Everything you need to know about reporting income from investments

There are seven income tax return forms spelling out earnings you should tell the government about.

Are you aware that it is mandatory to declare all your earnings to the government? This means if you have sources of income in addition to your regular salary, you are legally bound to let the income tax department know about those.

Yes, it is not enough that your employer deducts a certain amount every month from your salary as “tax deducted at source” (TDS), and deposits this amount to the government as your tax payment. 

Alongside, you yourself are required to tell the authorities about your salary income, as well as other sources, such as income from rent and investments, if any. This is what is known as filing one’s income tax returns.

It does not matter how small the amount might be or whether a particular income or investment will incur tax or not, it has to be filed; if it is not taxable, you can claim it back.

Filing Returns

One need not be a salaried employee for TDS or income tax returns to come into play. These rules are not specific only to permanent staff. Tax is deducted from payments to freelancers too, who are required to file returns. 

But what about those people who are neither salaried individuals nor freelancers earning from their services, but nonetheless have other income streams? Are they exempt from these income tax regulations? Certainly not, they too are bound under the same laws. 

The bottom line is, if you have an income, you must formally intimate the government and also pay income tax. However, the gross income has to be above Rs 2.5 lakh annually for you to be taxed. If you are under 60 years of age, the limit goes up as you grow progressively older.

Related: How to use the new ITR Form?

Income Tax Forms

Since income streams can be so varied, the income tax department has notified seven separate forms to declare the types of incomes. Known as the Income Tax Return (ITR) forms, they are commonly known as the ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 and ITR 7 forms.

Taxpayers are required to declare their tax returns on the appropriate ITR on or before the specified due date. Thus, these ITR forms also serve another purpose. They teach us the types of incomes that are taxable and need to be declared. 

As an individual, you are liable to pay income tax if your age and income fall in any of the following slabs:

• Age below 60 years: gross annual income above Rs 2.5 lakh.
• Age above 60 years but below 80 years: above Rs 3 lakh.
• Age above 80 years: above Rs 5 lakh.

There are other conditions that make it mandatory for an individual to file income tax returns, these being:

• The person concerned has more than one source of income (house property, capital gains etc).
• He or she wants to claim income tax refund.
• He or she has invested in foreign assets during the financial year, or has earnings from an asset abroad.
• He or she wants to apply for a visa or a loan.

Related: Income Tax Returns: Who should file them and when?

Income Types

As stated earlier, a guaranteed way to know which categories of income streams are taxable would be to study the various ITR forms. So let us have a look at them:

ITR-1 (total earnings below Rs 50 lakh)

Also called Sahaj, this form is for Indian residents whose total earnings are from any of the following:

• Salary/Pension.
• Rent from a single property.
• Other sources (excluding lottery wins and income from horse racing).
• Farm income (up to Rs 5,000).

ITR 2 (total income exceeds Rs 50 lakh)

This form comes into play when the following conditions are in addition to those of ITR 1:

• Income from other sources includes lottery wins and income from horse racing.
• There are taxable capital gains.
• Income is from business or professional services (doctor, lawyer etc).
• If the individual is a company director.
• There are investments in unlisted equity shares.
• Income from assets abroad.
• Foreign income.
• When the income of spouse/child/children are also clubbed with that of assesse.

These apart, rent income from more than one property and farm income over Rs 5,000 rupees to be mentioned in this form.

ITR 3 

This form is for use when the assesse has income from:

• Proprietary business (earnings above Rs 2 crore).
• Professional services.
• Company directorship.
• Investments in unlisted equity shares.
• Income as a company partner.

If in addition to any of these there is any income from property, salary, pension and other sources, that may be mentioned in this form.

ITR 4 

The fourth form, called Sugam, does not have any new income source, only mentioning different slabs of incomes stated in earlier forms.

ITR 5

This form pertains to associations and companies, and for individuals who have earned from:

• The estate of a deceased person.
• Estate of an insolvent person.
• Any business trust and investment fund.

ITR 6 

This does not mention incomes for individuals.

ITR 7

This is for individuals who have income from any property held under a trust or a legal entity set up wholly for charitable or religious purposes.

Related: How is taxable income calculated?

Last Words

There are many reasons why you should file your returns, the first being it is required under law, no matter how small or insignificant the income amount is. If it is a non-taxable amount, you will get it back.

Sometimes, your total income may be below the tax exemption limit even before the TDS. However, if you don’t file the returns, you don’t get the deducted amount back. Plus, if you ever approach the banks for a loan during an emergency, one of the documents you will be asked for is your tax statement.

Also, if you don’t pay your taxes and under-report your income, the penalties can be heavy. So play safe, stay safe, and know what incomes are taxable. See what are the deductions available under Section 80 of the Income Tax Act.