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Taxable and non-taxable | Income Tax Return Filing


Tax season is the time of the year that many of us feel but does not have to be mellow. If you have the right mentorship, filing your income tax return can be an easy and stress-free process. Why don’t you visit Web Online CA, your reliable collaborator in facilitating easy ITR filing? Let’s jump into more detail about what you should learn to master this crucial financial job.

Interpreting Income Tax Return Filing

The process of filing an income tax return is the one done by individuals and businesses where they report their income and tax liability to the government. This annual ritual is compulsory for everyone earning more than a given amount of income and entails recording different sources of income, deductions, and exemptions.

Why it Matters

Filing your income tax return accurately and on time is crucial for several reasons: 

  1. Compliance: Not filing your tax return involves penalties and even justice action. Through compliance, you can avoid unnecessary trouble with the tax authorities.
  2. Maximizing Savings: Properly recording your income and deductions makes sure that you benefit from all available tax breaks, minimizing your tax burden and maximizing your savings.
  3. Financial Planning: Your tax return is an important resource, giving you a clear idea of your financial situation, thus enabling you to come up with informed decisions as far as budgeting, investing, and retirement planning are concerned.

Taxable and non-taxable income are two types of income differentiated for tax purposes. Distinguishing between them is crucial for correct tax reporting and adherence.

Taxable Income:

Taxable income is any income subject to taxation by the government. It consists of a wide range of money-earning opportunities and gains, people or companies receive throughout the year. Some common sources of taxable income include:

  1. Wages and Salaries: Earnings from employment represented by salaries, wages, bonuses, tips, etc. are usually taxed as income.
  2. Interest and Dividends: Interests from savings accounts, certificates of deposits (CDs), bonds, and also dividends received from investments in stocks or mutual funds are usually taxable.
  3. Business Income: Income earned by businesses - sole proprietorships, partnerships, or corporations - is subject to taxation after deducting allowable business expenses.
  4. Rental Income: Earnings obtained from letting out a house, like real estate or vehicles, are considered to be taxable income.
  5. Capital Gains: Profits made from selling capital holdings like stocks, bonds, real estate, and valuable personal property will incur capital gains tax.
  6. Retirement Income: Withdrawals from retirement savings accounts such as 401(k) plans, traditional IRAs, or pensions are generally taxable at the individual's ordinary tax rate.

Non-Taxable Income:

Non-taxable income is income that is not subject to taxation. This income is not taxed, however, it's worth mentioning that there may be some requirement or condition attached so that an earning can qualify for tax exemption. Some examples of income that is not subject to tax include speeding up the production of goods or using robotics to maintain them all day.

  1. Gifts and Inheritances: A rule holds that gifts and inheritances received by individuals are not taxable. Nevertheless, certain gift and estate tax regulations may apply to large gifts or estates.
  2. Scholarships and Grants: Non-taxable scholarships and grants for which a qualified recipient is a degree candidate at an eligible educational institution can typically pay for tuition, registration, and course materials.
  3. Insurance Proceeds: Payments from life insurance, health insurance policies( for medical expenses) and some types of insurance proceeds are not taxable.
  4. Child Support Payments: The child support payments given to a custodial parent are non-taxable income.
  5. Certain Government Benefits: Some government benefits like Social Security benefits, SSI, and some veterans' benefits are partly or completely tax exempt.
  6. Qualified Roth IRA Distributions: Any qualified Roth IRA distributions, both contributions and earnings called out, are generally tax-free, as long as some conditions are satisfied.
  7. Worker's Compensation: The payments that a person receives as worker's compensation for the job–related injuries and diseases are usually exempted from income tax for the most part.

For taxpayers, it is vital to correctly report all taxable income and specify any non-taxable income on their returns. Not reporting taxable income or misidentifying non-taxable income as taxable income could draw penalties or additional taxes payable to the government.

Direct Taxes:

Direct taxes are those taxes that are levied directly on individuals or organizations by the government. These taxes cannot be shifted to another party and are paid directly by the taxpayer to the government. The Central Board of Direct Taxes (CBDT) is the apex body responsible for administering and collecting direct taxes in India. Direct taxes include:

  1. Income Tax: This is a tax imposed on the income earned by individuals, corporations, and other entities. It is levied by the Central Government and administered by the Income Tax Department.
  2. Property Tax: This tax is levied on the value of real property, such as land and buildings. It is collected by local authorities like municipalities or panchayats.
  3. Wealth Tax: Wealth tax was abolished in India in 2015. It was a tax levied on the net wealth of individuals, including assets such as residential properties, jewelry, cars, etc., exceeding a certain threshold.
  4. Capital Gains Tax: This tax is levied on the profit earned from the sale of capital assets, such as stocks, bonds, real estate, or precious metals.
  5. Gift Tax: Gift tax was abolished in India in 1998. It was levied on the transfer of certain assets by one person to another without adequate consideration, with some exceptions.

Indirect Taxes:

Contrary to direct taxes, on the contrary, are taxes are levied on goods and services, rather than on individuals and organizations directly. Such taxes are, however, passed on to the consumers through the price of the goods and services offered. The government raises taxes from the intermediaries such as wholesalers, manufacturers, and retailers, hence the end consumer ends up bearing the costs passed on by these intermediaries. Indirect taxes include:

  1. Goods and Services Tax (GST): GST is a sweeping indirect tax imposed at every stage of the supply chain; it starts from the manufacturing level and ends consumption, It substitutes indirect taxation like central excise duty, service tax, and VAT of the states.
  2. Sales Tax: The state government collects sales tax or tax on the sale of goods within the state. It is normally applied as a rate of the price of the sold goods.
  3. Value-Added Tax (VAT): VAT is a kind of consumption tax that is paid on the value added to products at each stage of production while making or distributing. It, however, resembles GST but was substituted by GST in India.
  4. Customs Duty: Import and export of goods is charged by customs duty. It is levied by the Central Government to oversee trade and preserve domestic industries.

The difference between direct and indirect taxes needs to be appreciated by both taxpayers and policymakers equally since it is a necessary prerequisite for the formulation of effective tax policies and the enforcement of tax laws as well.

Fringe Benefit Tax (FBT):

The fringe Benefit Tax (FBT) is a tax imposed by the Indian government on the benefits that an employer provides to his employees. It was introduced in 2005 as a part of the finance bill to impede the practice of companies offering different fringe benefits to employees to minimize taxable income. Several benefits fall under many areas such as worker privileges, services, facilities, or amenities that the employer can provide for employees either directly or indirectly.

FBT was set at 30% of the costs of the benefits provided by the company and the employer was supposed to pay it together with income tax as FBT has its separate rate. There are some examples of the benefits included in FBT, such as phone reimbursement, free or cheap tickets, and contributions to superannuation funds.

Minimum Alternate Tax (MAT):

The Minimum Alternate Tax (MAT) is a tax that is applied to companies to make sure that those corporations with large profits and high dividends to shareholders are paying the minimum tax amount, even though they are not paying sufficient corporate taxes due to various incentives and exemptions. If a company’s taxable income exceeds a particular ratio of its book profits, the company is required to pay MAT, which is computed as a fixed percentage of its book profits.

MAT intends to prevent corporates from managing their accounts to evade paying taxes and also ensure that they contribute a fair share of taxes. MAT is currently charged at a rate of 18.5%.

Alternate Minimum Tax (AMT):

Alternate Minimum Tax (AMT) and Minimum Alternate Tax (MAT) are similar, except that the former applies to LLPs, whereas the latter applies to companies. Similar to MAT, AMT requires LLPs to pay the minimum amount of tax if the regular income tax liability is less than a certain bottleneck. Under the proposed amendments to the Income-tax Act, persons, other than companies, who make deductions on any section (barring section 80P), will be liable to pay Alternative Minimum Tax (AMT).

The regular income tax payable by a person (other than a company) for the previous year will be ignored if it is less than the AMT payable in that year. The adjusted total income will be deemed to be the total income, and the person will be liable to pay income tax at the rate of 18.5% on such total income.

These direct taxes are a crucially important factor in the proper functioning of the tax system in that they guarantee that businesses and individuals fairly contribute to taxes in addition to the prevention of tax evasion and account manipulation.

Indirect Taxes in India

Indirect taxes are a critical part of India’s taxation system, they provide important revenues for the government and also can influence the prices of goods and services for the consumers. The taxes are levied on commodities’ production, distribution, or consumption and are collected by distributors like producers, wholesalers, or service suppliers. Let's explore the major categories of indirect taxes in India: Let's explore the major categories of indirect taxes in India:

1. Excise Duties:

Duties of Excise, commonly known as the CENVAT, is a tax on goods production within the country. Statutory provisions relating to the administration of central excise are found in the Central Excise and Salt Act, 1944; and the Excise Tariff Act, 1985. Excise duties can be either of two types. These are ad valorem (a percentage applied to the cost of production) and specific (a fixed rate which tends to be based on the nature or quantity of the goods). 

The was introduced by the Modified Value Added Tax (MODVAT) in the year 1986 which allows manufacturers to claim excise duty paid on the raw material used in manufacture. This credit can be used towards settlement of future excise duty liability towards subsequent manufacturing activities resulting in the reduction of the cascading effect of taxes.

2. Sales Tax:

A sales tax is a tax that is applied to selling things inside a state or across state lines. It is either imposed by the Central Government (Central Sales Tax) or by the State governments(State Sales Tax). Presently, a Central Sales Tax of 4% applies to inter-state sales while individual states have Sales Tax rates ranging from 4% to 15% for intra-state sales.

Usually, a sales tax is imposed at the “point of sale” and is factored into the purchase cost that the consumer pays. Nevertheless, certain items or services, like export and service, may escape from being in the scope of sales tax.

3. Service Tax:

Service tax is a tax imposed within India that is applied to the rendition of services except in the state of Jammu and Kashmir. The Government of India subject governs it and it applies to various services provided by individuals and organisations. It is controlled by the Central Board of Excise and Customs (CBEC).

Service tax is charged based on the value of the service sought and is paid by the person who renders the service. The tax is considered a consumption tax, and therefore it is the consumer who finally bears the responsibility for payment of the tax when buying the service.

These indirect taxes are of prime importance in terms of raising the government's revenue and fund its spending. They also sway consumer decisions and market dynamics through price influence on goods and services. Familiarity with the various kinds of indirect taxes is vital for businesses and consumers in mastering the intricacies of India's tax system.

An accountant may be consulted for tax compliance regarding taxable and non-taxable income.