Taxonomy

May 12, 2025

Taxonomy

Income Tax Rebate under Section 87A

One small but powerful tool salaried individuals often overlook when saving money on taxes is the Income Tax Rebate Section 87A. If you’re confused about tax-saving options, whether you’re exploring the old or new tax regime or even if you’re just learning how to file ITR online, understanding Section 87A can help you lower your tax liability smartly.

In this article, we’ll break down what Section 87A is, how much rebate you can claim, and its impact under different tax regimes.

What is Section 87A of the Income Tax Act?

Section 87A of the Income Tax Act offers a rebate to taxpayers whose total taxable income is within a certain limit. Think of it as a direct discount on your tax payable — if you meet the income condition, you can get a certain amount reduced from your final tax amount.

It’s important to note that the rebate is not a deduction from your income but a reduction in the tax you must pay after calculating it on your total income.

Budget 2025 Update

For FY 2025-26, the rebate under the new tax regime has been increased to ₹60,000.

The ₹60,000 rebate is not available on income taxed at special rates.
Under the new tax regime, individuals with an annual income of up to ₹12 lakh are now eligible for a higher tax rebate, effectively making them tax-exempt. This change benefits salaried taxpayers even further, raising the exemption limit to ₹12.75 lakh with the standard deduction.
Marginal relief under Section 87A of the Income Tax Act ensures that those slightly exceeding the ₹12 lakh income limit don’t face an excessive tax burden. This provision prevents a situation where a minor increase in income results in a disproportionately higher tax liability.
For FY 2024-25, the rebate is applicable for income up to ₹7 lakh (new tax regime) and ₹5 lakh (old tax regime).

Who Can Avail the 87A Rebate?

To claim the rebate under Section 87A:

You must be a resident individual (not applicable to firms, HUFs, companies, etc.).
After claiming deductions under Chapter VI-A (such as Sections 80C, 80D, etc.), your total income should not exceed ₹5 lakh in a financial year under the old tax regime and ₹7 lakh under the new tax regime.
The rebate is available under both the old tax regime and the new.

Rebate under Section 87A for FY 2024-25 (AY 2025-26)

Individual taxpayers whose total income falls within the prescribed limits can claim the Section 87A rebate. For FY 2024-25, the income threshold is ₹7 lakh under the new tax regime and ₹5 lakh under the old regime. If your income stays within these limits, your tax liability becomes zero.

How Much Rebate is Allowed under Section 87A?

If an individual’s total taxable income is up to ₹7 lakh and they opt for the new tax regime, they are eligible for:

For FY 2024-25 (AY 2025-26), the rebate limit under the new tax regime will continue to be ₹7 lakhs. It means a resident individual with taxable income up to ₹7 lakhs will receive a tax rebate of ₹25,000 or the actual tax payable, whichever is lower. Source: cleartax

Meanwhile, a resident individual who chooses the optional old tax regime (opting out of the new regime) and has a taxable income of less than ₹5 lakh can claim a rebate equal to:

An amount equivalent to the income tax payable on his total income or Rs 12,500, whichever is lower.

Additionally, under the new tax regime, an extra rebate benefit is available for individuals whose total income slightly exceeds ₹7 lakh. Thus, many middle-class taxpayers find the 87A rebate particularly attractive.

Example to Understand Section 87A Better

Suppose your total taxable income (after all deductions) is ₹4.9 lakh under the old tax regime. Your calculated tax is around ₹12,000.

Under the Old Tax Regime:

Income Tax Calculation:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5% of ₹2.4 lakh = ₹12,000

Your total tax payable = ₹12,000.

Since your income is below ₹5 lakh, you are eligible for a rebate under Section 87A of up to ₹12,500 or the actual tax payable, whichever is lower.
Here, you get a rebate of ₹12,000.

Final Tax Payable = ₹12,000 – ₹12,000 = ₹0

Under the New Tax Regime:

Suppose your taxable income is ₹6.8 lakh (no deductions allowed except standard deduction, if salaried).

Income Tax Slabs (New Regime):
- 0 – ₹3 lakh: Nil
- ₹3 – ₹6 lakh: 5% of ₹3 lakh = ₹15,000
- ₹6 – ₹6.8 lakh: 10% of ₹80,000 = ₹8,000

Total tax = ₹15,000 + ₹8,000 = ₹23,000
(plus cess @ 4%: ₹920)
Total tax payable = ₹23,920

Since your income is below ₹7 lakh, you’re eligible for a rebate under Section 87A up to ₹25,000 or the actual tax, whichever is lower.

Rebate = ₹23,920

Final Tax Payable = ₹23,920 – ₹23,920 = ₹0

This ensures low-income earners have zero tax liability under both options if their income falls within the eligible limit.

Key Points You Must Remember About Section 87A

Here are some important things to note:

The rebate applies only after deductions and exemptions are considered (for the old regime).
Citizens under the age of 60 can claim the benefit under 87A. Seniors above 60 but less than 80 can claim the same benefits. However, those above 80 cannot claim this rebate.
No carry-forward: If your rebate amount exceeds your tax liability, the extra rebate amount won’t be refunded.
It applies only to individual residents, not companies or firms.
The rebate is granted before adding the health and education cess.

How do you claim the rebate while filing ITR?

If you’re wondering how to file ITR online and claim the rebate under Section 87A, here’s a quick guide:

Log in to the Income Tax e-filing portal(https://www.incometax.gov.in/iec/foportal/).
Select the correct ITR form based on your income (for most salaried individuals, it’s ITR-1).
Fill your income details correctly, choosing the right regime (old/new).
The system automatically calculates your rebate under Section 87A if you qualify.
Review your Tax Computation before submission to ensure the rebate is reflected.
Verify and submit your return.

Section 87A Rebate and Investment Planning

While saving taxes is great, smart individuals also think about wealth creation.
Many experts suggest that if you get maximum benefits under Section 87A and save taxes, you should invest the saved amount wisely.

Investing in the stock market through a good stock market advisory can help you create long-term wealth.
If you’re comfortable with some risk, you can use those savings to start a SIP (Systematic Investment Plan) in mutual funds or direct equity.
Even safer options like tax-free bonds or public provident funds (PPF) can be good choices if you want assured returns.

TCS vs TDS: Does It Affect the 87A Rebate?

A common confusion among taxpayers is about TCS vs TDS (Tax Collected at Source vs Tax Deducted at Source) and whether it impacts their eligibility for the 87A rebate.

Here’s the short answer:

TDS is the tax your employer or any other deductor deducts on your behalf.
TCS is the tax that sellers collect (e.g., on the sale of a car above a certain amount or foreign remittance) when you purchase certain items.

Both TDS and TCS are credits against your final tax liability. When you file your ITR, you adjust these amounts and check whether your final taxable income is below the threshold to claim the 87A rebate.

Thus, TCS and TDS do not affect your eligibility for the rebate, but you must account for them correctly while filing your returns.

Should You Choose the Old Tax Regime or the New?

If you are specifically planning around the 87A rebate, here’s a quick thought process:

The old tax regime might still be better if you have many deductions and exemptions (like HRA, 80C, 80D, education loan interest, etc.).
The new tax regime could be a better option if you have minimal deductions and want to benefit from a higher rebate limit (₹7 lakh income level).

Conclusion

Section 87A of the Income Tax Act is a simple but highly effective tool for tax planning, especially for low and middle-income individuals. Whether you choose the old or new tax regime, understanding the 87A rebate rules can save you thousands of rupees annually.

And don’t stop at just saving taxes — take that extra money and invest wisely. Whether it’s the stock market, mutual funds, or safe government-backed instruments, building wealth over time is the key to achieving your financial goals.

FAQs

How can you claim a rebate under section 87A?
Only resident individuals can claim a rebate under Section 87A. If total income is within ₹7 lakh (new regime) or ₹5 lakh (old regime after deductions), a full rebate of ₹25,000 or ₹12,500, respectively, can be claimed while filing ITR.
Is a surcharge included when calculating the rebate under Section 87A?
Rebate under Section 87A is available to individuals with taxable income below ₹5 lakh, while surcharge applies only if taxable income exceeds ₹50 lakh. Therefore, anyone claiming this rebate will not be subject to a surcharge.
Is the rebate under section 87A available on Long Term Capital Gains (LTCG)?
Yes, a rebate under Section 87A is available on the sale of long-term capital assets, except for long-term capital gains from equity shares and mutual funds covered under Section 112A, where the rebate is not applicable.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

May 12, 2025

Taxonomy

Income Tax Notice – How To Check And Authenticate?

Paying your taxes is essential, but receiving an income tax notice can feel nerve-wracking even if you’ve done everything right. If you’ve recently received a communication from the Income Tax Department, don’t panic! Most notices are routine, and with the latest income tax notification, checking and authenticating have become much simpler. In this article, we’ll guide you through what an income tax notice is, common reasons why notices are issued, and steps to authenticate an income tax notice.

What is an Income Tax Notice?

An income tax notice is a formal communication from the Income Tax Department. It could be for various reasons: seeking additional information, clarifying discrepancies, informing about a refund adjustment, or initiating scrutiny.

According to the latest income tax notification, the government has made it mandatory that all notices be sent electronically through the e-filing portal, email, or SMS to your registered mobile number.

Why Do You Receive an Income Tax Notice?

Here are a few common reasons:

Mismatch in Income: If your declared income doesn’t match Form 26AS, AIS (Annual Information Statement), or TIS (Taxpayer Information Summary).
Unreported Income: Missing out rental income, bank interest, or capital gains.
High-Value Transactions: Big investments, property purchases, or large stock market trades are caught under direct tax rules.
Wrong Income Tax Calculation on Salary: Errors in salary declaration, especially missing deductions like HRA or 80C benefits.
Delay or Non-filing of Return: Not filing your ITR by the due date can prompt an automatic notice.
Professional Tax Issues: Professionals and freelancers who fail to pay professional tax or underreport their income can also expect to receive notices.

Types of Income Tax Notices

Based on the income tax new notification guidelines, here are the common types of notices:

Intimation under Section 143(1): Just a basic communication about processing your return, sometimes pointing out minor errors.
Notice under Section 139(9): Your filed return is defective. Minor corrections can fix this.
Notice under Section 142(1): Asking for documents and details before starting the assessment.
Scrutiny Notice under Section 143(2): A detailed check into your income, deductions, and other claims.
Notice under Section 148: Income escaping assessment — if the department believes you’ve hidden income.

How do you check if the income tax notice is genuine?

Worried if the notice is real or a scam?

Thanks to the latest income tax notification, every genuine notice from the department must now carry a DIN (Document Identification Number).

Here’s how to verify:

Visit the Income Tax e-filing portal: https://www.incometax.gov.in/iec/foportal/.
Select the “Authenticate Notice/Order issued by ITD” option.
Enter the DIN mentioned on your notice and other required details.
Click Submit to check if the notice matches the department’s records.

Alternatively, you can log in to your e-filing account and check under the ‘e-Proceedings’ or ‘View Notices’ section. It could be a fake if the DIN does not match or if you have never received any intimation about such a notice via email/SMS.

How to Authenticate an Income Tax Notice?

If you’ve confirmed your notice is genuine, the next step is to authenticate it properly. Here’s what to do:

1. Read the Notice Carefully

Check the section where the notice has been issued. It will tell you what kind of response is needed—just documentation, explanation, or a correction in your return.

2. Match it with your E-Filing Account

Your online account updates every notice issued by the Income Tax Department. Compare the notice you received with the one uploaded to your portal.

3. Confirm DIN

Again, the new income tax notification emphasizes the importance of DIN. Verify it using the steps we discussed earlier.

4. Look for Valid Communication Channels

Genuine notices are sent through:

Registered email ID
SMS from “ITDEFL” or official income tax sender IDs
Uploaded on the Income Tax portal

If the communication method seems odd (like WhatsApp or unofficial numbers), raise an alert immediately.

What To Do After Authenticating the Notice?

Once you’ve authenticated it, act quickly:

If It’s an Intimation: Usually, no action is needed unless there’s a discrepancy.
If It’s a Request for Information: Prepare your documents and submit them through your e-filing portal.
If it’s a Scrutiny Notice, you may want to seek professional help from a stock market advisor or tax consultant, especially if the notice concerns share transactions or capital gains.

Latest Notification of Income Tax You Must Know

As per the income tax new notification, here are some recent changes to keep in mind:

All communication must have DIN: Any notice without it is invalid.
E-verification: Simple cases can now be closed through online e-verification without personal appearances.
Increased Use of Technology: Notices are more automated and based on matching third-party data, like bank accounts, credit card spending, stock market advisor reports, etc.

Importance of Income Tax Calculation on Salary

One of the primary triggers for notices is errors in income tax calculation on salary. People often:

Forget to include allowances
Skip declaring other incomes.
Fail to claim deductions properly.

Using salary slips, Form 16, and consulting tools like income tax calculators can help you avoid such mistakes. Always cross-verify your salary-related income against AIS/TIS reports.

Professional Tax and Income Tax – Know the Difference

Many people confuse professional tax and income tax. Here’s the difference:

Professional Tax: A state-level tax deducted by your employer every month. Very small amount — capped at Rs. 2500 per annum in most states.
Income Tax: A central government direct tax based on your annual income.

Missing professional tax payments (for freelancers or consultants) can sometimes cause issues, especially in states such as Maharashtra, Karnataka, and Tamil Nadu, where enforcement is strict.

Conclusion

Receiving an income tax notice is not as stressful as it may seem. Thanks to the latest notification of income tax, the entire process has become more streamlined and transparent. It’s important to stay calm, understand the reason behind the notice, and verify its authenticity using the DIN. Responding promptly within the given timeline is crucial, and seeking professional help can make a big difference, especially in complex situations.

FAQs

How do I check if an Income Tax notice is genuine online?
Log in to your e-filing account on the official Income Tax e-filing portal. Navigate to the “e-Proceedings” tab to view all notices issued to you.
What details should I verify on an Income Tax notice?
Check for your PAN, assessment year, the issuing authority’s name, DIN (Document Identification Number), and the specific section of the Income Tax Act mentioned.
What is a DIN and why is it important?
DIN is a unique alphanumeric number on every communication from the Income Tax Department, ensuring its authenticity and preventing fraudulent notices.
Can I authenticate a notice if I haven’t e-filed?
Yes, you can use the “Authenticate Notice/Order Issued by ITD” option on the e-filing portal by entering the PAN and DIN mentioned on the notice.
What should I do if I suspect a fake Income Tax notice?
Do not respond directly. Verify its authenticity on the e-filing portal. If suspicious, report it to the Income Tax Department immediately.

May 12, 2025

Taxonomy

Income Tax Act 1961: Chapters, Objectives, Features, Provisions

As March closed this year, many businesses nationwide fulfilled a familiar annual obligation: paying their income taxes. For some, it was a routine they’ve followed for years; for others, it marked a first step into financial responsibility.

What stands out in this process is the structured clarity: specific rules determine how much one must pay, which exemptions apply, and by when payments must be made. These well-defined provisions are rooted in the foundational document of India’s taxation framework, the Bare Act of Income Tax Act of 1961. But was uniformity the only goal behind its creation? How does it help the taxpayers and clarify income tax basics? Let’s understand.

What Is Income Tax Act 1961?

The Income Tax Act, 1961, is the primary legislation governing the levy and collection of income tax in India. It took effect on 1 April 1962 and provides a comprehensive legal framework that guides how individuals, companies, and other entities are taxed on the income they earn.

The Act holds 23 chapters and 298 sections, covering various income tax concepts, rules, definitions, and procedures related to the Income Tax Rules 1961. It is the primary document used by the Income Tax Department to assess income, determine tax liability, process returns, and conduct audits. In simpler terms, the Act outlines:

What income is taxable?
Who needs to pay tax?
What are the procedures for filing returns, paying taxes, and resolving tax-related issues?
How is the tax to be calculated and paid?

Features Of The Income Tax Act 1961:

The Income Tax Act, 1961, has several essential features that define how income tax is levied and administered in India. These include-

Direct Tax: Income tax is a direct tax, which means it must be paid directly by the person or entity earning the income. The tax burden cannot be shifted to another person.
Governed by the Central Government: The income tax system in India is administered and regulated by the Central Government.
Applies to Income Earned in the Previous Year: The Act taxes income earned in the preceding financial year, also known as the “previous year,” and the tax is assessed in the “assessment year” that follows. This means you pay taxes for the year, say, 2023-24, in the assessment year 2024-25.
Progressive Tax System: The Act follows a progressive tax structure, where tax rates increase with income. This ensures a higher contribution from those with greater earning capacity.
Deductions and Exemptions: The Act provides various deductions and exemptions, allowing taxpayers to legally reduce their taxable income. However, these benefits are subject to specified limits for each financial year.

Objectives Of The Income Tax Act, 1961:

The Income Tax Act of 1961 was designed to collect revenue and support India’s broader economic goals. The major objectives behind introducing the Income Tax Act 1961 are:

Generating Revenue for National Development

The core purpose of imposing taxes is to raise funds for the government’s various social welfare initiatives and developments. These include developing public infrastructure, improving healthcare and education, offering subsidies, and strengthening national defense, all of which contribute to society’s broader development.

Responding to Economic Conditions

Tax policies under the Act are designed to be flexible. During economic slowdowns, lower tax rates can help boost spending and investment, while higher rates in times of growth can help curb excess demand. This helps maintain financial stability through changing cycles.

Encouraging Domestic Growth

The Act includes provisions for import duties on specific goods to support local industries. This discourages excessive imports and creates a more favorable environment for domestic production and job creation.

Stabilizing Prices and Inflation

The Act helps manage inflation and maintain price stability by influencing spending patterns through direct taxation. Setting tax rates and rules helps control excessive private spending, reducing the chances of commodity prices rising.

Boosting Employment Opportunities

When taxation is reduced in specific sectors or income brackets, it can increase demand for goods and services. This growth in demand encourages businesses to expand and hire, indirectly contributing to employment generation.

Structure Of The Income Tax Act, 1961:

The Income Tax Act of 1961 comprises various chapters, provisions, and rules that govern the imposition and collection of taxes in India. These elements are as follows:

A] Chapters Of The Income Tax Act:

The Income Tax Act is divided into 23 chapters, each focusing on a different aspect of taxation in India.

Chapter	What It Defines
Chapter I	Overview of the Income Tax Act
Chapter II	Scope and applicability of the Income Tax Act
Chapter III	Provisions for income not considered part of the total income
Chapter IV	Method of calculating total income
Chapter V	Income sources like salary, capital gains, business profits, etc.
Chapter VI	Provisions for set-off and carry forward of losses and determination of aggregate income
Chapter VIA	Deductions available to assessees (individuals and entities) for calculating total income
Chapter VIB	Deductions and exceptions available specifically for companies
Chapter VII	Income not subject to income tax or exempt from tax
Chapter VIII	Rebates and reliefs applicable to specific incomes when calculating tax
Chapter IX	Double taxation relief for international income
Chapter X	Special exemptions and cases where assessees are exempt from income tax
Chapter XA	General anti-avoidance rules for income tax
Chapter XI	Tax implications on undistributed profits
Chapter XII	Tax calculation rules for special cases
Chapter XIIA	Special rules for taxation of Non-Resident Indian (NRI) income
Chapter XIIB	Special tax provisions for certain companies
Chapter XIIBA	Special provisions for limited liability partnerships (LLPs)
Chapter XIIBB	Tax rules for foreign banks’ Indian branches converting to subsidiaries
Chapter XIIBC	Special tax rules for Indian Resident companies
Chapter XIIC	Special tax rules for the retail trade sector
Chapter XIID	Special rules for the distributed profits of domestic companies
Chapter XII DA	Tax rules for the income of companies involved in share buybacks
Chapter XIIE	Tax rules for distributed income
Chapter XIIEA	Special tax rules for income distributed by securitization trusts
Chapter XIIEB	Tax rules for income of accredited institutions and trusts
Chapter XIIF	Special tax rules for income from venture capital funds and companies
Chapter XIIFA	Special tax rules for business trusts
Chapter XIIFB	Tax rules for investment fund schemes
Chapter XIIG	Special tax rules for shipping organizations
Chapter XIIH	Tax implications on fringe benefits
Chapter XIII	Information on Income Tax Authorities
Chapter XIV	Procedures for income tax assessment
Chapter XIVA	Special rules to avoid repeated appeals
Chapter XIVB	Special rules for assessing search cases
Chapter XV	Tax liabilities in special cases
Chapter XVI	Special tax rules applicable to firms
Chapter XVII	Rules for tax collection and recovery
Chapter XVIII	Tax relief on dividend income in specific cases
Chapter XIX	Tax Refunds
Chapter XIXA	Settling tax disputes through case settlements
Chapter XIX-AA	Role of the Dispute Resolution Committee in specific tax cases
Chapter XIXB	Rules for advance tax rulings
Chapter XX	Appeals and revisions in tax cases
Chapter XXA	Rules for immovable property acquisition to prevent tax evasion
Chapter XXB	Modes of accepting payments in special tax evasion cases
Chapter XXC	Rules for the central government to buy immovable property in certain transfer cases
Chapter XXI	Penalties for tax evasion
Chapter XXI	Punishable offences and prosecutions
Chapter XXIB	Certificates of tax credit
Chapter XXIII	Miscellaneous provisions related to income tax assessments and other cases

B] Provisions Of The Income Tax Act, 1961:

The provisions of the Income Tax Act outline the specific rules and guidelines for calculating, collecting, and enforcing taxes. These provisions ensure taxpayers are clear about their obligations and the processes they must follow. These provisions include:

Tax appeals and litigation: Provisions for appealing tax assessments in higher courts (Section 260A to the High Court, Section 261 to the Supreme Court).
Information disclosure: Requirements for filing annual financial transaction statements.
Representation: Guidelines for authorized representatives who can act on behalf of taxpayers.
Taxability: Specifies which income is subject to tax and which is exempt.
Assessment procedure: Outlines the steps taken by income tax officers for tax assessment and the process for disputes and appeals.

C] Schedules to the Income Tax Act

Apart from its chapters and provisions, the Income Tax Act also includes Schedules, which serve as annexures to the main Act. These schedules have been added and updated over time to address areas and scenarios not initially covered within the legislation’s main body.

They aim to ensure the Act remains comprehensive and adaptable, accommodating evolving tax-related requirements and exceptional cases. With these, the IT Act becomes better equipped to handle complex or unique situations that arise in taxation, making the law more inclusive and practical in its application.

Scope Of The Income Tax Act 1961:

The applicability of income tax under the Income Tax Act, 1961, is determined by an individual’s residential status. The Act classifies taxpayers into three categories:

Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non-Resident (NR)

Each category is taxed differently based on the source and nature of the income, as shown below:

Type of Income	Resident and Ordinarily Resident (ROR)	Resident but Not Ordinarily Resident (RNOR)	Non-Resident (NR)
Income received or deemed to be received in India	Taxable	Taxable	Taxable
Income accrued or deemed to accrue in India	Taxable	Taxable	Taxable
Income earned abroad from a business or profession controlled from India	Taxable	Taxable	Non-taxable
Income earned abroad from a business or profession managed and operated outside India	Taxable	Non-taxable	Non-taxable
Past foreign income that was not taxed earlier but later brought into India	Non-taxable	Non-taxable	Non-taxable

Bottomline:

The Income Tax Act of 1961 has helped the government and taxpayers by creating a structured income assessment and tax collection system. It also supports investors by defining tax rules around capital gains, dividends, and other income sources. These provisions help investors plan better and understand the tax implications of their financial decisions. A share market advisor often refers to these rules while guiding clients on investments.

Overall, the Act has helped improve tax compliance, reduce disputes, and bring consistency to India’s taxation system. It continues to evolve with the economy, ensuring it stays relevant for policy-makers and taxpayers.

FAQs:

What types of income are taxable under the Income Tax Act?
Income from salary, house property, business or profession, capital gains, and other sources (like interest or lottery winnings) is taxable.
Has the Income Tax Act changed over time?
Yes, it is regularly amended through Finance Acts passed during the Union Budget.
How does the Income Tax Act impact investors?
It defines the tax treatment of capital gains, dividends, and other investment income, which helps in devising tax-efficient investment strategies.

February 17, 2025

Taxonomy

What Is the Tax-to-GDP Ratio? What Is a Good One?

Let’s return to school and look at a familiar example—test scores. Suppose you scored 85 out of 100 while your friend from another class got 65 out of 70. At first glance, 85 seems higher than 65, but can we say you performed better? Not necessarily, because factors like total marks, difficulty level, and subjects differ. To make a fair comparison, we convert both scores into percentages.

Now, let’s pan out and look at a bigger scale- comparing a nation’s tax revenue and tax systems. Since countries vary in size, economy, and population, tax revenue alone isn’t enough for comparison.

That’s where the tax-to-GDP ratio comes in—offering a standardized way to assess a country’s taxation efficiency. Let’s dive deeper into what this ratio means and how it connects with different income tax concepts.

What is the Tax-to-GDP ratio?

The tax-to-GDP ratio measures the proportion of a country’s tax revenue relative to its total economic output (GDP). It reflects how effectively a government collects taxes and whether it has sufficient funds to meet public expenditures. A higher ratio suggests a well-funded government capable of investing in infrastructure, public services, and economic development, while a lower ratio may indicate revenue constraints and reliance on borrowing.

This ratio also serves as a benchmark for comparing tax policies across countries. Developed nations usually have higher tax-to-GDP ratios, supporting extensive public services, whereas developing economies may struggle with lower tax collections. In India, the Direct Tax-to-GDP ratio reached 6.6% in 2023-24, the highest in 15 years.

How Is Tax-to-GDP Ratio Calculated?

The tax-to-GDP ratio is calculated using the following formula-

Tax-to-GDP Ratio = (Total Tax Revenue Gross Domestic Product)* 100. Here,

Tax revenue is the total amount a government collects in taxes within a specific period.
Gross Domestic Product (GDP) represents the total value of goods and services produced in the country during the same period.

For instance, say there are two countries- M and N

	Country M	Country N
Tax Revenue	Rs.7 lakh crore	Rs.5.5 lakh crore
GDP	Rs.21 lakh crore	Rs.25 lakh crore

The tax-to-GDP ratio by country would be

Country M = (7 lakh crore / 21 lakh crore) x 100 = 16.67%
Country N = (5.5 lakh crore / 25 lakh crore) x 100 = 22%

Even though Country N collects more tax revenue, its higher tax-to-GDP ratio suggests a more efficient tax collection system than Country M. This is why economists, investors, and stock advisory firms use the metric to assess a country’s financial strength and economic structure.

What Is The Optimal Tax-to-GDP Ratio?

The World Bank identifies 15% as the ideal tax-to-GDP ratio for sustainable economic growth and development. This threshold is crucial for countries transitioning from low-income to middle-income status, allowing governments to invest in essential public services, reduce economic volatility, and foster inclusive growth.

Why is 15% considered optimal? Research suggests that:

A tax-to-GDP ratio of at least 12.5% is linked to a noticeable acceleration in economic growth over the next decade.
13% is associated with stronger inclusive growth, reducing income inequality, and enabling better access to public services.
At 15%, countries usually transition from low to middle-income status. Data shows that in the decade leading up to this transition, nations experienced a 3-4% increase in their tax collection relative to GDP.

While crossing the 15% threshold can significantly impact a country’s growth and stability, increasing tax revenues is challenging. Most countries raise their tax-to-GDP ratio by only 3 percentage points over a decade, making the jump from 7% (common in weaker economies) to 15% a long-term effort. (Source: World Bank )

What is India’s Tax-to-GDP Ratio?

India’s tax-to-GDP ratio has fluctuated over the years, reflecting economic shifts, policy changes, and structural challenges. The ratio dropped from 11% in FY19 to 9.9% in FY20, largely due to the economic slowdown. It improved slightly to 10.2% in FY21, aided by post-pandemic recovery. In FY 2024-25, India’s tax-to-GDP ratio stands at 11.8%, marking progress but still trailing behind global benchmarks.

India’s figures remain modest compared to developed nations, where tax-to-GDP ratios exceed 30%. Even similar-sized economies like the UK (24.9%), France (24.6%), and Italy (24.6%) have significantly higher tax collections relative to GDP. South Africa, with a smaller economy, maintains a ratio of 24.2%—more than double India’s.

Several factors contribute to India’s lower tax-to-GDP ratio:

Large informal sector – A significant portion of economic activity remains outside the formal tax system.
Tax evasion & narrow base – Despite a population of over 140 crore, only 6.5 crore individuals filed income tax returns in FY 2023-24.
Heavy reliance on indirect taxes – India’s tax structure leans on indirect taxes (5.6%) rather than direct taxes (6.1%), which can be regressive. (Source: PWC)

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How Does the Tax-to-GDP Ratio Affect the Economy?

Public Services & Infrastructure

A higher tax-to-GDP ratio allows governments to invest more in essential public services like healthcare, education, and infrastructure. This improves quality of life and supports long-term economic growth.

Fiscal Stability & Debt Management

A healthy tax-to-GDP ratio reduces reliance on borrowing, ensuring the government can meet its financial obligations without excessive debt accumulation. Low ratios may lead to fiscal deficits and higher public debt.

Income Distribution & Social Welfare

A progressive tax system with a high tax-to-GDP ratio enables better wealth distribution. If used effectively, tax revenues can support social welfare programs, reducing income inequality.

Investment & Economic Growth

The impact on investment depends on tax policies. Excessively high tax rates can discourage private investment, while a moderate tax-to-GDP ratio with stable policies fosters investor confidence and economic expansion.

Bottomline:

The tax-to-GDP ratio is a vital indicator of a country’s fiscal strength, influencing economic stability, public investment, and business confidence. While a higher ratio enables better infrastructure and social spending, excessive taxation can deter investment and economic growth. Conversely, a lower ratio may indicate limited government revenue, affecting essential services and long-term development.

Navigating these dynamics is important for investors as it affects business confidence and long-term financial security. Tools like a retirement planning calculator can help individuals assess tax implications and plan effectively for future financial goals, ensuring stability amid changing tax policies.

FAQs

What is income tax?
The government levied Income tax on an individual’s or entity’s earnings based on applicable tax slabs and regulations.
What factors affect a country’s tax-to-GDP ratio?
Economic Policies: Tax rates, exemptions, deductions, and incentives all affect the total tax collected.
Economic Growth: When the economy grows, incomes and profits usually rise, increasing tax revenue.
Tax Administration: Efficient tax collection and efforts to combat tax evasion directly impact the tax-to-GDP ratio.
Sectoral Composition: Economies with high-tax sectors typically have higher tax-to-GDP ratios than those reliant on low-tax sectors.
Informal Economy: A larger informal sector often results in lower tax collection, as many transactions are unrecorded and untaxed.
What is India’s direct tax-to-GDP ratio?
India’s direct tax-to-GDP ratio stood at 6.6% in 2023-24 and is expected to increase to 6.7% in 2024-25.

February 13, 2025

News, Taxonomy

New Income Tax Bill to Be Announced Today—Here’s What It Means for You

Today, Union Finance Minister Nirmala Sitharaman is set to introduce the much-anticipated Income Tax Bill 2025 in the Lok Sabha. This new bill will replace the Income Tax Act of 1961, bringing significant changes aimed at simplifying the tax system for both individuals and businesses across India. The primary goal of this reform is to make tax laws more accessible, transparent, and easier to navigate.

Tax regulations have long been perceived as complex and cumbersome, often confusing taxpayers about filing requirements, deductions, and applicable rates. The introduction of the Income Tax Bill, 2025 is expected to address these concerns by streamlining provisions, introducing new concepts like the ‘tax year’, and updating regulations related to digital assets like cryptocurrencies.

Let’s review the key elements of the new bill and explain what these changes mean for taxpayers.

Why Is a New Income Tax Bill Being Introduced?

The existing Income Tax Act of 1961 has served India’s economy for over six decades. However, the numerous amendments and additions have made it complex and challenging for the average taxpayer to interpret. According to Finance Minister Sitharaman, this new bill aims to create a more straightforward tax structure that minimizes confusion and encourages voluntary compliance.

The new bill is expected to achieve the following:

Simplify Tax Language: Reduce technical jargon to make tax rules more comprehensible.
Modernize Tax Administration: Align tax provisions with contemporary economic practices, especially regarding digital transactions.
Promote Compliance: Introduce streamlined processes and taxpayer-friendly measures to encourage timely tax filing.
Ensure Fairness: Establish a Taxpayers’ Charter to protect taxpayer rights and promote fairness in tax administration.

By doing so, the government aims to ease the compliance burden for individuals and businesses. Source: Economic Times

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Key Changes in the Income Tax Bill, 2025

1. Introduction of the ‘Tax Year’ Concept

One of the most notable changes is introducing a ‘tax year’, which will replace the concepts of ‘previous year’ and ‘assessment year’.

Currently, taxpayers often struggle to distinguish between the financial year and the assessment year. Under the new bill, the tax year will directly align with the financial year (April 1 to March 31), simplifying record-keeping and filing processes.

For new businesses or sources of income, the tax year will begin on the commencement date and end on March 31 of the same financial year. This change is expected to reduce filing errors and streamline the tax reporting process.

2. Revised Income Tax Slabs

The Income Tax Bill 2025 introduces revised tax slabs with more progressive rates to ease the burden on middle-income earners. The updated tax slabs are as follows:

Income Slab (₹)	Tax Rate
Up to 4,00,000	No Tax
4,00,001 – 8,00,000	5%
8,00,001 – 12,00,000	10%
12,00,001 – 16,00,000	15%
16,00,001 – 20,00,000	20%
20,00,001 – 24,00,000	25%
Above 24,00,000	30%

What This Means for You:

Individuals earning up to ₹4 lakh annually remain exempt.
Middle-income taxpayers will benefit from reduced rates in comparison to the previous regime.
Higher-income brackets retain a maximum tax rate of 30%.

These adjustments aim to increase disposable income for individuals in lower and middle-income categories while maintaining the progressive structure of direct taxation.

3. Simplification of Deductions: What Happens to Sections 80C and 80D?

The new bill simplifies the structure of deductions by consolidating various sub-sections under Section 80.

Section 80C (investments in PPF, ELSS, LIC) and Section 80D (health insurance premiums) will continue to exist. However, these sections will undergo renumbering and restructuring for better clarity. The overall deduction framework will be easier to understand, eliminating redundant clauses and unnecessary complexities.
This change ensures taxpayers can continue to claim deductions on eligible investments while dealing with fewer technicalities during filing.

4. Taxpayers’ Charter: Your Rights as a Taxpayer

The bill mandates the creation of a Taxpayers’ Charter by the Central Board of Direct Taxes (CBDT). This charter will:

Protect taxpayer rights
Ensure transparency in tax proceedings
Guarantee privacy of taxpayer information
Hold tax authorities accountable for timely resolution of disputes

The charter is intended to build trust between taxpayers and tax authorities, fostering a culture of voluntary compliance.

5. Digital Transactions and Cryptocurrencies

As digital assets become increasingly popular, the bill introduces new regulations for cryptocurrency transactions. The bill will:

Define taxation norms for gains from digital assets.
Outline reporting requirements for crypto transactions.
Provide clarity on tax treatment for virtual digital assets (VDAs).

This move reflects the government’s commitment to regulating the rapidly evolving digital economy while ensuring tax compliance. Source: Money Control

Some Common Questions You May Have:

1. How Will the New Tax Slabs Affect Me?

The revised tax slabs primarily benefit middle-income earners. For instance, if your income is ₹10 lakh per year, you will now be taxed at 10% on the portion above ₹8 lakh—significantly lower than previous rates.

2. What Happens to Existing Deductions Like 80C and 80D?

While these deductions will continue, the structure will be simplified. The familiar benefits from investments in PPF, ELSS, LIC, and health insurance premiums remain intact.

3. Will the New Concept of ‘Tax Year’ Change My Filing Process?

Yes, but for the better. The ‘tax year’ will directly correspond to the financial year, eliminating confusion around assessment years and simplifying document preparation.

4. How Does the Bill Impact Cryptocurrency Investors?

The new bill provides a clearer framework for taxing gains from digital assets, including cryptocurrencies. Taxpayers in crypto trading should stay informed about specific rules under this category.

5. Will There Be Any Change in Corporate Tax Provisions?

While the primary focus is on individual taxpayers, some corporate tax procedures have been streamlined. Subsequent policy updates will announce further details. Source: Deccan Herald

Conclusion: A Step Towards Simplified Taxation

The Income Tax Bill 2025 marks a significant shift in India’s taxation landscape. By introducing straightforward language, modernizing tax procedures, and simplifying deduction structures, the bill aims to reduce taxpayer confusion and improve compliance rates.

The new provisions surrounding ‘tax year’, updated tax slabs, and digital asset taxation reflect the government’s proactive approach to aligning tax laws with modern economic realities. As the bill progresses through parliamentary scrutiny, taxpayers are advised to stay informed and understand the potential implications for their financial planning in the years to come.

The proposed changes will take effect on April 1, 2026. This reform is not just a legal amendment—it represents a move towards a more efficient, transparent, and accessible tax system for every Indian citizen.

January 17, 2025

News, Taxonomy

What to Expect from Budget 2025: Tax Cuts and Growth-Driven Reforms Under Modi 3.0?

As Budget 2025 approaches, all eyes are on Finance Minister Nirmala Sitharaman to unveil measures that will shape the economic landscape of India. Citizens, businesses, and economists are keen to see how the government addresses critical issues like GDP growth, infrastructure, taxation, and manufacturing.

This will mark Finance Minister Nirmala Sitharaman’s second full-fledged Budget under Modi 3.0 and her eighth Budget presentation in Parliament.

Based on past conventions, the Finance Minister is anticipated to deliver the Union Budget 2025 speech at 11 a.m. on February 1, 2025. However, the Finance Ministry has yet to confirm this date officially.

Notably, she concluded Pre-Budget consultations with various stakeholders, unions, and other representatives on January 6 before commencing work on the Budget for 2025-26. Source: Mint

Stock Markets to Remain Open on Budget Day

Unlike regular weekends, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) will remain operational on Saturday, February 1, 2025, due to the Union Budget 2025-26 presentation.

Typically, Indian stock markets remain closed on Saturdays and Sundays, but this special session underscores the significance of Budget Day for financial markets.

Based on expert opinions and key trends, here’s a breakdown of what you can expect from this year’s budget.

Focus on Economic Growth

India has demonstrated resilience in the face of global challenges, but sustaining robust GDP growth remains a priority. The government is likely to introduce policies that stimulate investment and consumption. Infrastructure continues to be a cornerstone of economic growth.

The middle class anticipates relief in personal income taxes to boost disposable incomes. Changes in the Goods and Services Tax (GST) structure are also anticipated.

Budget 2025 may see enhanced allocations to:

GDP Growth Revival	Investment Incentives: Expect schemes to attract private and foreign investments in manufacturing, technology, and green energy. Boosting MSMEs: Special focus might be placed on micro, small, and medium enterprises (MSMEs) to aid recovery and growth.
Push for Infrastructure Development	Road and Rail Networks: Expanding national highways and modernizing railways to improve logistics. Urban Infrastructure: More funds for smart cities and metro projects to meet urban demands.
Direct Tax Reforms & Corporate Tax Adjustments	Higher Exemption Limits: The basic exemption limit could be raised, benefiting taxpayers. Simplified Tax Structure: Streamlining tax slabs and reducing complexities in filing returns might be on the agenda. Reduction in Tax Rates: Especially for small businesses and start-ups in emerging sectors like renewable energy and AI.
GST Rationalization	Simplified Rates: Reduction in the number of tax slabs. Sector-Specific Relief: Lower GST for sectors like healthcare and education.
PLI Schemes Expansion	Extend PLI benefits to sectors like textiles, toys, and green hydrogen. Increase allocations for existing schemes to attract more global players.
Export Promotion	Provide incentives for exporters and reduce bureaucratic hurdles in trade processes.
Green Economy and Sustainability	Solar and Wind Energy Projects: Incentives for private players investing in clean energy. Green Bonds: Financing environmentally sustainable projects.
EV Sector	Expand subsidies for EV buyers and enhance the EV ecosystem with better-charging infrastructure.
Agriculture and Rural Development	Increase MSP (Minimum Support Price) for key crops and allocate funds for agri-tech and irrigation projects.
Rural Employment	Expect enhanced funding for employment schemes like MGNREGA to boost rural livelihoods.
Defense and National Security	Modernization of Armed Forces: Allocations for advanced weaponry and technology. Domestic Defense Manufacturing: Incentives for companies producing defense equipment locally.
Digital and Tech Revolution	Funds for expanding 5G networks and investments in AI, machine learning, and blockchain technologies.
E-Governance and Digital India	Expanding digital payment systems and improving access to government services via digital platforms.

Source: Mint

Let’s explore the key sectors where government support and reforms are anticipated to be a major focus in Budget 2025.

Strong Support for Startups Anticipated

Industry experts expect the government to maintain robust support for India’s thriving startup ecosystem in the Union Budget 2025. They anticipate focused measures, such as enhanced financial support mechanisms and simplified regulatory frameworks, to empower the sector further.

Section 80-IAC of the Income Tax Act allows eligible start-ups to claim a 100% tax deduction on profits for any three consecutive years within a ten-year window, provided the start-up is incorporated between April 1, 2016, and March 31, 2025. Experts believe that to further boost start-up growth in India, the incorporation deadline for eligible start-ups should be extended.

Empowering Taxpayers with Fair Reforms

According to industry experts, India’s tax reforms should empower the middle class and enhance compliance. Reducing the average tax rate to 10% for incomes up to ₹20 lakh can lower financial burdens, boost savings, and drive economic growth.

Additionally, synchronizing direct and indirect taxes—such as income tax and GST—can simplify taxation. A transparent, fair, and rewarding tax system will ease financial pressure and strengthen the economy.

Will Tax Cuts Be on the Agenda?

The Budget 2025 is expected to deliver tax relief while balancing revenue needs. Taxpayers anticipate a higher rebate for lower-income groups and an increased basic exemption limit under both tax regimes to ease inflation pressures. Enhancing presumptive taxation limits for businesses and professionals under Sections 44AD and 44ADA is also a key expectation.

Homebuyers hope for higher interest deduction limits on housing loans, with suggestions to raise the cap under Section 24(b) from ₹2 lakh to ₹3 lakh. Simplifying faceless appeals and TDS for non-residents remains crucial. Source: Economic Times

Boosting Real Estate Growth

Experts believe raising the long-stagnant tax exemption limit on home loan interest can reduce homebuyers’ financial burden and improve affordability. Granting industry status to real estate will help developers access structured financing and lower borrowing costs. Simplifying GST rates and input tax credit mechanisms will further enhance affordability. Policies for new greenfield cities and upgrading urban infrastructure are crucial to meet rising demand and ensure sustainable growth.

Strengthening Online Education

The Union Budget 2025-2026 presents a chance to boost India’s online education system, supporting the NEP 2020 goal of allocating 6% of the GDP to education.

Experts expect the budget to focus on creating standardized quality frameworks for online programs and improving institutions’ digital infrastructure. Additionally, initiatives to bridge information gaps, offering career counseling and digital literacy programs are also anticipated. These steps will help students make informed decisions and enhance access to quality education.

Boosting Financial Education

The Union Budget 2025-26 offers a key opportunity to enhance India’s financial education through edu-fintech partnerships. The budget is expected to introduce initiatives supporting digital financial literacy, including tax incentives for platforms offering specialized financial education and skill development programs. These measures will help improve financial knowledge and empower individuals to make informed financial decisions.

Relief Measures for Study-Abroad Aspirants is Expected

The Union Budget 2025-26 should address the rising costs faced by Indian students pursuing international education due to global inflation. Key measures could include reducing education loan interest rates and expanding financial aid for study-abroad aspirants.

Encouraging collaborations with foreign universities and simplifying procedures for establishing Indian campuses can also boost opportunities. According to experts, these steps will make global education more accessible, empowering Indian students to gain international exposure and contribute to India’s global presence in education.

Focus on Women, Youth, Farmers, and the Underprivileged

Industry experts hope for continued focus on infrastructure, fiscal prudence, and support for women, youth, farmers, and the underprivileged through skilling, welfare, and financial assistance. Key areas to address include boosting private consumption, reviewing income tax slabs, and reassessing interest rates for EMI relief. These measures can boost industries like consumer durables, encourage private investment, and promote innovation, PLIs, and sustainable growth for inclusive development.

What the Tourism Industry Wants

The tourism industry hopes for key measures to support growth ahead of the Union Budget. This includes granting industry status to hospitality, allowing GST credit for hotel construction, and rationalizing GST rates to reduce accommodation costs. These steps would boost domestic and inbound tourism.

The industry also seeks funding for an international campaign under the Incredible India initiative. Additionally, support for the growing homestay sector and resolving GST issues for Online Travel Agents (OTAs) are crucial for streamlining operations and reducing costs.

Budget 2025 Expectations: Higher Budget for Indian Railways?

The upcoming Budget may allocate 15-20% more capital expenditure for Indian Railways in FY26, increasing the total to over Rs 3 lakh crore from Rs 2.65 lakh crore this year. The focus will be improving infrastructure, including commissioning upgraded railway stations, launching modern trains, and decongesting the track network. This boost in funding aims to enhance the efficiency and modernization of the national transporter’s operations.

Will Railways Get Bigger Allocation for Passenger Safety?

Indian Railways is at a crucial point, needing both modernization and urgent safety improvements. The tragic Odisha rail accident in 2023 and multiple incidents in 2024 highlight the ongoing safety concerns. With over 70 derailments and several fatal accidents, there is a growing demand for greater investments in safety measures. The upcoming budget may address these issues, prioritizing passenger safety with a larger railway infrastructure and upgrade allocation.

Boost for Preventive Healthcare in India

India’s preventive healthcare sector holds significant potential, especially nutraceuticals (Nutraceuticals are products derived from food sources that provide health benefits beyond basic nutrition). To unlock this, the Union Budget should focus on reducing the 18% GST on nutraceuticals to 5% for better affordability.

Additionally, 50% capital subsidies for certified manufacturing units in smaller cities would encourage local production. Subsidies for digitization and digital payments are crucial for enhancing digital infrastructure.

Retail Sector’s Expectations from Sitharaman

The retail sector looks forward to key policy changes in the Union Budget. Stakeholders expect reduced interest rates to improve access to financing. The food & beverage (F&B) segment hopes to be recognized as an essential service with utility subsidies and land costs.

What the Insurance Sector Wants

Industry experts see the Union Budget as a crucial opportunity for the government to enhance the life insurance sector. They suggest raising tax deduction limits under Section 80C for life insurance premiums and establishing separate limits for term insurance and pension policies. Additionally, they advocate for mandatory basic term life insurance for formal employees, similar to the Employees’ Provident Fund (EPF). These measures would foster financial security and contribute to India’s long-term socio-economic development.

Challenges Ahead

While the expectations are high, the government faces the challenge of balancing fiscal discipline with growth-oriented spending.

Managing Fiscal Deficit: Efforts will be needed to keep the fiscal deficit within acceptable limits while funding key initiatives.
Global Economic Uncertainty: India must navigate global economic pressures, including inflation and trade tensions.

Budget 2025 may need to be transformative, addressing critical areas like economic growth, taxation, infrastructure, and sustainability. With its potential to shape the future of India’s economy, this budget is highly anticipated.

FAQs

What are the key expectations from the Union Budget 2025?
Taxpayers hope for reduced tax rates and exemptions, while industries seek financial support for growth. The healthcare, agriculture, and education sectors expect increased allocations. There are also calls for reforms in GST and infrastructure development.
How will the Union Budget 2025 affect individual taxpayers?
Taxpayers expect possible reductions in income tax slabs, increased exemptions, and higher rebates to increase disposable income and ease financial burdens.
What does the business community expect from the Budget?
The business sector hopes for lower corporate tax rates, tax incentives for new investments, and measures to improve the ease of doing business, which can stimulate economic growth.
Will the Union Budget 2025 focus on healthcare?
Yes, the healthcare sector anticipates a boost in spending for preventive care, including measures like lower GST on nutraceuticals and digital health initiatives.
How will the budget impact the education sector?
The education sector expects increased funding for infrastructure development, digital learning programs, and reforms to improve the quality, accessibility, and affordability of education.

October 18, 2024

News, Taxonomy

CBDT Introduces Form 12BAA: A New Way to Reduce TDS on Salaries

The Central Board of Direct Taxes (CBDT) has introduced a new form, 12BAA, to help salaried individuals reduce the Tax Deducted at Source (TDS) from their salaries. This is a significant development as it provides taxpayers with a more efficient way to manage their tax liabilities.

This new regulation, allowing employees to notify their employer about TDS from other income sources or TCS (Tax Collected at Source) collected during significant purchases, took effect on October 1, 2024. CBDT introduced this new form 12BAA, which allows employees to inform their employers about tax deductions from income sources beyond their salary. These sources could include fixed deposits, insurance commissions, dividends from shares, or taxes collected when making large purchases like cars or foreign currency. Source: Economic Times

Understanding Form 12BAA

Form 12BAA is a declaration form that salaried employees can submit to their employers to claim deductions or exemptions that may reduce their taxable income. This form allows them to inform their employer about taxes paid on other sources of income or expenses. It’s similar to Form 12BB, which is used to declare investments, ensuring the correct amount of tax is deducted from the salary.

Key Benefits of Form 12BAA

Reduced TDS: By accurately declaring deductions and exemptions, employees can ensure that the TDS deducted from their salaries is not excessive.
Enhanced Tax Compliance: Using Form 12BAA helps individuals comply with their tax obligations more efficiently.
Simplified Tax Filing: Providing accurate information on Form 12BAA can simplify filing income tax returns.
Comprehensive Tax Reporting: Modified form 12BB will allow employees to report additional income details, claim house property losses, and claim TCS credit through the employer, making the tax process more efficient and reducing evasion.
Form 12BAA to Boost Take-Home Pay: Form 12BAA will help employees reduce tax deductions on their salary by factoring in taxes paid from other income sources, ultimately increasing their take-home pay.

How Form 12BAA Helps Employees Reduce TDS from Salaries

TDS Deduction Based on Declarations	Employees can now inform their employers about TDS deducted from other income sources or TCS collected during major purchases. Before this, there was no formal way to convey this information to employers, but the new form provides a standardized mechanism for doing so.
Mechanism for Reporting Other Taxes	-Employees can now inform their employers about TDS deducted from other income sources or TCS collected during major purchases.-Before this, there was no formal way to convey this information to employers, but the new form provides a standardized mechanism for doing so.

Source: timesofindia

When to Submit Form 12BAA

Salaried employees can submit Form 12BAA to their employers anytime during the financial year. However, submitting the form at the beginning of the financial year is generally recommended to maximize the benefits of reduced TDS.

How to Submit Form 12BAA

Submitting Form 12BAA is relatively straightforward. Employees can obtain the form from their employers or download it from the CBDT website. Once completed, the form should be submitted to the employer along with supporting documents, if required.

Important Considerations

Accuracy: It is crucial to ensure that the information in Form 12BAA is accurate and complete. Inaccurate information may lead to penalties or other legal consequences.
Supporting Documents: Employers may require supporting documents to verify the claims made in Form 12BAA. It is essential to provide all necessary documentation to avoid delays or discrepancies.
Regular Updates: If any income or deductions are changed during the financial year, you may need to update Form 12BAA accordingly.

Income Tax Laws on Salary Tax Deductions

Employer’s Duty to Deduct Tax

Under Section 192 of the Income-tax Act, employers must deduct tax from the salary paid to employees.
The tax deduction is based on the employee’s chosen tax regime, either the new or old system.

Choosing Between Tax Regimes

Employees have the option of choosing between the new tax regime, which offers lower tax rates but fewer exemptions, and the old regime, which includes various deductions and exemptions.

Investment Declaration for Lower TDS

Employees need to submit an investment declaration to their employer to reduce the tax deducted from salary. This helps employers adjust the TDS by accounting for eligible deductions and exemptions based on the regime selected by the employee.

Additional Tips for Maximizing Tax Savings

Plan Ahead: Start planning your tax deductions and exemptions well in advance to ensure that you take advantage of all available opportunities.
Consult a Tax Professional: If you are unsure about which deductions or exemptions you are eligible for, it is advisable to consult with a tax professional for guidance.
Stay Updated: Stay informed about the latest tax laws and regulations to avoid penalties or interest charges.

By understanding and effectively utilizing Form 12BAA, salaried employees can significantly reduce their TDS liabilities and optimize their tax savings.

FAQ

What is Form 12BAA?
Form 12BAA is a new form introduced by the Central Board of Direct Taxes (CBDT) to simplify the process of claiming salary tax deductions. This form allows individuals to directly declare their eligible deductions to their employers, reducing the amount of Tax Deducted at Source (TDS) withheld from their salaries. This is a significant step towards making the tax filing process more efficient and convenient for taxpayers.
Who can benefit from Form 12BAA?
Form 12BAA is primarily beneficial for salaried individuals with eligible deductions under various sections of the Income Tax Act, such as Section 80C, 80D, or 80E. By submitting this form to their employers, they can ensure that the correct amount of TDS is deducted, preventing the need for excess tax to be paid during the annual tax filing process.
How does Form 12BAA work?
To use Form 12BAA, individuals need to provide their employers with a duly filled form and supporting documents for their claimed deductions. The employer will then verify the provided information and adjust the TDS deducted from the employee’s salary accordingly. This streamlined process eliminates the need for manual calculations and reduces the chances of errors.
What are the benefits of using Form 12BAA?
Using Form 12BAA offers several advantages to salaried individuals. It simplifies the tax filing process by reducing the need for manual calculations and adjustments during the annual tax return. Additionally, it helps taxpayers avoid paying excess TDS, which can be a significant financial burden. By accurately declaring their deductions, individuals can ensure that they pay only the correct amount of tax, optimizing their financial situation.

September 20, 2024

News, Taxonomy

14% Equity CAGR with NPS Vatsalya: Building Your Child’s Future from Birth

Securing your child’s financial future is one of the most important responsibilities of a parent. With rising education, healthcare, and general living costs, ensuring a strong financial foundation for your child is vital. One of the most innovative solutions to secure your child’s future financially is the National Pension Scheme (NPS) Vatsalya. Launched by the Indian government, this scheme is designed to help parents and guardians build a nest egg from birth, ensuring long-term financial security.

Since its inception, NPS has delivered highly competitive returns, with a compounded annual growth rate (CAGR) of 9.5% for the government sector. In the non-government sector, returns have been 14% in equity, 9.1% in corporate debt, and 8.8% in government securities. Initially introduced in 2004 for government employees, NPS was extended to non-government employees in 2009.

This article will explore how NPS Vatsalya works, its benefits, and how it can be a crucial tool in your child’s financial journey.

What Is NPS Vatsalya?

NPS Vatsalya is a new pension plan announced by the Indian government, specifically aimed at securing children’s financial future. Launched by Finance Minister Nirmala Sitharaman on September 18, 2023, NPS Vatsalya allows parents to start investing in their child’s future right from birth. The idea behind the scheme is to create a lifelong financial cushion that matures into a reliable pension once the child reaches adulthood, securing them against life’s uncertainties.

NPS Vatsalya is an extension of the existing National Pension Scheme (NPS), but its unique focus on children sets it apart from other investment options.

Key Features of NPS Vatsalya

Early Start	Parents can begin saving for their child’s retirement from infancy, leveraging the power of compounding.
Flexible Contributions	The minimum annual contribution is ₹1,000 with no upper limit, making it accessible to all.
Investment Options	Offers various investment options, including equity, government bonds, and corporate bonds, to cater to different risk appetites.
Partial Withdrawal	Allows for partial withdrawals before retirement under certain conditions.
Seamless Transition	Offers various investment options, including equity, government, and corporate bonds, to cater to different risk appetites.
Government-Backed	The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), providing government assurance and security.

Source: Mint

*Note: It’s important to note that parents’ contributions to NPS Vatsalya do not provide any tax benefits, unlike contributions made to the regular NPS, which qualify for deductions under Section 80C of the Income Tax Act.

How NPS Vatsalya Works

Parents or guardians can open an NPS Vatsalya account for their children by submitting key documents like Know Your Customer (KYC) details, the child’s birth certificate, and proof of identity. The account can be opened through banks, pension fund houses, or the e-NPS portal. The funds will remain locked until the child turns 60. At retirement, they can withdraw 60% of the corpus tax-free, while the remaining 40% will be converted into annuities.

For partial withdrawals, up to 25% of the corpus can be withdrawn for specific needs such as education or medical treatment for certain illnesses or disabilities. Withdrawals can be made a maximum of three times during the entire NPS tenure.

Eligibility

Parents or legal guardians can open the NPS Vatsalya account for their children as soon as they are born. The account remains active until the child reaches the age of 18, after which it converts into a regular NPS account. This allows the child to continue benefiting from the pension scheme, contributing further, or withdrawing the accumulated amount as per NPS rules.

Contribution Structure

Parents can start investing with as little as Rs. 500 per month. There is no upper limit, allowing flexibility in contributions depending on the financial situation of the family. The funds are then invested in a diversified portfolio that includes equity, corporate bonds, and government securities.

Withdrawal and Maturity

Once the child reaches adulthood (age 18), the NPS Vatsalya account transitions into a regular NPS account. The child can choose to continue contributing or withdraw a portion of the funds while keeping the remainder invested to accumulate further for retirement.

Comparison With Other Investment Options

When it comes to investing in a child’s future, NPS Vatsalya is not the only option available. Let’s compare it with other popular schemes:

	NPS Vatsalya	PPFs	MFs
Annual Min	Rs.1000 p.a.	Rs.500 p.a.	None
Annual Max	No Limit	Rs.1.5 Lakh	None
Assuming 75:25 Equity to Debt Portfolio (Since Equity Capped at 75%)
Last 10 Years	12%	7-8%	16% Flexicap Avrg.
How to Open	Via eNPS, nsdl.com, Banks	Through Bank	RIA/Distributor/Direct
Maturity	Matures at 60	Matures in 15 Yrs.	Anyday Withdrawl
Partial Withdrawal	Max 25% of Contributions	Max 50% after 4 Yrs.	No Restriction, 5 Yr. lock-in for Child Plan
Tax Deduction on Contribution	Not Clear	Yes	No
Tax on Maturity	60% Tax Free	No	12.5% Capital Gains after 1 Year.
	Corpus in 18 Yrs at 12%	Corpus in 18Yrs at 7.5%	Corpus in 18 Yrs at 15%
For 10K SIP	Rs.76.54 Lakh	Rs.45.74 Lakh	Rs.1.10 Crore
10k SIP + Step up 10%	Rs.1.44 Crore	N/A Due to Max Limit	Rs.1.94 Crore

50 Year SIP at 12% CAGR – Rs.39 Crore

Source: Mint

NPS Vatsalya vs. Mutual Funds

While mutual funds are good investment options, NPS Vatsalya offers certain distinct advantages.

Controlled Investment: NPS Vatsalya provides a controlled investment environment, ideal for long-term wealth accumulation.
Flexibility of Mutual Funds: Mutual funds offer greater flexibility, allowing withdrawals at any time, though some child-specific funds may have a five-year lock-in period.
Choosing Based on Goals: The decision between NPS Vatsalya and mutual funds depends on your preferences and your child’s future financial goals.
Controlled vs Flexible Approach: If you prefer a controlled investment, NPS Vatsalya is a strong option. For more flexibility and withdrawal access, mutual funds may be a better fit.

NPS Vatsalya vs. Public Provident Fund (PPF)

PPF is another popular investment option, but it has a longer lock-in period of 15 years. The maximum annual contribution to PPF is ₹1.5 lakh, and the interest rate is currently 7.1%, subject to quarterly revisions.

Benefits of NPS Vatsalya

1. Secure Future Planning

NPS Vatsalya provides a secure way to plan for long-term financial needs, including education, healthcare, and other life events. By investing consistently, you can accumulate a substantial amount that can cater to future financial needs.

2. Power of Compounding

One of the biggest advantages of starting early is the power of compounding. When you invest in NPS Vatsalya from the time of your child’s birth, the returns start compounding over time, generating wealth without requiring large contributions in the initial years.

3. Low Management Costs

NPS Vatsalya comes with very low management fees compared to mutual funds or other child-focused schemes. This makes it a cost-effective way to accumulate wealth over a long period.

4. Professional Fund Management

The funds under NPS Vatsalya are managed by professional fund managers, ensuring that your investments are diversified and optimized for returns. This takes the burden of actively managing the investments off your shoulders, giving you peace of mind.

Key Considerations for Parents

While NPS Vatsalya offers a host of benefits, there are certain factors you should consider before investing:

Market Risk: Since part of the investment is in equities, there is a certain level of market risk involved. However, this risk is balanced with investments in government bonds and corporate debt.
Liquidity: Unlike some other child investment schemes, NPS Vatsalya does not allow premature withdrawal except under specific conditions. Parents should be prepared for long-term commitment.
Investment Horizon: Since the scheme matures only when the child reaches 18, it is ideal for parents looking for long-term financial planning.

Conclusion: Securing Your Child’s Future

NPS Vatsalya is a forward-thinking scheme that enables parents to build a strong financial foundation for their children. With its flexibility, low management fees, and the benefit of market-linked returns, it stands out as a viable option for parents looking to create a nest egg from birth. By leveraging the power of compounding and professional fund management, NPS Vatsalya ensures that your child’s future is secure, regardless of the uncertainties of life.

Investing in NPS Vatsalya early on can set your child on the path to financial independence, giving you peace of mind that their future is well taken care of.

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

What is the significance of a 14% Equity CAGR in NPS Vatsalya?
A 14% Equity CAGR (Compound Annual Growth Rate) in NPS Vatsalya offers a substantial advantage for a child’s retirement savings. This high growth rate can lead to significant wealth accumulation over time, even with small regular contributions. It’s a powerful tool for building a strong financial foundation for the future.
Is it advisable to invest in NPS Vatsalya from birth, or should I wait until my child is older?
Starting an NPS Vatsalya account from birth offers several advantages, including the power of compounding. The earlier you start, the more time your investments have to grow. Even small contributions made early on can accumulate significantly over time.
Can I withdraw funds from my child’s NPS Vatsalya account before retirement?
While NPS Vatsalya primarily aims to provide retirement savings, there are limited circumstances under which partial withdrawals may be allowed. These typically include situations like critical illness or higher education. However, it’s important to consult with a financial advisor to understand the specific rules and requirements for withdrawals.

August 27, 2024

Personal Finance, Taxonomy

Gross Salary vs Net Salary: What’s the Difference?

Is a higher gross pay better than net pay? Are you confused about gross salary and net salary in your compensation document?

Understanding the distinction between gross and net salary is crucial when managing personal finances. These two elements play unique roles in financial planning and reflect different aspects of your earnings, though both are integral to your overall compensation.

For those just beginning their careers or seasoned professionals evaluating their compensation packages, grasping the nuances between gross and net salary is essential. This knowledge will help you build a solid financial foundation and make informed budgeting, saving, and investing decisions.

In this article, we’ll examine the distinctions between gross salary and net pay and comprehensively analyze each.

Gross Salary: Definition and Breakdown

Gross salary is an employee’s total income before any deductions are made. This figure represents an employer’s offered compensation, including wages, bonuses, allowances, and other benefits. It is the starting point from which various deductions, such as taxes and retirement contributions, are subtracted to determine the net salary (the amount the employee will take home).

Components of Gross Salary

Basic Salary: The core compensation amount forms the basis of the employee’s earnings. It is the fixed amount paid regularly, usually specified in the employment contract.

Allowances:

House Rent Allowance (HRA): Compensation provided to cover housing expenses.
Conveyance Allowance: Reimbursement for travel expenses between home and work.
Medical Allowance: Coverage for medical expenses or reimbursement for medical bills.
Special Allowance: Any additional allowances that don’t fall into other categories are often used for miscellaneous expenses.

Bonuses:

Performance Bonus: Additional pay awarded based on individual or company performance.
Festival Bonus: Paid during major festivals or at the end of the financial year.
Annual Bonus: This amount is usually given at the end of the fiscal year and is based on company performance and employee contribution.

Overtime Pay: Compensation for hours worked beyond the standard working hours or workweek. It is calculated at a higher rate than regular hours. Some companies provide this.

Commissions: Earnings based on sales or performance metrics, typically seen in sales and marketing roles.

Gratuity: A lump sum payment made to employees upon retirement or resignation, provided they have completed a certain number of years with the company. It’s calculated based on the basic salary and years of service. As of February 2024, the gratuity contribution rate in India was around 4.81% of an employee’s basic salary. However, this number may vary depending on the employer’s policies.

Other Benefits:

Car Allowance: Payment for the use of personal vehicles for work-related purposes.
Driver’s salary: This amount is paid to employees who employ drivers to commute to the workplace. This allowance is often a part of the Executive suite of employees.
Meal Allowance: Reimbursement or provision of meals during work hours.

How to Calculate Gross Income?

Gross income is the total amount an employee earns before any deductions, such as taxes or contributions to retirement funds. Add the base salary and all applicable allowances to find the gross income. Here’s how you can calculate it:

Gross Salary = Base Salary + Allowances

For example, let’s consider an employee with the following pay structure:

Basic Salary:	₹30,000
House Rent Allowance (HRA):	₹10,000
Transport Allowance:	₹1,500
Statutory Bonus	₹2,000

The calculation would be:

Gross Salary = ₹30,000 + ₹10,000 + ₹1,500 + ₹2,000

Total Gross Salary = ₹43,500*

*The gross income does not include deductions such as Provident Fund contributions or income tax, subtracted later to determine the net salary.

Net Pay: Definition and Breakdown

Net pay, or take-home pay, is the amount of money an employee receives after subtracting all deductions from their gross pay. It is the amount deposited into the employee’s bank account and available for spending or saving.

Components Included in Net Pay:

Gross Pay is the total amount earned by an employee before any deductions. It includes salary or wages, bonuses, overtime, and other forms of compensation.

Income Tax: A portion of the gross pay withheld by the employer as per the applicable tax laws and calculated based on income slabs and other factors.

Social Security Contributions: Mandatory contributions to government social security programs. It includes contributions to the Employees’ Provident Fund (EPF) and Employees’ Pension Scheme (EPS) in India.

Health Insurance Premiums: Deductions for any health insurance plans provided by the employer or chosen by the employee. It may include premiums for family coverage.

Retirement Contributions: Contributions to retirement savings plans like the Voluntary Provident Fund (VPF) or other pension schemes. Sometimes, these include employer-matched contributions.

Other Deductions: Any other deductions such as loan repayments, union dues, or contributions to employee welfare funds. Voluntary deductions, like charitable contributions, may also be included.

Bonuses and Incentives: Certain companies include bonuses or performance-related incentives in their compensation plans. These rewards can be given at regular intervals or as a single lump sum based on performance.

How to Calculate Net Pay?

Determining your net salary is a straightforward process. Here’s a step-by-step example:

Salary Breakdown

Gross Salary	₹45,000
TDS	₹600
Professional Tax	₹250
EPF Contribution	₹4,000
Insurance Premium	₹1,200

Net Salary = Gross Salary – TDS – Professional Tax – EPF Contribution – Insurance Premium

Calculation – Net Salary = ₹45,000 – ₹600 – ₹250 – ₹4,000 – ₹1,200 = ₹39,950*

*You need to deduct the professional tax when calculating your net salary. The maximum amount to be deducted annually for Professional Tax is ₹2,500.

Difference Between Gross and Net Salary

Aspect	Gross Salary	Net Pay
Definition	Total earnings before deductions and taxes.	Take-home pay after deductions and taxes.
Includes	Basic salary, allowances, bonuses, overtime.	Gross salary minus deductions (taxes, insurance, etc.).
Calculation Basis	Total before any reductions.	Total after all mandatory and voluntary deductions.
Impact of Deductions	Does not account for deductions.	Reflects the impact of deductions and taxes.
Tax Consideration	Pre-tax income amount.	Post-tax income amount.
Usage	It is used to determine the overall compensation package.	Used for budgeting and actual take-home calculations.

In summary, the difference between gross and net pay is crucial for understanding your earnings. Gross pay is your total earnings before any deductions, while net pay is the amount you take home after deductions. By comprehending these differences, you can better manage your finances, plan your budget, and understand your actual earnings.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

FAQs

What is the primary difference between gross pay and net pay?
The primary difference is that gross pay is the total amount earned before any deductions, whereas net pay is the amount received after all deductions have been subtracted from the gross pay.
How can I calculate my net pay from my gross pay?
To calculate your net pay, start with your gross pay, then subtract mandatory deductions such as income tax and Provident Fund (PF) and any voluntary deductions like insurance premiums. The remaining amount is your net pay.
Why is it important to understand the difference between gross and net pay?
Understanding the difference is essential for accurate budgeting and financial planning. It helps you know how much you will take home after deductions, which is crucial for managing your expenses and savings.

June 20, 2024

Personal Finance, Taxonomy

What is Form 16 and How to File ITR Without it?

With the tax filing deadline fast approaching, you must be concerned about your Form 16 if you are yet to get it. Form 16 is often considered indispensable for filing returns if you are salaried. But you can still file your ITR if your Form 16 is unavailable.

In this article, we will guide you through gathering information from alternative sources to ensure that your tax filing is complete, accurate, and in accordance with the tax laws.

Let us take off on this journey to file your ITR, even if Form 16 is not on hand.

What is Form 16?

Form 16 is a certificate employers issued confirming the tax deduction at source (TDS) from an employee’s salary. It comprises two parts: Part A and Part B.

Part A is a record of TDS deducted during a particular financial year. It includes the employer’s TAN and PAN, the employee’s PAN, the assessment year, the period of employment, and a summary of quarterly TDS deposited with the government.

Part B provides a detailed breakdown of employees’ salaries, deductions, and net taxable income.

Form 16 is essential for employees because it:

Offers proof of tax payment.
Assists in the efficient filing of the ITR.
Provides a comprehensive income record.

Therefore, Form 16 is an important document that facilitates tax compliance and serves as a crucial document in your loan application process.

Why You May Not Have Form 16?

Now, let’s discuss the circumstances under which you might not receive this form:

Income Below Taxable Limit: If your income falls below the minimum taxable threshold, the employer is not obligated to deduct tax at source (TDS), resulting in no Form 16 being issued.

Employment Shifts: When you switch jobs during a financial year and do not inform your new employer about your previous income, you don’t receive your Form 16.

Non-compliance by Employer: Sometimes, your employer may fail to deduct TDS or delay the process due to oversight or non-compliance with tax laws, which can result in your not receiving Form 16.

Freelance or Contractual Work: Freelancers or contract-based workers may not receive Form 16 as their tax deductions are not processed like those for salaried employees.

Exemption Claims: Employees who have declared investment proofs that qualify for tax exemptions might not have TDS deducted; hence, they may not be issued Form 16.

Technical Glitches: At times, technical issues with the employer’s payroll system or the tax department’s e-filing portal can delay or prevent the generation of Form 16.

Tax slabs

Tax Collected At Source

Tax saving investments

Income Tax on Salary

Tax laws

Income Tax Slabs

Alternative Documents to Form 16

While Form 16 is a primary document for ITR filing for salaried individuals, several other documents can be utilized to complete the process effectively:

Salary Slips: Your employer issues salary slips, or payslips, which detail your earnings and deductions for each pay period.

To obtain your salary slips:

Request them directly from your HR/Admin department.
Alternatively, you can access your company’s internal employee portal, log in, and navigate to the payroll or salary section, where you can view and download your payslip.

Form 26AS: Form 26AS, or the Tax Credit Statement, is a consolidated record of all taxes deducted on your behalf and deposited with the Income Tax Department.

To access Form 26AS:

Visit the e-filing portal.
Log in using your PAN, which serves as your user ID.
Navigate to the ‘e-file’ menu and select ‘Income Tax Returns’,’ then click ‘View Form 26AS’.
After reading the disclaimer, confirm to proceed to the TDS-CPC Portal.
In the TDS-CPC Portal, agree to the terms and click ‘Proceed’.
Choose the appropriate ‘Assessment Year’ and desired ‘View type’ (choose from HTML, Text, or PDF formats).
To view or download your Form 26AS, click the ‘View/Download’ button.

Bank Statements: Bank statements can be obtained through your bank’s online portal or by going to a branch. They record all transactions, including salary credits and tax deductions.

Interest Certificates: You can obtain an interest certificate from the bank or financial institution where you have a savings account or fixed deposit. Nowadays, with technology, most banks allow customers to download interest certificates from their online portal.

Investment Proofs: Gather all documents related to investments or expenses that qualify for tax deductions, such as insurance premium receipts, home loan statements, and tuition fee receipts.

Capital Gains Statements: If you have sold any investments or property, you will need capital gains statements from your broker or the mutual fund house to calculate the capital gains tax.

Aadhaar Card/PAN Card: Ensure you have your Aadhaar and PAN cards ready, as they are required for verification during the ITR filing process.

Step-by-Step Guide to Filing ITR Without Form 16

Step 1- Preparing your documents

You begin the process with a total of your income from all sources. Keep your pay stubs for the entire year and proof of any other sources of income. For instance, pension slips, interest certificates, rental income, and dividend income. Also, provide proof of any capital gains earned from the sale of property or shares.

If you changed jobs during the year, ensure you have pay slips from both employers for the broken periods.

Step 2- Calculating your taxable income

Download Form 26 AS from the TRACES using the steps outlined above. Check that your income corresponds to your Annual Information Statement (AIS) and Tax Information Summary (TIS).

You can download these statements from the Income Tax website’s “Services Tab” after logging in with your ID and password. These documents were introduced to encourage the self-filing of ITRs and reduce the chances of errors.

Step 3- Deductions and exemptions

Check the exemptions or the deductions available which will help reduce your taxable income. You can refer to the table below for eligible deductions/exemptions –

Section	Eligible Deductions/Exemptions	Exemption Limit
80 C	Investments in tax saving vehicles like PPF, NSC, Life Insurance etc.	Up to Rs. 1,50,000/-
80 D	Medical Insurance Premium for self and family	Up to Rs. 25,000 ( Rs. 50,000/- for senior citizens)
80 E	Interest on Education Loan	No limit (Interest paid for 8 years)
80 G	Donations to Charitable Institutions	Varies (50% or 100% of the donation amount)
80 TTA	Interest on Savings Account	Up to Rs. 10,000/-
HRA	House Rent Allowance	Least of rent paid minus 10% of salary, or HRA received, or 40% of salary (50% in metro cities)

Step 4- Filing the ITR online

Now, comes the last step of filing your ITR return by logging in to the Income Tax Portal.

Please input your user ID (PAN), password, and captcha code for logging in.
Navigate to the ‘e-File’ menu and click ‘Income Tax Return’.
Select the appropriate assessment year and ITR form, and fill in the required information. After submission, verify your ITR within 30 days to complete the process.

5 Tips for a Smooth ITR Filing Experience Without Form 16

Here are five tips for a smooth and professional ITR filing experience without Form 16:

Keeping financial records organized

Ensure you record all your income sources, including salary slips, interest income, and any other earnings. This will help you record your earnings precisely.

Utilize Form 26AS

Form 26AS is a consolidated tax statement on the Income Tax Department’s e-filing portal. It reflects all the taxes deducted on your behalf and is essential for verifying TDS and ensuring all income is accounted for.

Claim Eligible Deductions

Collect all relevant documents for deductions you’re eligible for, such as investment proofs under Section 80C, education loan interest under Section 80E, or medical insurance under Section 80D.

Compute Tax Liability Correctly

Calculate your tax liability considering all incomes and deductions. Use online tax calculators or consult a tax professional to ensure the correct tax is computed.

Choose the Correct ITR Form

It is crucial to select the appropriate ITR form based on your income sources. For instance, ITR-1 is for salaried individuals with income up to ₹50 lakhs, while ITR-2 is for those with income from more than one house property or foreign assets.

Key Takeaways

With the digitalization of financial records and the availability of online portals, obtaining these documents has become easier than ever. Starting the process early to gather all necessary information and avoid a last-minute rush is critical.

Do not let the lack of Form 16 cause a delay in your ITR filing. Procrastination can cause unneeded worry. So, to avoid penalties, file your tax returns on time.

If you take proactive steps and choose alternatives when Form 16 is unavailable, you can handle tax season with ease and precision.

Taxable Income

Old Tax Regime

Professional Tax

Tax Collected at Source

Taxable Income

Tax Saving Investment

FAQs

Can I file my ITR if I don’t have Form 16?
Yes, you can file your ITR using alternative documents like salary slips and Form 26AS for tax deductions and bank account statements, tax saving investment proofs, etc, at your disposal before you start the tax filing process.
Will I face penalties for filing an ITR without Form 16?
There are no penalties for filing an ITR without Form 16 as long as you report your income and deductions correctly. Also, remember to file your return by the specified deadline. To avoid penalties, verify the accuracy of total income declared during tax filing using the Annual Information Statement (AIS).
Can I file an ITR without Form 16 if I am a freelancer?
As a freelancer, you may file your Income Tax Return (ITR) without Form 16. However, since freelancers are not salaried, they rarely receive Form 16. You can file ITR using documents such as Form 26 AS, Annual Information Statement (AIS), and Taxpayer Information Summary (TIS).

You can also use the Presumptive Taxation Scheme (Section 44ADA of the Income Tax Act) to declare 50% of their gross annual income as net income if their total income is under ₹50 lakhs.

Frequently asked questions

Get answers to the most pertinent questions on your mind now.

[faq_listing]

What is an Investment Advisory Firm?

An investment advisory firm is a company that helps investors make decisions about buying and selling securities (like stocks) in exchange for a fee. They can advise clients directly or provide advisory reports and other publications about specific securities, such as high growth stock recommendations. Some firms use both methods, like Research & Ranking, India’s leading stock advisory company, specializing in smart investments and long-term stocks since 2015.

Do we have SEBI registration as an Investment Advisory?

Why choose a SEBI Registered Investment Advisor?

What is the Role of an Investment/Stock Market Advisory Firm in India?

Is investment advisory the same as wealth management?

Taxonomy

What is Section 87A of the Income Tax Act?

Budget 2025 Update

Who Can Avail the 87A Rebate?

Rebate under Section 87A for FY 2024-25 (AY 2025-26)

How Much Rebate is Allowed under Section 87A?

Example to Understand Section 87A Better

Key Points You Must Remember About Section 87A

How do you claim the rebate while filing ITR?

Section 87A Rebate and Investment Planning

TCS vs TDS: Does It Affect the 87A Rebate?

Should You Choose the Old Tax Regime or the New?

Conclusion

FAQs

How can you claim a rebate under section 87A?

Is a surcharge included when calculating the rebate under Section 87A?

Is the rebate under section 87A available on Long Term Capital Gains (LTCG)?

What is an Income Tax Notice?

Why Do You Receive an Income Tax Notice?

Types of Income Tax Notices

How do you check if the income tax notice is genuine?

How to Authenticate an Income Tax Notice?

1. Read the Notice Carefully

2. Match it with your E-Filing Account

3. Confirm DIN

4. Look for Valid Communication Channels

What To Do After Authenticating the Notice?

Latest Notification of Income Tax You Must Know

Importance of Income Tax Calculation on Salary

Professional Tax and Income Tax – Know the Difference

Conclusion

FAQs

How do I check if an Income Tax notice is genuine online?

What details should I verify on an Income Tax notice?

What is a DIN and why is it important?

Can I authenticate a notice if I haven’t e-filed?

What should I do if I suspect a fake Income Tax notice?

What Is Income Tax Act 1961?

Features Of The Income Tax Act 1961:

Objectives Of The Income Tax Act, 1961:

Structure Of The Income Tax Act, 1961:

A] Chapters Of The Income Tax Act:

B] Provisions Of The Income Tax Act, 1961:

C] Schedules to the Income Tax Act

Scope Of The Income Tax Act 1961:

Bottomline:

FAQs:

What types of income are taxable under the Income Tax Act?

Has the Income Tax Act changed over time?

How does the Income Tax Act impact investors?

What is the Tax-to-GDP ratio?

How Is Tax-to-GDP Ratio Calculated?

What Is The Optimal Tax-to-GDP Ratio?

What is India’s Tax-to-GDP Ratio?

How Does the Tax-to-GDP Ratio Affect the Economy?

Public Services & Infrastructure

Fiscal Stability & Debt Management

Income Distribution & Social Welfare

Investment & Economic Growth

Related Posts

FAQs

What is income tax?

What factors affect a country’s tax-to-GDP ratio?

What is India’s direct tax-to-GDP ratio?

Why Is a New Income Tax Bill Being Introduced?

Key Changes in the Income Tax Bill, 2025

1. Introduction of the ‘Tax Year’ Concept

2. Revised Income Tax Slabs

What This Means for You:

3. Simplification of Deductions: What Happens to Sections 80C and 80D?

4. Taxpayers’ Charter: Your Rights as a Taxpayer

5. Digital Transactions and Cryptocurrencies

Some Common Questions You May Have:

1. How Will the New Tax Slabs Affect Me?

2. What Happens to Existing Deductions Like 80C and 80D?

3. Will the New Concept of ‘Tax Year’ Change My Filing Process?

4. How Does the Bill Impact Cryptocurrency Investors?

5. Will There Be Any Change in Corporate Tax Provisions?

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