Guide to calculate tax liability, file income-tax returns
Puja Mehra Monday, January 30, 2006
Filing of annual income-tax returns requires only filling out a form and depositing it with the tax official concerned. Yet, it is not the simplest of tasks. Far from it.
Since filing the returns-disclosing an individual's income to the government- is mandatory for all people earning more than Rs 50,000 a year, it is a good idea to get the basics right. Select chartered accountants and tax experts helped INDIA TODAY compile a simple guide to filing tax returns, calculating tax dues and claiming refunds.
1. Which Form to Fill
The multitude of forms called 2, 2C, 2D, 2E and 3 make the task of filing returns confusing. As most of these forms are interchangeable, the key is to choose the simplest one. Tax laws categorise income as salary, capital gains and earnings from business, profession or agriculture. To pick the correct form one needs to figure out the category in which the income falls.
As a thumb rule, people who have only salaries and no capital gains or income from agriculture, business or profession, should use Form 2E, also called Naya Saral, to file returns. Those who also draw income from business or profession should use Form 2D. Form 2, called Saral, has been replaced by Naya Saral, which incorporates all the amendments to the income-tax laws, says Surya Bhatia, financial planner.
Amitabh Singh, partner, Global Tax Advisory Services, Ernst & Young, agrees: "Taxpayers should use either 2D or 2E forms, as they are simple, single-page forms, not Form 3, which is much more detailed."
Those who satisfy any of the following conditions can also use form 2C: own a car, an immovable property, a cell phone or a credit card, have travelled overseas (excluding SAARC countries), paid an annual club membership of over Rs 25,000 or an annual electricity bill of over Rs 50,000. But 2E should be preferred the most, since it is easiest to fill.
All these forms are available at stationery shops or can be downloaded from the official website of the Income Tax Department of India (http://www.incometaxindia.gov.in). Having filled the form, one must know where to submit it. The website also provides a list of offices that accept the completed forms. The source of one's income will determine where one submits the returns. The last date for filing returns is July 31, but it is usually extended every year.
2. How to Calculate Tax
Though the Income Tax Department's website also has a tax calculator, one must know one's taxable income to be able to use it. Form 16, provided by employers, can be used to compute the taxable income from the salary.
Investment in public provident fund (PPF), provident fund (PF), life insurance, specified pension funds and home loan repayments can be deducted from the taxable income. To claim tax deduction on income, taxpayers must provide their permanent account number (PAN) to the issuer of Form 16 or 16 A-the employer.
If that is not done, the tax deducted at source is transferred to a suspense account of the government. Claiming credit for the tax moved to suspense account is difficult. One can do that by attaching copies of certificates of investment with the tax returns, informs Rajiv Anand, associate director, PricewaterhouseCoopers.
All proofs of tax deducted at source (TDS) should be filed with the
returns in original. These are given in Form 16 or 16A. Deductions from taxable income should be claimed according to the tax provisions applicable for that year, as the government keeps changing the rules from year to year.
The tax rates are given in the returns form or can be downloaded from the website. If the estimated tax liability. after subtracting TDS, exceeds Rs 5,000, then tax has to be paid as advance tax in three installments-30 per cent by September 15, 30 per cent by December 15 and 40 per cent by March 15. If the tax is not paid in this manner, the Income Tax Department can charge a penal interest. Advance tax is paid using a form that is called Challan No. 280.
Most taxpayers tend to neglect rounding off the tax amount to the nearest Rs 10, something one should be careful about, warns Singh. Having calculated the tax dues, the next step is to deposit them with a nationalised bank. For tax deposited in cash, the bank will issue a challan acknowledgement counterfoil immediately.
Tax payments through cheques are issued a challan deposit acknowledgement only after the cheque is cleared, which normally takes two to three days. This counterfoil has to be submitted along with the returns.
Quoting the PAN correctly is very critical, because a mistake attracts a penalty of Rs 10,000. To avoid errors, Anand recommends the use of pre-filled PAN challans. Starting 2005, the Income Tax Department has begun posting pre-PAN filled tax filing forms to large taxpayers and to employers who undertake TDS. While collecting the receipt of tax deposit from the bank, one should not forget to check that the bank's stamp includes the date of tendering of challan, the seven-digit code of the bank branch or the BSR code and a serial number.
This tax deposit receipt, different from the counterfoil, is for one's personal record and does not have to be submitted with the returns. After computing the tax, adjusting the TDS and the advance tax paid, if any further tax is payable, it should be paid using Challan No. 280.
3. How to Claim Refunds
Tax refunds become due to a taxpayer who, after paying advance tax through the course of a financial year, claims deductions (such as those for investments in PPF, life insurance and other such schemes) at the time of filing his returns. This is because the deductions may reduce the amount of tax due. In such cases, the department issues refunds through cheques, which are sent by post.
The refunds also carry an interest - presently at 7 per cent-from the due date of filing the returns to the day of the issue of the refund. Though the refund cheques are normally valid for three months, they often reach taxpayers much after the expiry date. Expired tax refund cheques can be submitted with the Income-Tax Department for revalidation.
A common mistake made by people seeking refunds from income-tax authorities is that they fail to properly fill the particulars of the bank in which they pay their taxes. "In cases of refund, the particulars of the bank should be filled carefully, otherwise the refund may not be received," warns Anand. And do not forget to sign behind the refund cheques before depositing them with the bank.
For refunds in excess of Rs 5,000, the accompanying letter received from the Income Tax Department should be attached as well.