Filing an Income Tax Return

Why people file an income tax return

Income tax is a tax on the money you earn. Most countries use a self-reporting system: you tell the tax office what you earned, and you work out your own tax. The tax office can check later.

You file a return once a year because:

• it is the law if you earn above a limit, run a business or owe tax;
• it is the only way to get a refund of extra tax taken from your pay;
• many benefits (for example child benefits, tax credits for low income, student support) use your return to decide how much you get;
• banks ask for past returns when you apply for a loan.

There is a deadline each year. Filing late can bring a penalty (a fine) and interest on unpaid tax.

Documents and information you need

Before you start, collect:

• Your tax ID number (a personal number from the tax office, for example PAN in India or SIN in Canada).
• Income slips: a slip from each employer showing pay and tax taken (withheld); slips from banks for interest; slips for pensions or benefits.
• Receipts for things you can claim: pension or retirement savings, donations to charity, tuition fees, medical costs, child care.
• Last year's return and any letter from the tax office.
• Bank details so a refund can be paid straight into your account.

Keep these papers safely for several years (often 6 or more), in case the tax office asks.

Deductions, credits and working out the tax

Two words sound alike but work differently:

• A deduction lowers your taxable income. Example: putting 10,000 into a pension plan may cut taxable income by 10,000.
• A tax credit lowers the tax itself. Example: a 500 credit cuts the tax bill by exactly 500.

The five steps of a simple return

1. Total income = salary + interest + other income.
2. Taxable income = total income − deductions.
3. Tax = use the slabs (brackets): each part of income is taxed at its own rate.
4. Tax after credits = tax − credits (never below 0 for most credits).
5. Refund or balance = tax already paid − tax after credits. Positive = refund, negative = you owe.

Worked with the 3D numbers: total income 80,000; deduction 10,000; taxable 70,000. Slabs: 0% on 20,000 = 0; 10% on next 30,000 = 3,000; 20% on last 20,000 = 4,000. Tax = 7,000. Already paid 8,000, so refund = 1,000.

Self-employed people and small businesses

A self-employed person (a tutor, a plumber, an online seller) has no employer taking tax from pay. So they must:

• report all business income (sales, fees);
• subtract allowed business expenses (supplies, rent, phone used for work, travel for work): net business income = income − expenses;
• keep records and receipts for every sale and cost;
• often pay tax in instalments (advance tax) during the year, plus their own pension or social-security contributions;
• register for sales tax (GST/VAT/HST) once sales pass a limit.

A small company (a corporation) files its own separate business tax return on its profit.

Filing online and getting help

Most returns are now filed online (e-filing) on the tax office website or with approved software. Many forms come pre-filled with slips the tax office already has, but you must still check them.

Help you can use:

• the tax office website, guides and helpline;
• free tax clinics run by volunteers for students and low-income people;
• paid tax preparers or accountants for harder cases.

Be careful of scams: the real tax office will not threaten you by phone or ask for gift cards.

Try it at home

Make a pretend return for a family member: list their income, one deduction and the tax already paid. Use the 3D sliders to check if they would get a refund.

Key formulas and definitions

• Total income = salary + interest + other income
• Taxable income = total income − deductions
• Tax = Σ (income in each slab × slab rate)
• Tax payable = tax − tax credits
• Refund (+) or balance owing (−) = tax already paid − tax payable
• Net business income = business income − business expenses

Worked examples

Common mistakes

• Mixing up a deduction and a credit. A deduction cuts income; a credit cuts the tax itself.
• Taxing all income at the top slab rate. Each slab is taxed at its own rate.
• Forgetting small income like bank interest or a part-time job. All income must be reported.
• Not filing because no tax is owed. You may miss a refund or benefits; file anyway.