8% of their total turnover.
However, there is a variation in the presumptive rate if the income is received digitally or through a bank. In such cases, the presumed profit rate is reduced to 6% instead of the standard 8% applicable to cash receipts.
It’s important to note that taxpayers who opt for presumptive taxation under Section 44AD are not eligible for deductions for expenses as provided under sections 30 to 38 of the Income Tax Act.

From which year is Section 44AD applicable?

Section 44AD, along with Section 44AE, was introduced through the Finance Act of 1994 and became effective from the Assessment Year 1994-95. Since its inception, there have been amendments and updates to this section, including a recent update in the Budget of 2020.

What is Presumptive Income under Section 44AD?

Section 44AD was implemented to provide a reprieve to small taxpayers with a turnover of less than Rs 2 crores (subsequently revised to 5 crores, subject to a minimum threshold of digital transactions in the 2020 budget) from the obligation of maintaining detailed books of accounts.
Under the presumptive income scheme, taxpayers are permitted to assume a minimum level of profits based on the prescribed rate of their total turnover. This provision eliminates the need for them to undergo the process of auditing their books of accounts.

Who Can File a Return under Section 44AD?

Section 44AD of presumptive taxation is available for the following categories of taxpayers:
Resident Individuals, Hindu Undivided Families (HUFs), and Partnership Firms who have not availed of exemptions under sections 10A, 10AA, 10B, or 10BA, which relate to deductions of profits derived from the export of articles or goods.
The gross receipts of the firm or individual in the previous fiscal year should not exceed 2 crore rupees (or 5 crores, subject to the condition of digital transactions accounting for more than 95% of total receipts and payments, as introduced in the 2020 budget).
Individuals or firms engaged in the business of plying or hiring goods carriages are not eligible for these provisions.
However, it is important to note that individuals or firms opting for the presumptive taxation scheme must declare a minimum profit of 8% (or 6% in the case of digital receipts).

What Constitutes Turnover under Section 44AD?

To qualify for opting for the presumptive income scheme under Section 44AD, individuals, Hindu Undivided Families (HUFs), or partnership firms must ensure that their turnover does not exceed Rs. 2 crore.

How to File an Income Tax Return under Section 44AD?

To file an income tax return under Section 44AD, eligible taxpayers can utilize the “Sugam” ITR-4S form. This simplified return form is intended for use by assesses who qualify to declare profits on a presumptive basis and do not maintain books of accounts under Sections 44AD and 44AE. You can submit ITR-4 through the ClearTax free e-filing portal or the official income tax e-filing portal.

How to Calculate Tax under Section 44AD?

Section 44AD offers a presumptive taxation scheme where income is calculated based on a fixed percentage of the turnover. In this scheme, taxpayers are relieved from the obligation of maintaining detailed books of accounts.
For instance, consider Mr. Uday, who owns a bookshop with a turnover of Rs. 70 lakh for the previous year and opts for presumptive taxation under Section 44AD. Under this section, his income will be computed at 8% of the turnover, which amounts to Rs. 5.6 lakh. The annual presumptive tax will then be calculated based on the applicable tax slab for the income of Rs. 5.6 lakh.