Synopsis: In this article, we will simplify the complex lexicon of taxes to empower you with the right knowledge and confidence to timely file your annual tax returns. 

India’s abysmal financial literacy levels—a mere 27% of adults meet the RBI’s criteria—fail to inspire much relief when one thinks of tax planning. Not that all the labyrinthine tax terminologies are helping the cause of advancing tax literacy. As a result of the latest debate over whether to adopt a new tax regime or stick to the old one, the tax system has only become more complex. 

With the income tax filing season around the corner, it’s time to demystify the basic tax terminologies to avoid falling on the wrong end of the law. Below, we delve into the core concepts of tax filings, including deductions, exemptions, and income computations.  

1. Income Tax Return (ITR) 

An ITR is a form that assessees, i.e., individuals, HUFs, companies, LLPs, and more, fill out to report their annual income to the government. Accordingly, taxes are calculated on the reported income. However, depending on their source of income and net income, assessees must file their ITRs in different forms:  

  • ITR-1 SAHAJ: For resident individuals with total income from salaries, single house property, other sources, such as interest income, and up to Rs. 5,000 agricultural incomes, not exceeding Rs. 50 lakh 
  • ITR-2: For individuals and HUFs without any business or professional incomes  
  • ITR-3: individuals and HUFs with business or professional incomes 
  • ITR-4 Sugam: For resident individuals, HUFs, and firms with up to Rs. 50 lakh total income, including business/profession income computed under sections 44AD, 44ADA, or 44AE 
  • ITR-6: For companies except those claiming exemption under section 11 
  • ITR-7: For those required to furnish returns under sections 139(4A)/ 139(4B)/ 139(4C)/ 139(4D) 
  • ITR-5: For other persons, excluding individuals, HUFs, companies, and persons filing ITR-7 

2. Previous Year (PY) 

In tax parlance, the Previous Year refers to the financial year for which the tax return is being filed. It represents a 12-month period, starting on April 1st and ending on March 31st of the next year.  

3. Assessment Year (AY) 

As the name suggests, an Assessment Year (AY) is the year when your income is assessed or evaluated for the purposes of tax calculations. It follows your previous year or financial year. For instance, if the PY is 2022-2023, then the AY will be 2023-2024.  

4. Gross Total Income (GTI) 

After selecting the appropriate ITR firm, the tax portal directs to the computation of Gross Total Income (GTI), which is the total amount of money earned across several sources, such as salary income, capital gains, rental incomes, interest incomes, etc., before any tax deductions or exemptions. However, these incomes are adjusted per the relevant tax laws. To illustrate, salary incomes receive a Rs. 50,000 standard deduction. Similarly, house rent allowance (HRA), home loan interest exemptions, and more will come into play at this stage. 

5. Tax Deduction at Source (TDS) 

The Income Tax (IT) Act has stipulated that a portion of income should be directly deducted as tax, thereby staggering the tax payout throughout the year. TDS is generally deducted from salary incomes, interest on bank deposits, consultation fees, rent payments, professional fees, commission charges, etc. It is recorded in Form 26AS or a TDS certificate. 

6. Form 16 

Employers issue Form 16 to their employees, enabling them to file their ITRs. It details the amount of salary paid, TDS details, any other incomes, and deductions availed of by the employees. The form also specifies the PAN details of both the employer and the employee, challan numbers, and the employee’s TAN number.  

7. Advance Tax 

Advance tax is the system where taxes are paid early in four separate installments: by the 15th of June, the 15th of September, the 15th of December, and the 15th of March. This system applies to: 

  • All individuals incurring a tax liability of over Rs. 10,000 in a given FY 
  • Those earning business income 
  • Those opting for presumptive taxation under Section 44AD/ 44ADA 

8. Self-Assessment Tax 

Self-Assessment tax is the difference left after factoring in advance tax payments and TDS collection from your total liability computation. It is paid before the final filing of ITR to avoid penalties on unpaid taxes. 

9. Form 26AS 

Form 26AS is a tax credit statement that presents a concise summary of all the taxes paid so far. It describes TDS, tax collected at source (TCS), advance taxes, self-assessment taxes, regular assessment taxes, any refunds, and high-value financial transactions. 

10. Net Taxable Income 

Net taxable income is the final amount that is subject to tax. It is arrived at after deducting various exemptions and deductions available to the tax assessee. For example, investments made under Section 80C are removed from gross total income to calculate net taxable income. However, these exemptions may no longer apply if you choose to report your income under the new taxation regime.  

11. Surcharge 

A surcharge represents a cascading of taxes, i.e., a tax on taxes. It is calculated as a specific percentage of the regular tax paid. It is an additional tax imposed on persons falling under higher tax slabs. 

12. Tax Slabs 

Assessees are categorized into different tax slabs, or tax categories, per their income levels. As income increases, individuals and businesses are subjected to higher tax rates. As mentioned above, there are currently two different tax regimes in play. While the old system allowed for tax exemptions, the new system does away with them. As a result, the tax slabs and the corresponding tax rates vary for both systems. Additionally, senior citizens (60-80 years) and super-senior citizens (above 80 years) are offered higher basic income exemption limits, in addition to other deductions. 

13. Section 80C 

Under the old tax regime, individuals could reduce their taxable income by up to Rs. 1.5 lakh by investing in eligible investments, including the National Pension System (NPS), Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year Fixed Deposits, Senior Citizens Savings Scheme (SCSS), LIC policies, Employee Provident Fund (EPF), and more. 

Additionally, more exemptions are available under sections 80D, 80E, 80EE, and 80EEA for health insurance premiums, interest on education loans, first-time homeowners, and home loan interests, respectively. 

The Key Takeaway 

Ensuring adequate tax literacy is no longer a luxury but is indeed a necessity, especially if you desire to stay on top of your finances. While the list is by no means exhaustive, it highlights the key terms you might come across while filing your returns.