An Analysis of The Income Tax Rules, 2021

Introduction:

Just like people in their houses need income to run their families, similarly, the government also needs revenue to be able to run the country in a smooth manner and work for the welfare of the people. The government does the same by collecting taxes from them and this also helps to bridge a little gap between the rich and the poor. Taxes are of two types; direct taxes and indirect taxes. While direct taxes are imposed on income and profits, indirect taxes are levied on goods and services. Direct tax is directly paid to the government, while there is generally an intermediary for collecting indirect taxes from the end-consumer. The burden of the indirect taxes can be shifted whereas the burden of the direct taxes cannot be. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift tax, expenditure tax, etc. Some examples of indirect taxes are sales tax, excise duty, VAT, service tax, entertainment tax, customs duty, etc.[1]

Exempted Incomes, Gross Total Income & Net Taxable Income

The government has exempted certain incomes from the taxable incomes category. For example, the amount received on maturity of life insurance & payment received from NPS account, etc.[2] Paying tax shall not be applicable on such incomes, but while filing the Income-tax return i.e., ITR, it is important to disclose the information related to all of these exempted incomes. Gross Total Income (GTI) is the total income earned by adding all heads of income. Income from salary, property, other sources, business or profession, and capital gains earned in a financial year are all added to arrive at the GTI.[3] The government has allowed a deduction in some investments and expenditures. For example, investments in PPF, ELSS Funds, Sukanya Sam Riddhi Yojana, etc. are allowed deduction.[4] After the deductions from the Gross Total Income, what we get is called Net Taxable Income. Also called Taxable income, it is the portion of an individual’s or a company’s income used to calculate how much tax they owe the government in a given tax year.[5]

Rebate

According to section 87A, if the net taxable income is less than 5 lakhs or equal to 5 lakhs then a rebate (a partial refund to someone who has paid too much for tax, rent, or a utility) would be applicable but if the Net taxable income is more than 5 lakhs then the tax is payable at the applicable rate. Also, in order to be eligible for a rebate, it is important for the taxpayer to be a resident of India.[6]

Tax Components

Some tax components together form the Total Tax Liability of the taxpayer. those components are:

• Income Tax (which is payable as per the slab rates)
• Rebate
• Surcharge (An extra fee, charge, or tax that is added on to the cost of a good or service, beyond the initially quoted price. Often, a surcharge is added to an existing tax and is not included in the stated price of the good or service.)
• Health And Education Cess

Ways to Pay Tax

There are majorly three ways available to the taxpayers to pay their tax:

• Advance Tax- The taxpayer can pay the tax to the government in installments.
• TDS Or Tax Deducted at Source- The taxpayer can pay the tax to the government by getting it deducted at the source.
• Self-Assessment Tax- The taxpayer can pay the tax to the government at the time of filing the income tax return.

If the tax is not paid and the taxpayer along with the tax payable liability, files the Income Tax Return then the person shall receive a notice from the income tax department. Hence, it is recommended to file the Income Tax Return only after the tax is paid.

Financial Year and Assessment Year

There are two very important terms and those are Financial Year and Assessment Year. In India, the Financial Year is from 1st April to 31st March of the next year. Assessment Year is always the following year of the Financial Year.[7] An example to understand assessment year would be: Financial Year 2020-21 means Assessment Year 2022-23.

Income Tax Rules, 2021

Some of the major changes regarding Income Tax that were introduced on 1^st April 2021 for the Financial Year 2021-22 are:

1. Pre-Filled ITR Forms: Once a person logs in to his/her income tax portal, they will get pre-filled information regarding:
   • The salary that they receive.
   • The advance tax that they might have paid in installments.
   • The deducted TDS
   • The collected TCS
   • If the person makes transactions in the share market, then the income that they get from short-term capital gains or long-term capital gains shall also be mentioned in the ITR forms already.
   • The interest that they received from the banks or the post office,
   • The statement of financial transactions.
2. TDS Rate for Non-Filer of ITR
   Two new sections have been introduced, section 206AB and section 206AC, whoever has not filed the ITR for the last two years and if the TDS or TCS crosses Rs.50,000 then the amount that is supposed to be deducted as tax shall be double of the TDS Rate or 5%, whichever out of these two is higher. For instance, the TDS rate is 10%, The double of it would be 20% and since 20% > 5%, hence tax shall be deducted at 20% TDS Rate.  all of this applies to all the incomes except 192, 192A, 194N, 194B, 194BB,194 LBC.
3. Normal TDS Rate Again
   In the time of the Covid situation, on the 14th of May 2020, the TDS rate was reduced to 75% up to 31 March 2021. This was done to support all the taxpayers in the time of crisis which the covid situation brought along. From 1 April 2021, the TDS rate was changed to normal again.
4. Penalty for PAN-Aadhaar Non-Linking
   According to section 234H, whoever did not get their PAN and Aadhaar linked before 30 June 2021 is supposed to pay 1000 Rs. as a penalty. Once, this penalty is paid, then they will be able to link their PAN and Aadhaar.
5. Tax on, interest earned on employee contribution above 2.5 lakhs
   After 1 April 2021, if the employee contribution is more than 2.5 lakhs, the interest earned on the contribution shall be taxable.
6. Senior citizen exempted from ITR filing
   A new section has been introduced 194P. Under this section, whoever is more than 75 years old and has only one bank which is the source of their income (pension and interest) shall be exempted from filing their ITR. The banker is supposed to file the ITR on their behalf and deduct the tax amount. Also, it is important to be noted that senior citizens are not exempted from the tax liability, they are only exempted from filing the ITR.
7. Belated return can be filed only up to 31 December 2021
   The pending Income Tax Returns can be filed up to 31 December 2021 only after paying 5000 as a penalty for being late.
8. Two Tax Slab Options Available
   It is the choice of the taxpayer which tax slab they want to opt for, be it the old tax slab or the new tax slab.
9. The Time for Reopening IT Assessment Has Been Reduced
   The time to eat reopen the income tax assessment is changed from 6 years to 3 years if the income is up to 50 lakhs, i.e., either equal to 50 lakhs or less than 50 lakhs. If the income is more than 50 lakhs, then the time to reopen the income tax assessment is 10 years. this provision has been made to benefit the small taxpayers who are also called MSME[8] i.e., Ministry of Micro, Small and Medium Enterprises.

Conclusion

These Income Tax Rules, introduced by the Income Tax Department have worked out well. And we look forward to more such beneficial rules in the upcoming Financial Year 2022-23 that is supposed to begin on the 1^st of April 2022.

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References:

[1] Direct Tax and Indirect Tax: The Explanation You’ve Been Searching For, www.adityabirlacapital.com, https://www.adityabirlacapital.com/abc-of-money/direct-vs-indirect-tax-what-is-the-difference.

[2] Preeti Motiani, Incomes that are exempted under the new tax regime, The Economic Times, https://economictimes.indiatimes.com/wealth/tax/incomes-that-are-exempted-under-the-proposed-new-tax-regime/articleshow/74074285.cms?from=mdr (last visited Nov 2, 2021).

[3] Investopedia Staff, Gross Income Investopedia (2003), https://www.investopedia.com/terms/g/grossincome.asp.

[4] Salaried employee? These payments, investments and incomes will give you tax benefits in 2021 (Top 10 List), The Financial Express (2021), https://www.financialexpress.com/money/income-tax/top-10-list-of-income-tax-deductions-for-ay-2021-22-for-salaried-employees-tax-benefits-on-payments-investments-and-incomes/2291512/ (last visited Nov 2, 2021).

[5] Taxable Income, Investopedia, https://www.investopedia.com/terms/t/taxableincome.asp#:~:text=Taxable%20income%20is%20the%20portion (last visited Nov 2, 2021).

[6] Income Tax Rebate – A Detailed Guide, www.bajajfinserv.in, https://www.bajajfinserv.in/insights/income-tax-rebate#:~:text=Section%2087A%20of%20the%20Income%20Tax%20Act%20provides%20a%20rebate (last visited Nov 2, 2021).

[7] Financial Year and Assessment Year – Difference Between FY and AY, Groww, https://groww.in/p/tax/financial-year-and-assessment-year/#:~:text=The%20financial%20year%20is%20the (last visited Nov 2, 2021).

[8] Ministry of Micro, Small & Medium Enterprises, Msme.gov.in (2019), https://msme.gov.in/.