Accounts Notes: What is Income Tax

Tuesday 12 April 2011

What is Income Tax

What is Income Tax?
The Government collects tax from its citizens based on the income they get. This is called as Income Tax.
What is the linkage between Payroll, Income Tax and TDS?
For salaried employees, the employee's Income Tax (IT) deduction is the responsibility of the employer (Company). Employer has to calculate the IT on the employee’s salary, deduct the amount while paying the salary and then pay it to the Income Tax Dept. in the employee's name. The Tax that is deducted is called as TDS (Tax Deducted at Source)
Can you explain how Income Tax (IT) or TDS is calculated during the process of salary computation?
Indian Income Tax laws are one of the most complicated in the entire world. We will make an attempt here to give a broad overview on how Income Tax is computed.

The IT for an employee is calculated on an annual (yearly) basis. This is called as Financial Year. The year begins on April 1st and ends on March 31st of the subsequent year. For. e.g. April 1at 2009 to March 31 2010.
The IT for an employee is calculated on an annual basis. Annual here means for a year. The year begins on April and ends on March of the subsequent year. For. e.g. April 1999 to March 2000. This is also referred to as Financial Year.
Income Tax is broadly calculated as follows:
1. The Income for a year is calculated. (This is the actual income paid to an employee)
2. To this income, the Perquisites are added. (This is the notional value of the Perqs or benefits given to an employee)
3. Then the Gov. allowed Exemptions are calculated and deducted from the income.
4. Then Prof. Tax are deducted from the income.
5. The balance income at his stage is called as Income chargeable under head Salaries
6. To this, any other income declared by the employee is added. Any loss is also deducted.
7. Then Deductions in terms of Medi Claim Premiums, Savings in LIC, Bonds and others (referred to as Chapter 6A Deductions) are deducted from the income.
8. The balance income is called as Taxable Income.
9. On this income, tax is calculated based on the slabs prescribed.

Can I have detailed information on various components of the Income Tax calculations?
Please Direct and Indirect professional books.
What is PAN?
PAN stands for Permanent Account Number. All eligible citizens need to apply for and get a Permanent Account Number. All transactions with the Income Tax Department happens with this number.

What are the various reports that I need to generate as an employer?

As an employer you need to generate and file the following reports:

1. Monthly Income Tax Report - This is the total amounts that you have deducted from each employee. This amount needs to be paid under a Tax Challan to the Income Tax Department.

2. In June 2009, the Income Tax Dept notified that the monthly statement of Income Tax deducted and paid should be filed as a separate report called Form 17. This was later withdrawn and is expected to come into effect from April 2010 onwards.

3. Form 24Q - This is a report that needs to be generated every quarter. This gives information on all the amounts paid to your employee, tax that you have deducted and the tax that you have paid. Quarter is a 3 month period starting from April of every year.

4. In June 2009, the Income Tax Dept notified that the quarterly return Form 24Q was not needed and instead a quarterly compliance

statement called Form 24C was to be generated and filed. This was later withdrawn and is expected to come into effect from April 2010 onwards.

5. Form 24 - This report needs to be generated once a year. This is a consolidated information of all amounts paid to an employee, tax deducted and tax paid.

6. Form 16 and Form 12BA - This report needs to be generated and given to an employee once a year. This contains complete information on all the salaries paid to the employee along with information on Perquisites, Exemptions, Deductions and Tax calculations. This is give either when an employee leaves the company or at the end of the Financial year.

What is eTDS returns?

"eTDS stands for electronic Tax Deducted at Source Returns".
From July 2004 onwards, employers need to file the various Income Tax returns in an electronic format. The paper formats of the returns are no longer accepted.

What is Digital Signature for Form 16?

To address the challenge of physically generating, signing and distributing large number of Form 16s, the Income Tax department has now allowed organizations to generate Form 16s and sign them digitally. These documents are called as Digitally signed Form 16s. After the introduction of this facility, it is now not needed to print and sign Form 16s.

What is Form 24Q?

Form 24Q is a statement / report that you need to generate quarterly - 4 times in a financial year. This statement contains information on all employees who have a taxable income, the tax that has been deducted every month and whether the deducted tax has been paid.
This statement needs to be generated and filed with the Income Tax department. The statement needs to be generated in an e-format i.e. as a file in a format specified by the IT department. This is also commonly referred to as eTDS Returns.