How to Prepare for Tax Returns

Tax season can be a trying time for both people and businesses. Good planning can make things easier and help prevent mistakes that could result in penalties. Filing tax forms is required by law, and knowing the details of tax filing can help people follow the rules and make the most of discounts and credits. Here’s a step-by-step guide on how to prepare for tax returns quickly.

Step 1: Understanding Tax Returns

All that a tax return is essentially is documentation sent to the Income Tax Department. It provides everything they require knowledge about your income, spending, and any other tax-related matter. This information helps you determine if you are getting a refund or how much tax you owe. The following are the primary forms used for Income Tax Returns:

ITR-1 (Sahaj): For those with income from salary, pension, or interest (under ₹50 lakh).

ITR-2: ITR-2 forms are used by individuals or Hindu Undivided Families whose total earnings for the financial year consist of income from salary/pension, earnings from house property, or earnings from short-term or long-term capital profits/sale of investments/property.

ITR-3: Applicable to self-employed persons or Hindu Undivided Families (HUFs) engaged in business or profession.

ITR-4 (Sugam): ITR-4 is to be submitted by small company owners who do not keep books of accounts but only track sales in an estimated ledger. This involves online retailers, traders, wholesale suppliers, manufacturers, etc.

Choosing the correct form ensures that your tax return is processed smoothly and avoids unnecessary scrutiny from tax authorities.

Step 2: Gather Necessary Documents

Collecting the requisite financial documents prior to submitting your tax return will facilitate the process and guarantee that all income and deductions are accurately reported. Important documents consist of:

PAN Card: A Permanent Account Number (PAN) is mandatory for filing income tax returns in India.

Form 16: Issued by employers, this document contains details of salary earned and tax deducted at source (TDS).

Form 26AS: TDS deductions, advance tax payments, and high-value transactions are summarized in this tax credit statement.

Bank Statements: To report income earned from interest, dividends, or any other banking transactions.

Investment Proofs: If you have investments eligible for tax deductions under sections like 80C (PPF, LIC, ELSS), 80D (health insurance premiums), and 24(b) (home loan interest), you need documentary evidence.

Capital Gains Statements: If you have sold stocks, mutual funds, or real estate, statements showing the capital gains earned must be gathered.

Business Income Records: If you are self-employed, records of invoices, expenditure, and GST filings should be maintained.

Rental Income Proof: If you earn rental income, keep rental agreements and tenant details handy.

Step 3: Compute Taxable Income

After the acquisition of all required documents, the following stage includes determining an individual’s tax earnings. This comprises:

Income from Salary: In case the individual is salaried, first total earnings are calculated and eligible deductions are subtracted.

Income from House Property: Subtract house loan interest and municipal taxes from rental revenue.

Income from Capital Gains: Determine any short-term or long-term capital gains and any relevant exemptions if you have sold investments.

Income from Business or Profession: Calculate net profit after deducting business expenses.

Other Sources: Add dividends, interest on bank savings, and any other sources of income.

To determine net taxable income, deduct applicable deductions under sections 80C, 80D, 80G (donations), and 80E (interest on student loans) from total income.

Step 4: Choose the Right Filing Method

There are two main ways to file income tax returns:

Offline Filing (XML Upload)

1. Obtain the appropriate ITR form from the Income Tax Department’s e-filing website.
2. Complete all necessary details and confirm the form.
3. Create an XML file and add it on the gateway or portal.

Online Filing (Direct Entry on Portal)

1. First go to the Income Tax e-filing Portal: www.incometaxindiaefiling.gov.in
2. Sign in with the help of your PAN and password.
3. Choose the appropriate ITR form and add information right away.
4. Confirm the information and submit the return.

Step 5: Verify Your Tax Return

Once the return is filed, it is required to be verified. Available verification options are

Aadhaar OTP: Obtain an OTP on your Aadhaar card. It is to be noted that the Aadhar card is required to be linked with your mobile number.

Electronic Verification Code (EVC): It can be created with the help of net banking, pre-verified bank accounts, or demat accounts.

Digital Signature Certificate (DSC): It is used by the companies and/or professionals that have audited accounts.

Physical Verification (ITR-V Form): Download and approve ITR-V by signing it and forward it to CPC Bengaluru under the time span of 120 days.

Step 6: Understanding GST Returns (For Businesses)

In case the business entity is registered under GST, then it becomes mandatory for timely filling of the GST return for that business. Below are several types of GST returns that are mentioned:

GSTR-1: Monthly return for outward supplies.

GSTR-3B: Form GSTR-3B is a clear-cut summary return, and the aim of the return is for taxpaying individuals or businesses to disclose their overview GST liabilities for a specified tax timeframe and release these liabilities.

GSTR-9: Form GSTR-9 is a yearly return to be filed once every financial year by the officially recognized taxpayers who were routine taxpayers, comprising SEZ units and SEZ developers.

Failure to comply with GST filings can result in penalties as well as interest on delayed payments.

Step 7: Avoiding Common Mistakes

Errors in tax filings can bring notices from the Income Tax Department.

Incorrect ITR Form Selection: Using the wrong form can result in the rejection of your return.

Mismatch in Income Details: Cross-check Form 16, 26AS, and bank statements to ensure consistency.

Failure to Declare Additional Income: Reporting of all earning sources that includes rental revenue, interest, and freelance projects.

Ignoring Eligible Deductions: Confirm all deductible amounts and exemptions are requested.

Late Filing: Filing after the due date attracts penalties and loss of benefits like loss carryforward.

Step 8: Post-Filing Activities

Check ITR Status: Monitor your return progress on the e-filing portal.

Monitor Refund Processing: If qualified for a refund, check on processing status in Form 26AS.

Maintain Records: Keep copies of filed returns and supporting documents for at least six years in case of scrutiny.

Questions to understand your ability

Q1.) Which of these is NOT a document you’ll need to file your tax return in India?

A) PAN Card

B) Bank Statements

C) Passport

D) Form 16

Q2.) You earn a salary, pension, and interest (under ₹50 lakh). Which ITR form should you choose?

A) ITR-1 (Sahaj)

B) ITR-2

C) ITR-3

D) ITR-4 (Sugam)

Q3.) How can you verify your tax return after filing it? 

A) Aadhaar OTP

B) Credit Card

C) Pan Card Verification

D) Email Confirmation

Q4.) Which section lets you claim deductions for investments like PPF, LIC, and ELSS?

A) 80E

B) 80C

C) 80G

D) 24(b)

Q5.) If you’re a business with GST registration, which return do you file to summarize sales, purchases, and taxes?

A) GSTR-1

B) GSTR-3B

C) GSTR-9

D) GSTR-4

Conclusion

Preparing and submitting tax returns may be intimidating; nevertheless, with adequate organization and comprehension, it becomes feasible. Prompt submission guarantees adherence to tax regulations, alleviates anxiety, and facilitates efficient financial strategizing. If tax filing appears intricate, contemplate seeking the assistance of a tax expert to optimize deductions and mitigate compliance complications.