“Demystify complex taxation terms under the Income Tax Act in India with simplified explanations. Understand key concepts like income, taxable income, deductions, exemptions, assessment year, advance tax, TDS, tax return, tax credit, penalties, tax residency, capital gain, tax audit, tax evasion, tax planning, APA, tax deductible, and GST. Gain insights into the layman’s language definitions to navigate the tax landscape effectively. For personalized advice on tax matters, consult with a Chartered Accountant with over 5 years of experience.”
Here are some important and often difficult taxation terms explained in layman’s language as per the Income Tax Act in India:
Income: Income refers to the money you earn or receive from various sources, such as salary, business profits, rental income, interest, dividends, etc.
Taxable Income: Taxable income is the portion of your income that is subject to taxation after taking into account applicable deductions, exemptions, and allowances.
Deductions: Deductions are specific expenses or investments that you can subtract from your total income, thereby reducing your taxable income. Examples include contributions to the Public Provident Fund (PPF), life insurance premiums, tuition fees, etc.
Exemptions: Exemptions are certain types of income that are not subject to tax. For example, agricultural income, certain allowances received by government employees, and income from specified sources in certain North-Eastern states may be exempt from taxation.
Assessment Year (AY): Assessment Year is the year in which your income for a particular financial year is assessed, and you file your income tax return for that period. For example, for the financial year 2022-2023, the assessment year would be 2023-2024.
Advance Tax: Advance tax refers to the payment of taxes on your estimated income in instalments during the financial year, rather than paying it all at once at the end of the year. This is applicable if your tax liability exceeds a certain threshold.
Tax Deducted at Source (TDS): TDS is a mechanism through which taxes are deducted by the payer (such as an employer or bank) at the time of making certain payments, such as salary, interest, rent, etc. The deducted amount is then deposited with the government on behalf of the recipient.
Tax Return: A tax return is a document or form filed with the tax authorities that contains details of your income, deductions, and tax liabilities for a specific financial year. It is filed by individuals and entities to report their taxable income and settle their tax obligations.
Tax Credit: Tax credit refers to the reduction in tax liability directly provided by the government as an incentive. It reduces the amount of tax payable. For example, if you are eligible for a tax credit of Rs. 5,000, it will be deducted directly from your tax liability.
Penalties and Interest: Penalties and interest are charges levied by the tax authorities for non-compliance or late payment of taxes. These charges are imposed to encourage timely and accurate tax filing and payment.
Tax Residency: Tax residency determines the country in which you are liable to pay taxes. In India, it is determined based on the number of days an individual spends in the country during a financial year.
Capital Gain: Capital gain refers to the profit earned from the sale of a capital asset, such as property, stocks, or mutual funds. It is calculated as the difference between the selling price and the purchase price of the asset.
Long-Term Capital Gain (LTCG): LTCG is the gain arising from the sale of a capital asset held for a certain period, typically more than 1 year for most assets. LTCG is taxed at a lower rate compared to short-term capital gain.
Short-Term Capital Gain (STCG): STCG is the gain arising from the sale of a capital asset held for a short period, usually 1 year or less. STCG is taxed at the applicable income tax slab rate.
Tax Audit: Tax audit is a process where the books of accounts and financial statements of a taxpayer are examined and verified by a qualified chartered accountant to ensure compliance with the provisions of the Income Tax Act.
Tax Evasion: Tax evasion refers to the illegal act of intentionally avoiding paying taxes by concealing income, inflating expenses, or providing false information in tax returns.
Tax Planning: Tax planning involves arranging your financial affairs in a manner that legally minimizes your tax liability by taking advantage of deductions, exemptions, and other tax-saving strategies.
Advance Pricing Agreement (APA): APA is an agreement between a taxpayer and the tax authorities to determine the transfer pricing methodology for transactions between related entities. It provides certainty and reduces disputes related to transfer pricing.
Tax Deductible: Tax deductible refers to expenses that can be subtracted from your total income to reduce your taxable income. These expenses are allowed as deductions under the Income Tax Act and can include items like medical expenses, donations to specified funds, etc.
Goods and Services Tax (GST): GST is a comprehensive indirect tax levied on the supply of goods and services. It replaced various indirect taxes like service tax, excise duty, and VAT. GST has different tax rates for different goods and services.
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Author is A Practicing Chartered Accountant with over 5 years of rich experience in Company Law, Audits, Accounts & taxation. She is keen in streamlining business accounts of the Company and provide Business advisory services She can be connected on sweta@caswetamakwana.com or on 9819244185.
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