Are You filling first time Income Tax Return? Read This

INCOME TAX RETURN
How to fill your tax form
Deepti Bhaskaran Posted online: Monday, July 09, 2007 at 1547 hours ISTUpdated: Monday, July 09, 2007 at 1605 hours ISTFor the salaried and the retired, it’s a toss-up between two forms: ITR-1 (two pages) and ITR-2 (six pages). If your income heads comprise salary, pension and interest only, ITR-1 will suffice. However, if you are earning income from a house you have rented out or have capital gains, brace yourself for the dreaded ITR-2: two pages of returns, four pages of annexures, six pages of instructions. Reprinted below are the first two pages of ITR-2. In the boxes alongside it, our correspondent takes you through the nitty-gritty of nine key portions of the form: what they mean and what you should do. Even if you are filling ITR-1, this is a useful guide.
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Whether original or revised return?If you are filing your returns for financial year 2006-07 again because you missed some information or made a mistake in your original returns, tick on ‘revised’. In the next row, state the receipt number of your original return and the date on which you filed it.
Whether filed by a representative assessee?This clause is primarily meant for individuals living outside India. Since they might not have a contact address in India, the tax authorities treat the representative assessee as a point-person for all matters relating to their income. The representative assessee needs to have a power of attorney from the tax-payer.Designation of assessing officer (ward/circle)There are various basis of classification — for example, the area where you reside, the income you earn, the organisation you work for. Don’t spend much time here figuring out your assessing officer. Either look up your last year’s returns. If you are filing for the first time or can’t locate your last year’s returns, ask when you go to the income tax office to submit your returns.
SALARY INCOMEIf you’re a salaried person, the Form 16 given by your employer is the source of a lot of, sometimes all, your tax-related information. The Form 16 basically details how much you have earned in the company during the year and under which heads, what you have done to save tax and how much tax you have already paid. Whether you are filing ITR-1 or ITR-2, keep your Form 16 handy.Rastogi’s Form 16 for 2006-07 shows that he earned a salary (excluding allowances, perquisites and profit sharing) of Rs 10 lakh. In addition, he got Rs 2 lakh as allowances and payments that are exempt under Section 10 within limits — for example, HRA, conveyance, LTA, gratuity and VRS. You have to state these in the form, but don’t have to add them to your taxable income.Then, Rastogi earned Rs 1 lakh in allowances that are not exempt. These are usually company-specific — for example, journals allowance and lunch allowance. Then, there are perks like company car, accommodation and stock options, which are also taxable.Rastogi’s employer gave him Rs 2 lakh of perks. His package also had a profit-sharing clause, and that brought him Rs 2 lakh for the year.
INCOME FROM HOUSE PROPERTYIf you have a house but don’t live in it, this section should matter to you. If you have let it out, you will be earning rental income. In order to prevent income concealment, even if the house is vacant, the law assumes you have let it out.Further, to stop you from under-reporting, the municipality calculates a standard annual per sq ft letable value of each locality, which is stated in your property tax bill. If your house has been let out for the entire financial year, the higher of the municipality value and the rent received is considered for tax purposes. If it has been let out for part of the year, the lower of the two is considered. From this, you deduct the rent due but not received and the property tax paid. On the balance, you can claim a deduction of 30 per cent. The rest is your income from house property.There’s another step of calculation involved if you have a housing loan going on that house. The entire interest paid (unlike the Rs 1.5 lakh a year, in case of a self-occupied house) can be set off against your rental income. Rastogi, who earns Rs 10,000 a month (Rs 1.2 lakh a year) as rent paid, paid interest of Rs 3 lakh during the year.You also have to account for arrears. Section 3 in Schedule HP lists this. Says Amit Patel, senior partner, Kanu Doshi Associates: “Entry 3a in the table deals with rents of previous years, while 3b deals with rents that were increased due to some structural change or were disputed.” If your income from house property is negative, which is a possibility if you have a loan, your income from house property is zero. Further, you can use this loss to set off other income (See Box 6).
INCOME FROM CAPITAL GAINSGains incurred from selling assets are taxed at differential rates, sometimes not taxed. Based on the holding period, they are classified into short-term and long-term. For shares and mutual funds, the cut-off between short- and long-term is one year; for other assets, it’s three years.
Short-term capital gainsShort-term gains from shares and mutual funds are taxed at 10 per cent (under Section 111A). Other assets are clubbed with your income, and taxed at your marginal rate. In the annexure, you don’t have to give break-ups, just consolidated figures. So, give the sale value of your short-term sales, adjusted for cost of acquisition, cost of improvement (for example, painting a house or repairing a painting’s frame) and expenditure on transfer (brokerage and taxes).Rastogi recorded short-term gains from two transactions: sale of a plot (cost price: Rs 10 lakh; sale price: Rs 12 lakh; cost of improvement: nil; transfer cost: Rs 10,000) and sales of shares (Rs 10,000, Rs 20,000, nil, Rs 100). His total gains are Rs 1.99 lakh. Of this, those from sale of shares, Rs 9,900, is shown in Row 5; the rest of taken down.
Long-term capital gainsLong-term gains from shares sold through a stock exchange and equity funds are exempt, and needn’t be shown here. All other assets are classified into two. One, shares not sold through a stock exchange and debt funds, which is dealt with in Row 3 of the annexure. Two, all other assets, which are dealt with in Row 2.The same process for calculating short-capital gains is used here, with one difference. The cost of acquisition is increased by the rate of inflation, which reduces your capital gains. In March 2007, Rastogi sold a house bought for Rs 40 lakh in February 2004 for Rs 80 lakh. The indexed cost of acquisition is calculated as Cost of acquisition x (Cost inflation index in year of sale/cost inflation index in year of purchase)= 40 lakh x 463/519= Rs 44.8 lakhHis long-term capital gains was Rs 35.2 lakh. On this, he’d have to pay 20 per cent tax. He could save this outgo by investing his capital gains in Section 54EC bonds (which have a lock-in of three years), which he did to the tune of Rs 24 lakh. Hence, his long-term capital gains was Rs 10 lakh. If Rastogi sold the 54EC bonds in three years, that Rs 24 lakh will be treated as long-term capital gains (Entry 4), and taxed accordingly.
SET OFF OF LOSSESThis portion lets you use your losses to reduce your taxable income — and lower your tax liability. But there are restrictions. One, capital losses and speculative losses can’t be used to set off income from any other head. Rastogi had a loss from house property of Rs 2,18,100, which he used to reduce his taxable income. Two, a business loss cannot be set off against salary income. Three, a short-term loss can be set off against any capital gains, long-term or short-term. However, long-term capital loss can be set off only against long-term capital gains.Four, the loss amount that can’t be set off — called ‘unabsorbed loss’ — can be carried forward to be set off against income from the same source only (for example, house property against house property) for eight years. Five, if you are carrying forward a loss, it is available for set off in future years only if it has been declared in a previous income tax return.
TAX DEDUCTIONSThis is where you reduce your taxable income. There are 13 sections given in the tax form, some of which you might have not even heard about. You probably recognise Section 80C, but also go through the others to see if you qualify for any additional deduction.Rastogi is claiming a deduction of Rs 1 lakh for investing in designated Section 80C instruments, Rs 10,000 for payment of medical premium, Rs 25,000 for payment of interest towards an education loan and Rs 20,000 for contribution to an NGO. Or, a total of Rs 1.55 lakh.
COMPUTATION OF TAX LIABILITYOnce you have worked out your income, applied the deductions, calculate your tax. There are two rates: normal rates and special rates. Most incomes are clubbed, on which, the ‘normal’ tax rates apply (See page 1). Then, there are some incomes that are taxed at different rates. In Rastogi’s case, these were short-term capital gains from shares (10 per cent), polo match winnings (30 per cent) and long-term capital gains from house property (20 per cent). All in all, he paid Rs 2,15,980 in tax at special rates. The rest was taxed at normal rates, or Rs 3,48,070. Since Rastogi’s taxable income exceeds Rs 10 lakh, he has to pay a surcharge of 10 per cent. Further, he, like all tax payers, has to pay 2 per cent as education cess.Entry 5, ‘tax relief’, deals with cases that were taxed at a higher rate in previous years or those that qualify for double taxation relief. Entry 7, ‘interest payable’, is if you incur any penalty or interest for default in furnishing returns or advance tax payment.Next, set off your tax liability against the TDS cut by your employer and the advance tax paid by you. Rastogi’s employer had cut Rs 4 lakh, which meant he has to pay Rs 2,32,864. In case you have a refund, give your bank details.
INCOME FROM OTHER SOURCESAs the name suggests, this section is used to account for income that isn’t accounted for under the broad heads mentioned previously. The two most popular sources here are interest income (from fixed-income instruments like bank deposits) and dividend income (from shares and mutual funds). However, since dividend income from shares and mutual funds in India is tax exempt in your hands, this entry is only for dividends received from equity investments in foreign companies.There can also be unconventional sources like winnings from game shows, lotteries, rental income from machinery, plants and buildings.Rastogi earned interest income of Rs 12,000 and Rs 50,000 from a polo match. This (Schedule OS) is where these get a mention.
Annual Information Return (AIR) transactionsIn order to track illegitimate use of funds or spot anomalies, the tax authorities introduced Annual Information Return (AIR) for voluminous investments and transactions during the year. There are eight such categories and each of them has a code:001: Cash and cheque deposits aggregating Rs 10 lakh or more in one savings account002: Spend of Rs 2 lakh or more on one credit card003: Single investment of Rs 2 lakh or more in a mutual fund004: Single investment of Rs 5 lakh or more in bonds or debentures005: Single investment of Rs 1 lakh or more in shares of a company006: Purchase of an immovable property valued at Rs 30 lakh or more007: Sale of an immovable property valued at Rs 30 lakh or more008: Investment in RBI bonds aggregating Rs 5 lakh or moreOn the form, you need to tick the code and state the amount. Rastogi had three transactions: sale of house for Rs 80 lakh, credit card spend of Rs 2.3 lakh and investment of Rs 2.5 lakh in a mutual fund