Income Tax - Knowhow of Income Tax

QUICK LOOK

* Income tax is levied on the 'total income' of the assesses.
* Income of the 'previous year' is taxed in the 'assessment year.'
* Income is classified into and completed under five categories called 'heads of income'.
* The basic scheme of income tax is the principle '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 income tax basic scheme is explained in brief as:

* Income tax is levied on the 'total income' of the assessable entity which is computed under the provisions of the Act.
* The income which are pertaining to the 'previous year' is taxed, but in the 'assessment year'.
* Income tax is charged at the rates being fixed by the for the year by the annual Finance Act. But the liability to pay the tax is based on the principle 'pay as you earn'.

Also check Taxable Heads of Income for the definition of salary, wages, pension, allowance, etc.

Pay as you Earn

A person is not allowed to wait until 31 March to pay his/her taxes. The Income Tax Act has the provision of 'pay as you earn.' This do not pinch a tax payer at the end of the year making a lump sum payment. Such payments are done during the previous year in the form of 'TDS', 'TCS' and 'advance tax.'

TDS (Tax deducted at source)

This tax is deducted at the source of income, by the employer or the payer and paid to the government. It includes salary, interest, commission and contract fees, rent, professional fees, etc. This type of deduction is popularly known as TDS.

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)

Unlike tax deducted at source, TCS is collected 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. In the same way, a person granting a lease or license 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 income earner 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 installments.

Schedule of Advance Tax:

1. On or before 15 September Not less than 30% of advance tax.
2. On or before 15 December Not less than 60% of advance tax as reduced by amount paid earlier.
3. On of before 15 March Full advance tax as reduced by the amount or amounts if any, paid in earlier installments.

If the assesses 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.