The income tax system in India is not just about paying taxes — it’s about proper compliance, record-keeping, and timely filing of returns. This unit covers the key elements of the tax computation process, the required documentation, and the distinctions between lawful and unlawful tax-saving practices.
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Permanent Account Number (PAN)
Definition – PAN is a unique 10-character alphanumeric code issued by the Income Tax Department.
Purpose – It acts as a universal identification key for all financial transactions and ensures that your tax-related information is linked and tracked.
Usage Examples – Required for opening bank accounts, high-value transactions, buying property, and filing income tax returns.
Example: If you sell a property worth ₹50 lakhs, your PAN must be provided so that the income from the sale can be tracked for tax purposes.
Tax Deduction and Collection Account Number (TAN)
Definition – TAN is a unique 10-digit alphanumeric number required by individuals or organizations responsible for deducting or collecting tax at source (TDS/TCS).
Who Needs TAN? – Employers, banks, companies, and any entity deducting TDS on payments like salaries, rent, or contractor fees.
Penalty for Non-Compliance – Failure to obtain TAN can lead to a penalty of ₹10,000.
Tax Deducted at Source (TDS)
Meaning – TDS is the tax collected at the source of income before it is paid to the recipient.
Purpose – Ensures a steady inflow of revenue to the government and minimizes tax evasion.
Common Examples –
10% TDS on interest from fixed deposits above ₹40,000.
TDS on salaries, professional fees, rent, and sale of property.
TDS Certificate – The deductor must issue Form 16 (for salaries) or Form 16A (for other incomes) to the deductee as proof.
Filing of Income Tax Returns (ITR)
Definition – An Income Tax Return is a form used to declare income, expenses, and tax payments to the government for a specific financial year.
Why File Returns? –
It’s mandatory if your income exceeds the basic exemption limit.
Helps claim refunds if excess tax is paid.
Serves as income proof for loans and visas.
Types of ITR Forms –
ITR-1 (Sahaj) – For individuals with salary/pension, one house property, and other sources.
ITR-2 – For individuals with capital gains or more than one property.
ITR-3 – For individuals with income from business or profession.
ITR-4 (Sugam) – For presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE.
Example: If a salaried person also earns from stock market trades, they must file ITR-2 instead of ITR-1.
Advance Tax and Self-Assessment Tax
Advance Tax –
Paid in installments during the financial year if your estimated tax liability exceeds ₹10,000.
Due Dates: 15th June, 15th September, 15th December, and 15th March.
Self-Assessment Tax –
Paid before filing the return if there’s any pending tax liability after adjusting TDS and advance tax.
Ensures that you clear all dues before submission of the ITR.
Tax Planning, Tax Avoidance, and Tax Evasion
Understanding the difference between these terms is crucial for compliance:
Tax Planning –
Legal use of provisions to reduce tax liability.
Example: Investing in Public Provident Fund (PPF) to claim deduction under Section 80C.
Tax Avoidance –
Arranging financial affairs in a technically legal but dishonest way to reduce tax liability.
Example: Shifting income to family members in a lower tax bracket without actual transfer of control.
Tax Evasion –
Illegal non-payment or underpayment of taxes by concealing income.
Example: Not disclosing rental income in the ITR.
Punishable by fines and imprisonment.
Steps in the Tax Computation Process
Determine Residential Status – Based on the number of days an individual stays in India.
Identify Sources of Income – Salary, business, capital gains, etc.
Calculate Gross Total Income – Sum of all incomes under five heads.
Claim Deductions – Under Chapter VI-A (Sections 80C, 80D, etc.).
Compute Tax Liability – Apply the applicable income tax slab rates.
Adjust TDS/Advance Tax – Subtract taxes already paid.
Pay Remaining Tax – As self-assessment tax if needed.
File the ITR – Submit online/offline before the due date (usually 31st July).
Penalties for Non-Compliance
Late Filing Fee – ₹5,000 (₹1,000 if income < ₹5 lakh) under Section 234F.
Interest on Delay – 1% per month under Sections 234A/B/C.
Penalty for Misreporting – Up to 200% of the tax under Section 270A.
Conclusion
The process of income tax return filing in India is more than just a yearly obligation — it’s an important step in ensuring financial transparency and legal compliance. Understanding PAN, TAN, TDS, advance tax, and the correct use of tax-saving provisions helps individuals and businesses avoid legal troubles and make the most of legitimate benefits.
Filing on time, maintaining accuracy, and engaging in ethical tax planning not only safeguard you from penalties but also contribute to the nation’s economic development.