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20 Basic Tax Terms You Should Know Before Filing Taxes

  • Akshatha Sajumon
  • 11 Dec
  • 9 minutes

An Income tax return (ITR) is a form to be used for reporting information on your income and subsequent tax to the Income Tax Department. Every taxpayer’s tax liability is calculated based on his or her income/earnings. As per the country’s income tax laws, an ITR must be filed every year by an individual or business as per their income during the financial year. The income could be generated from salary, business income, house property, dividends, interest earnings, capital gains, etc.

If, as per the ITR form, an excess amount of tax has been paid during a financial year, the assessee is eligible to claim an income tax refund from the Income Tax Department. Income Tax returns must be filed within a specified date. If a taxpayer does not file ITR within the deadline, he or she has to incur a penalty. Before filing your taxes, you must know some of the basic terminologies on tax. 

Here are 20 basic tax terms that will help you in being better prepared before filing taxes:

a. Income Tax Return – 

ITR is the form used for reporting income and tax to the Income Tax Department for the Previous Year or the applicable Assessment Year. There are different forms for ITR filing.

  • ITR 1
  • ITR 2
  • ITR 3
  • ITR 4
  • ITR 5
  • ITR 6 
  • ITR 7

Either of these forms must be used depending on the source of income, the net income earned and type of assessee. 

b. Gross Total Income – 

The first step of filing tax returns is the computation of Gross Total Income (GTI). 

GTI can include:

  1. Salary income
  2. Capital gain 
  3. Income from house or property
  4. Profits and gains from business & profession
  5. Income from other sources

These must be calculated after making adjustments related to relevant exemptions like eligible allowances, HRA, interest component on home loan, etc. 

c. Net taxable income – 

Net taxable income is :

  • The income chargeable to tax 

It is computed after considering deductions allowed under Income Tax Act (i.e. different Section 80s). Tax is payable on this final amount. 

d. Assessee – 

A ‘person’ who, as per the Income Tax Act, is liable to pay income tax. An assessee could be:

  1. Individual
  2. Hindu Undivided Family (HUF)
  3. Association of Persons (AOP)
  4. Body of Individuals (BOI)
  5. Companies 
  6. Limited Liability Partnerships (LLPs)
  7. Local authority
  8. Any artificial juridical person (AJP) not part of the above-mentioned categories

e. Assessment – 

This is the process of inspection of the returns filed by an assessee as carried out by the Income Tax Department.

f. Assessment Year (AY) – 

AY is the twelve-month period:

  • That begins on the 1st day of April and
  • Ends on March 31 

It succeeds the respective Financial Year. For instance, for FY 2020-21, the AY is 2021-22. An assessee has to file an income tax return for the applicable AYs.

g. Previous Year (PY) – 

Previous year refers to the financial year immediately before the Assessment Year. In this context, PY is the same as the Financial Year.

h. Tax Deduction at Source (TDS) – 

The tax deducted before making payment to the recipient is called Tax Deducted at Source or TDS. Following payments are subject to TDS as per Income Tax Act:

  • salary 
  • interest on bank deposits
  • commission
  • consultation fees
  • professional fees 
  • rent payment, etc

TDS is reflected in the Form 26AS or the TDS certificate. It is issued by the deductor or the entity/individual making the payment. To claim credit for the tax paid, an assessee can use these documents while filing income tax returns.

i. Form 26AS – 

Form 26AS is a tax credit statement which reflects the tax deducted or collected by an entity. It contains details of:

  1. Tax deducted from all sources 
  2. Tax collected at source 
  3. Advance tax paid by the assessee 
  4. Self-assessment tax paid
  5. Regular assessment tax 
  6. Refund in the financial year (if any)
  7. Any high-value financial transactions (if any) 

j. Form 16 – 

Form 16 is issued by employers and contains information that is required to prepare and file Income Tax Returns. 

Part A of Form 16 states :

  1. Full address of the employer and employee 
  2. Permanent Account Number (PAN) of both
  3. Tax deduction Account Number (TAN) of the employer
  4. amount of tax deducted and deposited by the deductee for the Assessment Year 
  5. challan numbers

Part B of Form 16 states details like:

  1. salary paid
  2. any other income
  3. exemptions & deductions availed and 
  4. tax deducted

k. Surcharge – 

Also known as tax on tax, this is the additional tax payable apart from the applicable tax rate for an assessee who comes under a higher income tax slab. 

l. Advance Tax – 

This is the tax payable in advance. Instead of being paid in lump-sum at the end of a financial year, advance tax must be paid in four instalments:

  1. on or before 15th June, 
  2. 15th September, 
  3. 15th December, and 
  4. 15th March

This is applicable to any 

  1. individual whose tax liability is more than Rs. 10,000 in a financial year. 
  2. those in business, and 
  3. those who have opted for presumptive taxation under Section 44AD or 44ADA

m. Self-Assessment Tax – 

Income tax paid by the assessee after considering Advance Tax and Tax Deduction at Source is known as Self-Assessment Tax. It must be paid before filing the Income Tax Returns in an assessment year. 

(The below-mentioned deductions of various Section 80s are not applicable if one chooses the New Tax Regime U/S 115BAC)

n. Section 80C – 

Annual investments in certain eligible financial instruments of up to Rs 1.5 lakh can be claimed as a deduction under Section 80C of the Income Tax Act. This is one of the most commonly used deduction. The eligible financial instruments are:

  1. Public Provident Fund
  2. Sukanya Samriddhi Yojana
  3. National Saving Certificate 
  4. 5-Year tax-saver term deposits
  5. Senior Citizens Savings Scheme
  6. National Pension System
  7. Equity Linked Savings Schemes
  8. Life insurance policies premium
  9. Premium paid for pension plans 
  10. Contribution to the Employees’ Provident Fund
  11. Principal repayment on housing loans
  12. Tuition fees paid for children’s education 
  13. Registration fees and stamp duty on registration of a house

o. Section 80D – Deduction for payment of health insurance premium

Premium amount paid towards a health insurance policy is eligible for deduction as per Section 80D of the Income Tax Act, 1961

  1. For a non-senior citizen – up to Rs 25,000 
  2. For senior citizens – Rs. 50,000 

This deduction can be claimed by an individual and Hindu Undivided Family.

p. Section 80E – Deduction for interest payment on education loan

Deduction for interest repayment on an education loan:

  • Can be claimed by assessees who are individuals
  • The loan must specifically be taken to pursue higher studies in India or abroad. 
  • It should be taken from a bank, or financial institution or other approved charitable institution. 
  • The deduction can be claimed for a maximum of 8 years (starting from the year the assessee begins interest repayment) or till the interest is paid, whichever is earlier.
  • No restriction on the amount to be claimed. 

q. Section 80EE – Deduction for first time home owners

This deduction is meant for individuals who have taken a home loan for the first time. Some of the terms to be satisfied for claiming this deduction are:

  • Applicable only on the interest portion
  • The individual should not be owning any other house property
  • The house or property value should be within Rs. 50 lakhs 
  • The loan amount can be maximum Rs. 35 lakhs 
  • Applicable on loans sanctioned between 1st April 2016 and 31st March 2017
  • A deduction of Rs 50,000 can be claimed per annum from the Gross Total Income until the loan has been repaid in full. 
  • Beyond this amount, an assessee can claim a deduction under Section 24(b) for interest payment towards the home loan. Maximum permissible limit is Rs 2 lakhs per annum. 

r. Section 80EEA – Deduction of home loan interest in affordable housing segment

Deduction for interest paid towards home loan taken specifically for availing a home in the affordable housing segment. It can be claimed only for individuals. The conditions for this deduction are:

  1. the borrower should not own any other house or property as of the date of sanctioning of the loan
  2. the loan must be taken from a bank or financial institution
  3. the individual cannot claim a deduction under the existing Section 80EE

The individual is allowed to claim a deduction under Section 24(b) for interest paid towards the home loan, with maximum permissible limit being Rs. 2 lakhs per annum.

s. Section 80TTA – Deduction of interest on SB account

Under this individuals and HUFs can claim a deduction for interest earnings from a savings account maintained with a bank, co-operative society and post office. The interest earnings must be within Rs. 10,000.

t. Section 80TTB – Deduction of interest on SB account for senior citizens

Under this section, senior citizens can claim a deduction for interest earnings on savings accounts maintained with a bank, co-operative society and post office up to Rs. 50,000.

Conclusion

Before filing your income tax returns, make sure to know some of the basic terms associated with ITR to be better prepared for the filing. It can help you understand tax applicability, tax-saving options, and scope of getting returns through ITR filing.

FAQs

Do I need to file my income tax return?

Yes, it is mandatory to file your income tax return if your income is above Rs. 2.5 lakhs in a Financial Year. This is the basic exemption limit as per Income Tax laws, without providing for any deductions or investments.

My employer deducts TDS on my behalf every year. Should I be still filing my Income Tax Return?

Yes, you must file your ITR if your income is above Rs. 2.5 lakhs even if your employer deducts and deposits TDS every year. ITR is required to determine if any dues are pending or if you are eligible for refunds.

What are exempt and taxable incomes?

Exempt incomes are those that are not chargeable with tax, since these are not included in the total income for tax calculation purposes. Taxable incomes are chargeable to tax as per Income Tax law.

What is the age criteria for senior citizens and very senior citizens?

As per Income Tax laws, any individual who has attained 60 years of age is called a Senior Citizen. If an individual’s age exceeds 80 years, he/she is called a Super
 Senior Citizen.

What is PAN?

PAN is a Permanent Account Number. It is a 10 digit alphanumeric identification issued by the Income tax department to each taxpayer in the country.

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Akshatha Sajumon

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