Key Terms of Income Tax Explain before you filing tax returns
Income tax is definitely one of the main portions of any country's system. And, it must be known to each professional or businessman and also each common man that what and how income tax works as it is one of those necessary requirements of any single individual. Many terms will sound confusing for a beginner in the language of Income tax. This guide would clarify some of the most critical income tax terms in India. The salaried professionals as well as the self-employed professionals would find them simple and easy to grasp to understand their tax responsibilities better. Let's proceed with looking at the vital terms in income tax in India or say Key Terms of Income Tax Explain before you filing tax returns .
Assessment Year (A.Y.)
Preceding Year (P.Y.)
By the term "Preceding Year", it simply means the financial year anterior to the assessment year. Income earned in the previous year is assessed and subject to tax in the given assessment year. This expression is necessary to know from which period's income is actually taxed.
Assessee
Any individual or entity (such as companies, trusts, HUFs)
liable to pay taxes, file returns, or otherwise meet the obligations under the
Income Tax Act is called an "Assessee. Assessees are classified into
categories like individual, Hindu Undivided Family (HUF), company, firm,
association of persons (AOP), body of individuals (BOI), and local authority,
among others.
Income
In any case, income is just the sum total that someone makes
from his or her earnings-earning sources. The income tax act has divided its
income under five heads; these are:
Salaries: The
income gathered from the employment of humans by other humans.
House Property: Rental Income earned from
the property owned by the individual.
Profits and Gains of Business or
Profession: Those incomes which are earned with the help of a specific
business.
Capital Gains: Income from selling capital assets,
such as real estate, shares, or mutual funds.
Other Sources:
This includes any source of income aside from these three categories. These
could include interest, dividends, or gifts.
Gross Total Income
Gross Total Income or GTI is the sum total of all incomes earned by the individual from all sources of income before any deductions arise under various sections of the Income Tax Act. If we apply the deductions, then we get Taxable Income, which constitutes the base for calculating tax payable.
Deductions & Exemption
Deductions are with regard to the expenses and investments specified that one can claim up to a certain limit for the exemption from tax. Under the Income Tax Act, various provisions have been there to offer deductions that benefit the taxpayer in reducing his taxable income:
Section 80C: Deduction is possible on contributions to schemes like EPF, PPF, LIC, NSC, ELSS, principal repayment of home loan, etc. up to ₹1.5 lakh.
- Section 80D: Health insurance for self and family: Deduction of total premium paid.
- Section 80G: Any contribution to certain funds or charities.
- Section 24(b): Interest on home loans up to ₹2 lakh.
Exemption
Exemptions actually reduce the gross income by exclusion of certain types of incomes from tax. For example, House Rent Allowance (HRA) for salaried taxpayers or agricultural income is exempt under certain conditions.
Rebate under Section 87A
Section 87A gives a "rebate" to individual taxpayers who do not have more than a certain limit of taxable income. For instance, during the Assessment Year 2024-25, up to ₹12,500 rebate is available as there is no tax incidence where the taxable income is within ₹5 lakh and reduces the tax liability entirely.Advance Tax
Advance tax is a pre payment of income tax that becomes payable if an individual has a total tax liability over ₹ 10,000 for the financial year. Taxpayers are bound to pay advance tax installment in certain percentage on stipulated dates in the entire financial year.Self-Assessment Tax
Self-Assessment Tax is the tax that a taxpayer pays at the time of filing returns in case any amount of unpaid tax liability remains after adjustment of advance tax and tax deducted at source. The self-assessment tax has to be paid before the income-tax return is submitted.
Tax Deducted at Source (TDS)
TDS refers to the mechanism of paying tax deucted by the payer such as an employer or a banker while making certain payments for example salaries, interest and rent. The payer then remits the tax straight to the government on behalf of the recipient. The TDS is then withheld on specified thresholds and at specified rates.
Form 16 Form 16A,16B and 16C
- Form 16: the certificate, issued by an employer in case of an employee with regard to the salary they were paid and the tax deduction at source.
Other 16A, 16B, 16C are also the TDS Certificate have to issued by person deducting TDS to the assess on which income was TDS was deducting on payment.ie. Bank deducting TDS on Fixed Deposit interest and issued a form 16A
Form 16B is issued for by the deductor to the deductee in respect of TDS deposited to Government on sale of property.
Form 16C is issued for amount of TDS deducted on rent under section 194IB, 194IC.
Income Tax Return (ITR)
An Income Tax Return (ITR) is a form, submitted annually by the taxpayer, reporting income, deduction, and tax liability for the Income Tax Department. According to the source and quantum of income, there exist different ITR forms- ITR-1(Sahaj) for people with income from salary or pension, ITR-3 for people with incomes from business or profession.
If the tax paid through TDS, advance tax or self-assessment by an assessee exceeds his actual liability to pay, then such a person is entitled for refund. The income-tax department issues refunds on receipt of return filed by taxpayers and after verification thereof.
Notice and Assessment Order
If the Income Tax Department requires clarification of the return, it may send a "Notice" asking for supplementary information or clarification. It may then pass an "Assessment Order" confirming the tax payable or the refund due after considering the return and supplementary documents, if any.
Scrutiny Assessment
A "Scrutiny Assessment" is a careful analysis and evaluation by the Income Tax Department of an income tax return submitted by a taxpayer, regarding whether the information in it is correct or not. Normally, the scrutiny assessment arises if errors or inaccuracies are noted in the returned income tax document.
Capital Gains Tax
That profit derived from the sale of a property or shares or mutual funds and other capital assets is tax levied on that kind of profit. There exist two types of capital gain:
Short Term Capital Gain (STC): Profit from investments held for a short-term duration. Such profits will be taxed at a rate higher than that of interest income.
Long Term Capital Gains (LTCG): From assets held for a period of time, which might be taxed at a reduced rate or even exempt depending on the conditions.
Tax Audit of books
That is all for "Key Terms of Income Tax Explain before you filing tax returns" where Understanding these key income tax terms in India helps an individual and business navigate their tax obligations more effectively. Being aware of tax terms and processes greatly eases the experience of filing returns and managing tax liabilities, hence enabling taxpayers to make the most of available exemptions, deductions, and rebates.