All of us need to help India develop a tax culture. Only by learning all the rules and regulations can the fear of the income tax department be dispelled. India's income tax rates have dropped dramatically from more than 90% in the early seventies, to now (2020), where no tax is required on an annual income of Rs 2.5 lakhs. However, taxpayers continue to be apathetic towards filing income tax returns or paying taxes.
The IT department's systems are becoming more sophisticated each year. This means that there is a greater chance of penalties and notices for non-filing, filing incorrectly or hiding information when you file your income tax returns. Just like how the Income-tax (IT), department has access to all of your bank account details and can check on your capital market activity through the exchanges, as they all map to your Permanent account number (PAN). AADHAR is slowly becoming linked all over the world, so the day is not far when the IT department can send you a consolidated activity statement (income and expenses), similar to what NSDL/CDSL sends to your holdings across all Demat account.
This notice was sent to a client by whom he hadn't reported his trading activity on commodity markets in FY 2012/13. The notice was only sent in 2015 and asked for explanation.
Even though the intention is to comply, many people, including many Chartered Accountants (CAs), don't really understand taxation when it comes to trading and investing. A blog post entitled Taxation Simplified was posted on Z-Connect years ago. It simplified key aspects of taxation to market participants. That post received several thousand questions. After answering all the questions, it became clear that we needed to do more to simplify taxation when trading or investing in markets.
If you only invest money in stocks and mutual funds, filing returns is easy. However, it can be difficult to file returns if you trade intraday stocks or financial derivatives (futures or options).
This module will break down complex concepts into easy-to-understand chapters, without resorting to the jargon used by tax consultants or CA's. This is a preview of what you can expect in the module.
It is a tax that the Government of India levies on every person's income. The Income-tax Act 1961 contains the provisions that govern the Income tax Law. In simple terms, Income Tax refers to a portion of your earnings that is paid to the government.
Why should you pay tax?
Although India doesn't offer free health care or social security, the government still needs to collect taxes in order to fulfill a variety of responsibilities, including Education, National defense and Infrastructure development.
Who should pay income tax?
Every person earning more than the minimum income threshold set by the government is subject to income-tax. The Income-tax Act defines 'person' as including natural and artificial persons (including corporations).
Only 5 percent of the over 130 crore Indian population files income tax returns, and 1.5 crore Indians (1%), pay any income taxes. If you want to compare, more than 45% of people in developed economies like the U.S.A. pay taxes. This is partly due to the fact that many Indians aren't earning enough to be eligible to pay income taxes. But, the bigger reason lies in a lack of tax culture.
Based on your income for the financial year, taxes must be paid. India's financial year begins on April 1st and ends 31 March. You can specify the year as either a financial (FY), or an assessment year (AY).
FY denotes the year in which the income was earned and for which taxes are being filed. FY 2019/20 refers to the financial year that began April 1, 2019, and ends 31 March 2020.
The year you are required to file taxes is denoted by AY. The year in which you file your returns for income earned during FY 2019/20 is AY 2020/21. FY 2020/21 and FY 20/20 are the same. To file your taxes on income earned during the financial year that began April 1, 2019, and ends 31 March 2020, you will use ITR with the AY 2020/21 inscription.
All Indians must pay taxes on their total income each year, according to the tax slabs below. Your employer will already pay taxes on your behalf and issue you a'16 as an acknowledgement that you have paid taxes. Your employer won't have access to any of your income sources, such as bank interest, capital gains and rental income. The form 16 is used to add all income and calculate any additional taxes. You must file your income tax returns by the due date each year. Below is the tax slab for individuals (FY 21/21).
Individual (age of up to 60 years)
|Slabs of Income||Tax Rates|
|0 – Rs 2.5L||NIL|
|Rs 2.5L – Rs 5L||5% of the amount to which income exceeds Rs 2.5L.|
|Rs 5L – Rs 10L||Rs. 12,500 + 20% of the amount to which income exceeds Rs 5L.|
|10L and above||Rs. 112,500 + 30% of the amount to which income exceeds Rs 10L.|
Senior citizen (age 60-80 years)
|Slabs of Income||Tax Rates|
|0 – Rs 3L||NIL|
|Rs 3L – Rs 5L||5% of amount by which income exceeds Rs 3L.|
|Rs 5L – Rs 10L||Rs. 10,000 + 20% of the amount by which income exceeds Rs 5L|
|10L and above||Rs. 110,000 + 30% of the amount by which income exceeds Rs 10L|
Senior citizen (age 80 and over)
|Slabs of Income||Tax Rates|
|0 – Rs 5 L||NIL|
|Rs 5L – Rs 10L||20% of the amount by which income exceeds Rs 5L|
|10L and above||Rs. 100,000 + 30% of the amount by which income exceeds Rs 10L|
You can get a 5% tax rebate if your total income is between Rs 2.5 and Rs 5lks. This effectively means you pay zero tax.
Surcharge applicable to all age groups: 10% income tax for incomes between Rs 50lks and Rs 1 crore. 15% for incomes between Rs 1 crore and Rs 2 crores. 25% for incomes between Rs 2 crores and Rs 5 crores. If it exceeds Rs 5, crores, 37%
Budget 2020 introduced a new tax system where taxpayers have the option of choosing to either pay taxes according to the above slabs or claim the various deductions (eg. ELSS, House rent allowance etc. or opt out for the lower tax slabs. As per the above, surcharge.
|0 – Rs 2.5lks||NIL|
|Rs 2.5L – Rs 5L||5% of the amount by which income exceeds Rs 2.5L|
|Rs 5L – Rs 7.5L||Rs. 12,500 + 10% of the amount by which income exceeds Rs 5L|
|Rs 7.5L – Rs 10L||Rs. 37,500 + 15% of the amount by which income exceeds Rs 7.5L|
|Rs 10L- Rs 12.5L||Rs. 75,000 + 20% of the amount by which income exceeds Rs 10L|
|Rs 12.5L- Rs 15L||Rs. 1,25,000 + 25% of the amount by which income exceeds Rs 12.5L|
|Above 15L||Rs. 187,500 + 30% of the amount by which income exceeds Rs 15L|
We will be focusing on taxation in trading and investing in markets from the next chapter.
Disclaimer Before you file your returns, please consult a chartered accountant. This content is intended for general information only. This content is for Indian retail investors/traders.