Taxonomy

Since its introduction in the 1970s, the windfall tax has stirred ongoing discussions. While proponents of the tax argue for its societal benefits, opponents raise concerns about its potential impact on business profitability and innovation.

Understanding this pivotal aspect of taxation is essential for entrepreneurs or those aspiring to venture into business. Let’s delve into the concept of windfall tax, exploring its implications, advantages, disadvantages, and more.

What is Windfall Tax?

A windfall tax is a fiscal measure governments implement to target specific industries that unexpectedly enjoy significant profits. When certain sectors experience a sudden and notable increase in earnings, the government intervenes by imposing this additional tax.

The term “windfall” denotes an unforeseen and substantial boost in profits, while “tax” signifies the government’s response to this sudden wealth accumulation. This tax is typically applied when authorities detect a rapid surge in revenue within a particular industry.

For instance, the oil and gas sectors may witness a sudden profit spike during geopolitical instability like the recent Russia-Ukraine conflict. In such cases, governments may implement a windfall tax on these industries.

Importantly, these increased profits are often unrelated to the companies’ active business strategies or expansions. Instead, they stem from external factors beyond their control. Thus, the imposition of a windfall tax aims to ensure that these unexpected gains are shared with society. You can also learn about the concept of taxation from our blog.

For example, In 2011, the UK government imposed a windfall tax on profits from oil and gas companies operating in the North Sea. The tax was intended to capture some of the extraordinary profits of high oil prices.

What is the Purpose of Windfall Tax?

• Revenue Generation: One primary purpose of a windfall tax is to generate additional revenue for the government. Governments can fund public services, infrastructure projects, or other initiatives by taxing excessive profits without imposing additional burdens on the general population.
• Fairness and Equity: Windfall taxes are also seen as a means of promoting fairness and equity in society. By taxing windfall profits, governments can prevent a small number of entities from disproportionately benefiting from favorable circumstances, ensuring a more equitable distribution of wealth.
• Market Stabilization: In some cases, windfall taxes stabilize markets and prevent excessive speculation or exploitation of resources. Governments can discourage excessive risk-taking and promote stable economic conditions by taxing windfall profits.

How does Windfall Taxation Function?

For investors eyeing an upcoming Initial Public Offering (IPO), the prospect of a Windfall Tax may not be a pressing concern. Typically targeted at well-established enterprises poised to profit from external circumstances, Windfall Taxes are designed to capture unexpected gains.

In essence, Windfall Profits denote sudden gains, and taxes levied on such gains are dubbed Windfall Taxes. They aim to tax windfall beneficiaries arising from novel or unforeseen events, such as the crisis between Russia and Ukraine. Unlike taxes tied to production processes or deliberate corporate strategies, Windfall Taxes are a one-time levy imposed retrospectively atop standard tax rates.

Traders often discuss Windfall Taxes within volatile stock markets and commodities prone to price fluctuations.

How is Windfall Tax Calculated?

The government assesses profits exceeding a specified baseline over a defined period to calculate the windfall tax. Initially, a baseline profit level is established, often based on industry or business average profits from previous years.

After identifying the baseline profits, the excess profits generated during the windfall period are deducted to determine the surplus. The windfall tax is then computed as a percentage of this surplus.

It’s important to note that the windfall tax rate and the surplus calculation can vary based on government policies or specific circumstances. Additionally, governments may occasionally offer windfall tax rebates to taxpayers.

What are the Advantages and Disadvantages of Windfall Tax?

Here’s a detailed understanding of the advantages and disadvantages:

Windfall Tax in India – Latest Update:

On Monday, 15^th April 2024,  the Indian government declared a rise in the windfall tax on petroleum crude, elevating it from ₹6,800 to ₹9,600 per metric ton, effective April 16. This periodic tax adjustment, undertaken every fortnight, will continue to stand at zero for diesel and aviation turbine fuel.

The reason being stated for this is that the decline in oil prices mirrored a shift in market sentiment, seemingly diminishing concerns about a wider regional conflict in the aftermath of Iran’s weekend attack on Israel.

In conclusion, a windfall tax is a targeted levy imposed on businesses or industries that experience sudden and unusually high profits. It is designed to capture some excess profits for society’s benefit and promote fairness, equity, and market stability. 

FAQs

Income tax applies to all salaried employees in the country. However, the nitty-gritty of how to calculate income tax on salary can be overwhelming, especially for first-timers. 

From understanding income tax slabs to deciphering different applicable deductions and exemptions, all these details are necessary to calculate tax on taxable income. 

In this blog, we will discuss how income tax is calculated and walk you through a detailed example. This will give you a fair idea of what is considered when calculating income tax.

Relation between Income Tax and Taxable Income

Before we discuss how income tax is calculated, it is crucial to understand the difference between earned income and taxable income. 

• Earned income is the total annual salary, including income from salaries, house property, business, capital gains, and other sources.
• Taxable income is calculated by subtracting tax exemptions, deductions, and rebates. You can use the tax loss harvesting strategy for long-term investments to reduce income tax. 

How is Income Tax Calculated?

Determine your Gross Salary

The first step is to determine your gross salary to know how income tax is calculated. To do so, add up the following salary components.   

• Basic Salary
• House Rent Allowance (only valid if you can submit proof of living on rent)
• Leave Travel Allowance 
• Mobile Allowance
• Special Allowance  
• Bonuses 
• Overtime payments 
• Income from other sources like house property gains, dividends, stocks, 

Subtract Deductions for Taxable Income

To calculate income tax on salary, you must subtract the net salary from the gross salary. Here are all the deductions that are eligible for income tax. 

• All salaried employees are entitled to a fixed ₹50,000 deduction per the new income tax regime. 
• A taxpayer can claim a tax deduction of up to ₹1.50 lakhs under Section 80C based on their investments. This deduction helps you assess how to pay less tax as it reduces the taxable income. 

The investments can include Equity-Linked Savings Schemes, Employees’ Provident Funds, Public Provident Funds, and Mutual Funds. 

• All deductions under Section 57(IIA).

Taxable Income = Gross Salary – Standard Deduction (₹50,000) – HRA – Other Deductions

After removing the necessary deductions, you get your taxable income. Next, you must learn how income tax is calculated on this new taxable income. 

Determine Applicable Income Tax Slab

The next step in calculating income tax is to assess and evaluate which income tax slab your taxable income falls into to determine the tax rate.

Calculate Taxes

Based on the taxable income calculation and slab recognition, you must apply the valid tax rate to calculate the tax on taxable income for the final tax liability. 

Income Tax Calculation Example for New Regime

To understand how income tax is calculated, let us look at the example of Ms. Rashi Gupta below.

Ms. Rashi Gupta earns an annual income of ₹12,00,000 and lives in a metropolitan city. 

Let us learn how to calculate income tax on salary for Ms. Rashi. 

According to the illustration above, Ms. Rashi pays more under the old regime scheme based on the tax slabs and deductions permitted under that scheme. However, her tax liability is lesser when she chooses the new income tax regime. 

Conclusion

Knowing how income tax is calculated on your earned income is necessary to assess your tax liability. Additionally, it is crucial to understand the different applicable deductions and exemptions to help you reduce your tax liability.

Investments offer significant deductions; thus, spending extra time on stock, share, and equity portfolio management is the need of the hour. For added assistance, you can always consult a SEBI-registered advisory that offers maximum support through daily reporting and stock management.  

Knowing how to calculate income tax on salary with examples helps in accurate filing, availing maximum deductions, and financial planning.

Tax laws evolve every financial year; keeping yourself updated ensures compliance and savings.

FAQ On Income Tax

Investing can be a powerful tool for building wealth, but it’s essential to understand the tax implications of your investment returns. In India, profits from the sale of assets are classified as either short-term or long-term capital gains, each with its tax rates and rules. Let’s dive into these terms and how they can affect your investment strategy.

What Are Capital Gains?

Capital gains are profits from selling a capital asset, such as property, stocks, or bonds. When you sell an asset for more than you paid, the profit is considered a capital gain subject to taxation.

Short-term Capital Gains (STCG)

If you sell an asset within 36 months (or 24 months for certain assets like unlisted equity shares) of purchasing it, any profit you make is classified as a short-term capital gain. These gains are taxed at the same rate as your regular income, which varies depending on your income tax bracket. Meanwhile, the tax on capital gains on equity and equity-based funds is 15%. For example, if you’ve invested Rs 50 thousand in equity and it grows to Rs 80 thousand in 6 months, this is how much tax you are supposed to be paying:

So, with your capital gain of Rs 30,000, you will be paying a tax of Rs 4,500.

Also Read: Paid Up Capital Explained

Long-term Capital Gains (LTCG)

On the other hand, if you hold onto an asset for longer than the periods mentioned above, the profit from its sale is classified as a long-term capital gain. Whereas the below-listed assets shall be considered long-term capital assets if held for over 12 months.

• Equity or preference shares in a company listed on a recognized stock exchange in India
• Securities (like debentures, bonds, govt securities, etc.) are listed on a recognized stock exchange in India.
• Units of UTI, whether quoted or not
• Units of equity-oriented mutual funds, whether quoted or not
• Zero coupon bonds, whether quoted or not

The tax rate for LTCG is generally lower than that for STCG and can be 20% with indexation benefits, which adjusts the purchase price of an asset for inflation. In the case of Equity or Equity funds, the tax on capital gain is 10%  if the capital gain is over Rs 1 lakh. To understand it, let’s take the example above, where you have bought equity of Rs 50 thousand, which grows to Rs 80 thousand in one year. So you have made a capital gain of Rs 30 thousand, which is under 1 lakh so that this income will be tax-free. But this would have been the tax calculation if your investment had grown to Rs 1.6 Lakhs.

Why Does It Matter?

Understanding the difference between STCG and LTCG is crucial for investors because it can significantly impact their net returns. By planning the duration for which you hold an asset, you can optimize your tax liability and maximize your returns. For example, all long-term capital gains up to Rs 1,00,000 are tax-free, but they would be taxable as short-term capital gains as you’ll be paying 15% tax on the gain, and the payable tax will be Rs 15,000, making your effective income Rs 1,00,000 – 15,000 which is Rs 85,000

You can also use these criteria to help you reduce taxes on your long-term investments. Here’s an example: Let’s say you have invested Rs 40 lakhs in a company for 10 years, and your investment grows by 20% every year. Then, this is what your taxes would look like.

So the total payable tax becomes Rs 1.56 lakhs, but here’s a clever trick to reduce how much tax you pay:

• If you sell your stocks and buy them back immediately, it’s like hitting a reset button on your investment. It’s still the same stock, but it’s considered a new investment for tax purposes.
• By doing this, you can make it look like you’re not earning as much each year, so you pay less tax.

Let’s see how it works over a few years:

• Year 2: You earn ₹80,000. That’s less than ₹1 lakh, so you pay no tax.
• Year 3: You earn ₹96,000. Again, it’s less than ₹1 lakh, so no tax.
• Year 4: You earn ₹1,15,200. This time, it’s more than ₹1 lakh, but you only pay tax over ₹1 lakh. So, you subtract ₹1 lakh and find that you have ₹15,200 that can be taxed. The tax rate is 10%, so you pay 10% of ₹15,200, which is ₹1,520.
• If you continue paying these taxes yearly after the 10th year, the total tax will be Rs 78,791 instead of Rs. 1,56,391, which is 98% higher.

In simple terms, by selling and buying back your stocks, you’re spreading out your earnings to keep them below the ₹1 lakh limit each year, so you either pay no tax or a much smaller amount. It’s like slicing a big cake into smaller pieces so each slice fits into a smaller box. Each slice is still part of the same cake, but you’re packaging it differently to save space or, in this case, to save on taxes!

Tips for Investors

• Plan Your Sales: Consider the timing of selling your assets to qualify for LTCG and benefit from lower tax rates.
• Tax Loss Harvesting: You can offset capital gains with capital losses, so consider selling underperforming assets to reduce your tax burden.
• Take Advantage of Exemptions: Certain exemptions, such as reinvestment in residential property or specified bonds, are available for LTCG, which can help with tax savings.

Conclusion

Investing is about picking the right assets and understanding the tax rules for your returns. By being aware of the differences between short-term and long-term capital gains, you can make more informed decisions that align with your financial goals.

FAQs

Marriage is a personal milestone and a significant financial decision, especially in India, where it can offer tax benefits. For salaried individuals, tying the knot can lead to various legal avenues to save on taxes as a couple. While marriage expenses are exempt from taxes as they are considered personal expenditures, gifts received from immediate family or relatives for the marriage are also exempt from income tax under Section 56 of the Income Tax Act.

After marriage, though joint filing is not allowed in India, there are still ways for couples to maximize their tax savings. Each spouse can leverage different avenues to enhance their income tax savings, making it beneficial to plan finances together.

This approach becomes crucial as couples envision and plan for shared financial goals such as higher education, vacations, asset purchases, and other investments. By planning early and considering tax-saving investments, couples can achieve their financial objectives and optimize their tax liabilities, making their journey together financially secure.

Let’s explore the best ways to save income tax post-marriage in the country. We will also learn what gifts are tax-exempt during marriage.

Health Insurance

When embarking on the journey of marriage, safeguarding your family’s health becomes paramount. Under Section 80D of the Indian Income Tax Law, couples can claim deductions of up to Rs 25,000 for health insurance premiums for themselves and their families. This comprises a deduction of Rs 20,000 for insurance premiums and a sub-limit of Rs 5,000 for preventive medical check-ups. However, failing to undergo the annual health check-ups forfeits the sub-limit.

To optimize deductions, couples can pay premiums for each other’s health insurance policies, doubling the tax benefits to Rs 50,000 annually. For instance, if one spouse pays Rs 14,000 for their health insurance and the other pays Rs 11,000 for theirs, the total deduction amounts to Rs 25,000. Investing in a spouse’s health insurance can reduce taxable income, offering significant savings.

Home Loans

Post-marriage, many couples aspire to build a home together. Home loans offer substantial tax benefits under Section 80C, allowing individuals a deduction of Rs 1,50,000 for home loan repayments annually. By co-borrowing the loan on a 50:50 basis, couples can double this benefit to Rs 3,00,000 per year. Similarly, Section 24(B) provides tax benefits of up to Rs 2,00,000 annually on the interest paid for the home loan, effectively doubled for co-borrowing couples.

Life Insurance Policies:

Life insurance policies offer tax benefits under Section 80C. Both spouses can individually claim deductions, with varying premiums based on age. By strategizing premiums and coverages, couples can optimize tax savings while ensuring comprehensive financial protection for their families.

Tax Efficiency Through Investments:

Proper investment planning is crucial for reducing overall tax liabilities. Couples can strategically allocate investments to capitalize on tax-saving instruments. By diversifying investments and considering tax implications, couples can compound savings while securing their financial future.

Maximizing Salary Structure Benefits:

Optimizing different components of the salary structure can unlock additional tax benefits. House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Medical reimbursement offer avenues for tax optimization. For instance, couples residing in rented accommodation can leverage HRA exemptions based on specific criteria, further reducing taxable income.

Planning for Retirement

Though retirement may seem distant, early planning ensures financial stability. Investing in retirement plans and annuity solutions offers tax-saving benefits under various sections of the Income Tax Act. Couples can capitalize on these provisions to build a substantial corpus while minimizing tax liabilities.

What are the Tax Rules for Wedding Gifts?

Some wedding gifts could be subject to tax, and the details should be known clearly. Here’s a breakdown of the gifts that can be taxed: 

Conclusion

Marriage brings love and opportunities for financial optimization, including income tax savings. By implementing these strategies, couples in India can effectively minimize their tax liabilities and channel their savings towards their shared goals and aspirations. Always remember to maintain your records of wedding gifts and discuss financial planning with your partner in advance.

*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.

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FAQs

Have you failed to submit your investment declaration to your department on time? Or did you pay TDS on your interest, commission, and rental income even though your total income was not taxable? Or did you make a mistake in your advance tax calculation and pay too much?

Well, we have some good news for you. You can use the income tax refund tool to get back any excess tax deducted. Now, you must be super excited to know how. 

We have created this in-depth piece that covers everything you need to know about claiming an income tax refund. 

This article encompasses everything in detail, starting with eligibility, how to calculate your income tax refund, the claiming process, and 7 essential tips to get your income tax refund on time.

What is an income tax refund?

 An income tax refund arises whenever you pay more tax than your actual tax liability. This overpayment can be either through Tax Deducted at Source (TDS), TCS, Self-Assessment Tax, or advance tax; you are eligible for an income tax refund.

The earlier you file your return, the better your chances of receiving an income tax refund. The income tax department has significantly reduced refund processing time by leveraging technological advancements.

Faster tax return processing has resulted in faster income tax refunds. According to some media reports, the timeline for processing income tax returns in FY 2022-23 has jumped from 26 days in 2021-22 to 16-17 days in 2023-24, with the timeframe dropping further to 10 days beginning with AY 2023-24. 

Who is entitled to claim an Income Tax Refund? 

You may be eligible to claim an Income Tax Refund if you have paid more tax than your actual tax liability. Now, let’s discuss several instances to make the idea clear for you:

• Case 1: When advance tax paid on estimated income exceeds the actual tax liability.
• Case 2: If Tax Deducted at Source (TDS) from salary, interest, or other incomes is higher than the tax payable on regular assessment. (when you miss submitting your investment proofs on time, the employer deducts higher TDS).
• Case 3: When self-assessment tax paid is more than the actual tax liability.
• Case 4: In cases of double taxation, where tax is paid on the same income in India and a foreign country, India has an agreement with that country to avoid double taxation.

Pre-requisites For Claiming An Income Tax Refund

To claim an income tax refund, you must have-

1. Valid User ID and Password.
2. Pan Linked to your Aadhar Number
3. Filed ITR claiming an income tax refund.
4. The name entered in the Bank account must match the PAN Card details
5. Pre-validated Bank account.

Procedure to Claim a Refund

Claiming an income tax refund in India is a straightforward process integrated into filing your Income Tax Returns (ITR). 

Step 1: File Your ITR

Begin by accurately filing your ITR using the correct forms and properly reporting all income, deductions, and credits. Use Form 16, Form 26AS, and other relevant documents as references to avoid discrepancies.

Step 2: Verify Your Filing 

After submission, verify your ITR through Aadhaar OTP, EVC from your bank account, or by sending a signed ITR-V to the CPC. This step is crucial as unverified returns are not processed.

Step 3: Check Refund Eligibility 

You’re eligible for a refund if your paid taxes exceed your actual tax liability. The excess can be due to higher advance tax, excess TDS, or double taxation relief under DTAA.

Step 4: Track Your Refund

Post verification, the IT Department processes your return and issues a refund if applicable. You can monitor the progress of your tax refund through the e-filing portal.

Step 5: Refund Disbursement 

The refund is credited directly to your pre-validated bank account linked with your PAN. Ensure your bank details are current and correct.

Step 6: Address Delays 

If the refund takes longer than expected, raise a query on the e-filing portal or contact the CPC.

Refunds are typically issued 7 to 120 days after e-filing and verification and credited accordingly. (IT officials are constantly working on improving this deadline.) Remember, timely filing and accurate reporting are critical to a hassle-free refund process.

Steps to Check an Income Tax Refund Status

Step 1: Go to the e-filing portal.

Step 2: Feed in your User ID and Password

• Step 3: In the e-filing tab, go to View Filed Returns.

Step 3: Check your refund status for the desired Assessment year here.

How to Calculate Income Tax Refund Amount?

Income Tax Refund = Income Tax Liability for the financial year (tax calculated on your total income after considering all deductions and exemptions) – Total Taxes Paid ( Advance Tax, TDS, TCS, Self-Assessment Tax)

Let’s take an example to get a deeper understanding. Say, Mr Gupta has a taxable income of ₹7,50,000. After deductions under various tax-saving vehicles eligible under Section 80C, his net tax liability is ₹50,000. 

This example illustrates that a refund is due when the total tax liability (B) is less than the taxes paid. Conversely, additional tax would be payable if the taxes paid are less than the total tax liability (B).

7 Important Points To Get Your Refunds on Time

• File Early: Submit your ITR well before the deadline to avoid last-minute errors and delays.
• Accurate Information: Double-check all entries for accuracy, especially bank details and PAN, to ensure smooth processing.
• Pre-Validate Bank Account: Ensure your bank account is pre-validated on the e-filing portal to facilitate a direct refund.
• Rectify Mistakes Promptly: If you notice errors after filing, file a rectification request as soon as possible to avoid delays.
• Utilize Digital Signatures: If applicable, use a digital signature certificate to authenticate your ITR, which can expedite the processing.
• Keep an Eye on Notifications: The IT Department communicates through SMS and email. Regularly check for any communication regarding discrepancies or additional documentation required.
• E-Verification: You can opt for electronic verification of your ITR through Aadhaar OTP or EVC, which is faster than sending a physical ITR-V form.

The Bottom Line

Getting through the complexities of income tax refunds need not be a challenge. You can ensure a smooth refund experience by filing your returns accurately and on time, promptly verifying your information, and staying up to date on the status of your refund. 

Remember, the key to a quick refund is in the details, from pre-validating your bank account to understanding the nuances of interest on late refunds. Stay informed and prepared, and your careful preparation will ease the tax refund process.

FAQs

*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.

Know more about
IPO | Current IPO | Upcoming IPO | Listed IPO