Tax Declaration and Tax Filing: Know How They Differ

Income tax is one of the government's most significant revenue sources. This naturally means that taxpayers must be aware of each step that goes into paying their taxes on time. While most taxpayers in India are aware of the significance of Income Tax in their financial lives, they might find it difficult to decipher complex jargon and legalese. A common question that leaves most stumped is the nuance between the terms ‘income tax declaration’ and ‘tax filing’. 

The taxation process starts with an IT declaration and ends with IT return filing.

An income Tax declaration is an employee's information given to the employer. The declaration includes details about an employee's gross income and expenditures. It requires the employee to furnish details and evidence of investments into instruments such as PPF, life insurance, annuity plans etc., allowances such as leave travel allowance (LTA), House Rent Allowance (HRA), and interest paid on loans such as housing or educational loans.

A proper procedure needs to be fulfilled to reach an appropriate TDS figure per the employee's salary income.

When shared with the employer, this information helps them arrive at an appropriate net taxable income to deduct TDS (Tax Deduction at Source) from the salary as per the particular slab rate. The Income Tax declaration for salaried employees is to be provided to the entity deducting TDS is also important because it helps the employee claim tax benefits and influences the final tax deducted. The information must be shared towards the end of the financial year, in January or February or as required by the employer. Through Form 12BB, one can provide an estimation of their intended investment.

Through IT filing, you share details about all incomes, including but not limited to salary, with the ITD of India. As per the tax slab you fall under, the nature of your work, and many other factors, you are required to file the correct Income Tax form (there are 7 forms in total). Thus, submitting your Income Tax Return to the IT Department is known as Income Tax Return filing.

To file an income tax return accurately and in a hassle-free manner, one must consider systematically preparing before going forward to filing electronically.

Filing Income Tax returns is a mandatory process for those with an income beyond a certain threshold (for instance, INR 2.5 lakhs for the general taxpayer category). It also becomes easy to claim income tax deductions and tax refunds once the Income Tax returns are filed. The loan approval process becomes smooth because ITR filed accurately acts as proof of income.

IT filing generally takes place between April to July; in some cases, extensions are provided on the deadline. Eligible individuals must accurately file their Income Tax returns (in most cases electronically) to prevent any penalties. The ITR filing process is complete once the same is verified by the assessee online.

Any corporation or individual with income, irrespective of the amount received, must file ITR under the current rules of the Income Tax Act. At the moment, however, only if an FY's net taxable income exceeds Rs.2.5 lakhs is the tax on income due. The main categories of individuals and businesses that must pay tax if their net taxable income for Fiscal Year 2023–2024 exceeds the specified limit are as follows:

• Salaried individuals

• Self-employed individuals

• Independent professionals

• Hindu Undivided Family (HUFs)

• Association of Persons(AOP)

• Body of Individuals(BOI)

• Organisations and corporate businesses

• Local Governments

It is a statement that has to be submitted to the employers by the employees, usually at the end of the year.

According to the IT Act, it is compulsory to file income tax returns in cases:

• If during a fiscal year, your gross annual income exceeds Rs.25s lakhs. For elderly citizens and people over 80, this ceiling is increased to Rs.3 lakhs and Rs.5 lakhs, respectively.

• Your business exists, whether you make a profit or a loss.

• You eagerly anticipate claiming a tax refund.

• If you are an Indian resident with assets outside India, you must file an income tax return.

• If you get funds from property held in trust for religious or charitable reasons, or a political party uses it, a news organisation, educational institution, medical facility or research organisation.

• Income earned in India is taxable for NRIs.

A taxpayer can use one of the nine different income tax return forms when submitting his taxes. However, the Central Board of Direct Taxes in India states that individuals may use only the following forms to file returns:

Only individual taxpayers are permitted to file this ITR form. This form cannot be used to file returns for any other entity that must make a tax payment.

The following people are the target audience for this form:

• An individual who receives a wage or another form of income, such a pension, to support themselves.

• An individual who earns their living from just one piece of property.

• Those who have not won any unexpected fortune through horse racing, lotteries, or other means.

• A person with an annual farm income of less than Rs.5,000.

• A person who does not make any money from other businesses or from any asset sale, such as capital gains.

• People who wish to combine their income with their spouse or minor children, provided the combined income satisfies the requirements mentioned above

• A person whose income comes from various sources or investments, including fixed deposits, schemes and other income streams.

• People who do not own any assets or real estate outside of India.

• A person who receives no income from any other nation

Individuals who have funds from the sale of property or assets use the ITR-2 Form. Those who make their living in nations other than India can also benefit from using this form. This form can often be used by Hindu Undivided Families (HUF) or individuals to file their income tax returns.

The following people are the target audience for this form:

• People can support themselves with a wage or other means, such as pension

• An individual whose income, or financial gains, comes from the sale of property or other assets in India

• Individuals who do not generate any form of revenue from business activity.

• An individual with holdings outside of India.

• Someone who makes money from multiple residential properties.

• People who make their living outside of India.

• A person who makes more than Rs.5,000 per year from agriculture

• An individual who earns a living through a stroke of good luck, like winning the lottery or a horse in a race.

A new ITR form called the ITR-2A was made available for the 2015–2016 tax year. This form may be used by a single taxpayer or Hindu Undivided Family (HUF).

Below are the people for whom the ITR-2A form is intended:

• People whose primary income source is a pension or a wage.

• Individuals who make their income from several rental properties.

• An individual who has no capital gains and no income from any other businesses or the sale of assets.

• An individual who doesn't obtain income from any nation other than India.

• Person with an annual farm income of less than Rs.5,000.

• People who have not won a fortune in the lottery or through horse racing.

• Individuals who earn money through a variety of sources, including investments, shares, fixed deposits and so forth.

• An individual with no assets or property outside of India.

A Hindu Undivided Family or an individual taxpayer who is a partner in the firm but does not conduct business through the firm may find use for the ITR-3 Form. This also holds for those who don't profit financially from the business operations.

Taxpayers who solely have the following forms of taxable revenue from their business often file this form:

• Commission

• Interest

• Salary

• Remuneration

• Bonus

People who operate a business or make their income through a profession can benefit from using ITR-4 form.

There is no restriction on income when using this form, making it acceptable for all companies, endeavours, or professions. Taxpayers may also combine company revenue with income from other sources such as lottery winnings, speculative income, salaries, and real estate. Anyone can use this form to submit their ITR, including business owners, physicians, designers, retailers, contractors and agents.

Individuals or Hindu Undivided Family may file income tax returns using the ITR-4S form. The following people are the intended audience for this form:

• Individuals who are employed by any kind of business.

• Individuals whose income is based solely on one residential property.

• Those individuals who don't make capital gains from selling assets or real estate in India.

• Those have annual agricultural incomes less than Rs.5,000.

• People who do not own any assets or real estate outside of India.

• People who do not have a source of income outside of India.

The following organisations only submit income tax returns using the ITR-5 form:

• Firms

• Co-operative societies

• Local authorities

• Body of individuals

• Artificial Judicial persons

All companies use the ITR-6 form, except for those who claim tax exemption under Section 11. Organisations that obtain income from assets used for charity or religious purposes are eligible for tax deductions u/s 11. Only online submissions of this specific ITR form are accepted.

ITR-7 must be used by businesses and individuals filing ITR under the following sections:

• People who receive money from assets held in trust or under legal obligation for the benefit of religion or charity are required to file returns under Section 139(4A).

• Political parties are required to file returns in accordance with Section 139(4B) if their overall revenue exceeds the non-taxable threshold.

• The following entities must file returns under Section 139(4C):

• Any institution or organisation mentioned in Section 10(23A).

• Any group with a scientific research focus.

• Any of the establishments mentioned in Section 10(23B).

• Any media outlet.

By visiting the IT Department’s official website, you can submit an ITR. However, you must register before you can submit the IT Return online. The web platform for the electronic filing of income tax returns has recently been revised by the Government of India's Income Tax Department (ITD).

The streamlined portal makes e-filing easier, and it can be done by following the steps listed below:

• Step 1: Utilise the methods indicated in the IT rules to ascertain your tax liability.

• Step 2: Look at Form 26AS for a breakdown of your tax deducted at source payments for every quarter of the year assessed.

• Step 3: Choose which group you will belong to based on the criteria of eligibility listed by the ITD.

• Step 4: Go to the ITD's official e-filing website login to complete your electronic filing.

• Step 5: If you are using it for the first time, click on the "Register" button.

• Step 6: In case you have registered with the website already, select "Login" from the menu.

• Step 7: Click the "File Income Tax Return" option under the "e-file" menu.

• Step 8: Choose the appropriate category from the list on the internet, such as "Hindu Undivided Family(HUF)", "Individual",  etc.

• Step 9: Select the best income tax return form for your circumstances.

• Step 10: Your bank account details must also be entered. You will be asked to pre-validate the information if you have previously provided the same information.

• Step 11: After that, you'll be redirected to a new online page where you may view the ITR's pre-filled information.

• Step 12: Verify the information and make any required corrections. Validate the form once you are convinced that all pertinent information is accurate.

• Step 13: Verify the returns once the procedure is complete, and then mail a physical copy to the ITD.

To have effective tax planning, you must begin by understanding the distinction between income tax declaration and income tax return filing. Alongside, you can also consider investing in tax-saving instruments as the tax filing season nears. Such investments will help you make an informed decision regarding your finances and be integral to your tax-saving goals. In this manner, you can handily secure your future while focusing on the significance of timely and accurate income tax declaration and tax return filing.