Understanding Income Tax in India

Understanding Income Tax in India

Before moving ahead lets have a quick understanding of Income tax system in India. For the purpose of tax :

• It is on the total income of the assessee, Income tax is levied
• The previous year income is taxed in the 'assessment year.'
• For the purpose of Tax income is classified and computed under five categories called 'heads of income.
• The basic principle of income tax is 'pay as you earn.'
• One must pay his taxes in advance and by the due dates, in the prescribed percentages.
• Deferment in the payment of advance tax would result in the payment of interest.
• The definition of salary, wages, pension, allowance, etc. is provided in the “Taxable Heads of Income”
  

Pay as you Earn
Under this principle, the tax payer is saved from lump sum payment of the tax at the end of the year
Such payments are done during the previous year in the form of 'TDS', 'TCS' and 'advance tax.'Thus
a person is not allowed to wait until 31 March to pay his/her taxes.

TDS (Tax deducted at source)
When the tax is deducted at the source of the income the employer or the payer and paid to the government, it is called as TDS. This incorporates salary, interest, commission and contract fees, rent, professional fees, etc. Such tax is subject to certain limits and certain conditions. For example if the earning up on fixed deposit is Rs. 5,000 in a bank, TDS at 10% and education cess at 2% i.e. a total of 10.2% will be deducted at the time of credit or at the time of payment, whichever is earlier.

In case of senior citizen, if he/she estimates that the tax on the income is nil, Form No.15H duly filled and signed is to be submitted in duplicate to the bank. So, no TDS will be deducted. If the total income is less than the threshold limit, Form No.15G is to be submitted to the payer to prevent TDS from such interest.

TCS (Tax collected at source)
TCS is a collection of a tax by a seller of certain specified goods at the specified rates on the purchase of the goods and it is remitted to the treasury on behalf of the buyer. Similarly, a person granting a lease or licence in a parking lot, toll-plaza, etc. collects the taxes at the specified rates as tax paid on behalf of the lessee.

Advance Tax
Advance Tax is paid by the tax payer, during the previous year. The computing of the liability of advance tax is done by estimating the 'total income' for the year, calculating the surcharge and taking into consideration the rebate that will be available. The advance tax is required to be paid in three instalments.

If the assessee does not pays the advance tax as described above, an interest of 1% is charged per month for 3 months for the deferment of advance tax installment. If the total amount of advance tax is not paid on or before 15 March, an interest of 1% is charged for one month.

Further, if the total advance tax paid is less than 90% of the advance tax payable, the interest at 1% per month is charged for the shortfall in the advance tax paid for the period commencing from 1 April of the assessment year and ending on the date of payment or assessment, whichever is earlier.