Income Tax Act

Not all of us are familiar with various tax deduction concepts and the benefits we can avail from those. We tend to follow certain myths regarding tax deduction and we end up making the whole process of taxation too complex. Let’s understand some common tax myths.

Tax Deduction and its Myths

Here are some of the popular tax deduction myths:

A Hindu Undivided Family (HUF) or a Joint Hindu Family is treated as a separate taxable entity under the provisions of sec. 2(31) of the Income Tax Act, 1961. This is in addition to an individual as a separate taxable entity. As per Indian laws, the same person can be assessed in two different capacities: as an individual and as a Karta or the leader of his HUF. The rates of income taxes for HUFs are the same as the ones applicable for individuals.

Tax planning is an integral component of overall financial planning and budgeting, helping to reduce the net tax liability. Tax planning entails taking maximum advantage of tax exemptions by investing in relevant investment platforms. Another important aspect of tax planning is ensuring that your investments are aligned to your long-term financial goals.

India follows a progressive system of taxation, having a three-tiered tax slab, wherein the tax rate increases with an increase in the level of income. As per the tax slabs for the assessment year 2009-2010, an individual with an aggregate annual income of Rs.5,00,000 is liable for income tax worth Rs.47,500.

The Income Tax Act, 1961 has several provisions that help assessees (tax-payers) to claim deductions and save on their tax payments while filing their returns. The tax slabs and deduction limits are revised periodically, typically during each annual budget to identify and charge taxable income groups. These slabs and benefits, however, do not apply to foreign income or international transactions.   

In India, the Income Tax Act, 1961 requires every individual, with an annual income over the minimum exemption limit, to file Income Tax Returns (ITR).  An ITR is basically a document that contains a breakdown of different sources of income, which includes your salary, dividend income and income from house property. Income tax deductions, if applicable, are also claimed with the ITR. The structure of an income tax return differs for different assessees.

The Income Tax Act, 1961 states that every assessee in India, which includes individuals, companies and local authorities, is entitled to pay an annual income tax. However, not all assesses are required to pay income tax. The Indian government has setup a minimum exemption limit, which is revised periodically, typically every financial year. The assessee is only mandated to pay income tax when their income exceeds this limit.