Income Tax in India

Meaning of Income Tax

Income Tax in India, Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens.

The first Income-tax Act in India was introduced in 1860 on account of financial stress owing to the mutiny of 1857 and was to be in force for a period of 5 years.

The Income Tax Act 1961 has been brought into force on 1 April 1962. It applies to the whole of India (including Jammu and Kashmir).

An Income Tax in India is a direct tax that a government imposes on the annual income and profits earned by individuals and entities. It is calculated on the net taxable income of a person or entity for the applicable financial/fiscal year, which starts from the 1st of April of a year and ends on the 31st of March of the next calendar year.


Who needs to pay Income Tax?

Under existing rules of the IT Act, any individual/business with income regardless of the amount earned is liable to file income tax returns. But, currently, tax on income is payable as long as the net taxable income for a fiscal exceeds Rs. 2.5 lakh. the subsequent are the key types of individuals and entities who are liable to pay tax provided their net taxable income for FY 2018-19 exceeds the prescribed limit:

  • Salaried individuals
  • Self-employed individuals
  • Self-employed professionals
  • Hindu Undivided Family (HUF)
  • Legally recognized artificial persons
  • Body of people (BOI)
  • Association of Persons (AOP)
  • Companies and company firms
  • Local Authorities

What are Income Tax Slab Rates?

Income Tax in India is taxable consistent with prescribed income tax slab rates that vary based on the net annual income of the tax assesse. The slab rates for taxation of income are progressive in nature i.e. the slab rate increases with the web annual income of the individual. The slab rates for tax on income are susceptible to be changed periodically and are announced as part of the Union Budget announcement. The tax slab rates for the financial year 2018-2019 i.e. assessment year 2019-2020 are as follows:

Income Tax Slab for Individuals

  • General Category (Less than 60 years):
                  Existing Tax Regime                   New Tax Regime
Income Slab Income Tax Rate Income Slab Income Tax Rate
Up to ₹ 2,50,000 Nil Up to ₹ 2,50,000 Nil
₹  2,50,001 – ₹  5,00,000 5% above ₹ 2,50,000 ₹  2,50,001 – ₹  5,00,000 5% above ₹ 2,50,000
₹  5,00,001-₹  10,00,000 ₹  12,500 + 20% above ₹  5,00,000 ₹  5,00,001-₹  7,50,000 ₹  12,500 + 10% above ₹  5,00,000
Above ₹ 10,00,000 ₹ 1,12,500 + 30% above ₹  10,00,000 ₹  7,50,001-₹  10,00,000 ₹  37,500 + 15% above ₹  7,50,000
₹  10,00,001-₹  12,50,000 ₹  75,000 + 20% above ₹  10,00,000
₹  12,50,001-₹  15,00,000 ₹  1,25,000 + 25% above ₹  12,50,000
Above ₹ 15,00,000 ₹  1,87,500 + 30% above ₹ 15,00,000

 

  • Senior Citizens (60 years and above but below 80 years):
                  Existing Tax Regime                   New Tax Regime
Income Slab Income Tax Rate Income Slab Income Tax Rate
Up to ₹ 3,00,000 Nil Up to ₹ 2,50,000 Nil
₹  3,00,001 – ₹  5,00,000 5% above ₹ 3,00,000 ₹  2,50,001 – ₹  5,00,000 5% above ₹ 2,50,000
₹  5,00,001-₹  10,00,000 ₹  10,000 + 20% above ₹  5,00,000 ₹  5,00,001-₹  7,50,000 ₹  12,500 + 10% above ₹  5,00,000
Above ₹ 10,00,000 ₹ 1,10,000 + 30% above ₹  10,00,000 ₹  7,50,001-₹  10,00,000 ₹  37,500 + 15% above ₹  7,50,000
₹  10,00,001-₹  12,50,000 ₹  75,000 + 20% above ₹  10,00,000
₹  12,50,001-₹  15,00,000 ₹  1,25,000 + 25% above ₹  12,50,000
Above ₹ 15,00,000 ₹  1,87,500 + 30% above ₹ 15,00,000

 

  • Very senior citizens (80 years and above):
                  Existing Tax Regime                   New Tax Regime
Income Slab Income Tax Rate Income Slab Income Tax Rate
Up to ₹ 5,00,000 Nil Up to ₹ 2,50,000 Nil
₹ 5,00,001 – ₹  10,00,000 20% above ₹ 5,00,000 ₹  2,50,001 – ₹  5,00,000 5% above ₹ 2,50,000
Above ₹ 10,00,000 ₹  1,00,000 + 30% above ₹  10,00,000 ₹  5,00,001-₹  7,50,000 ₹  12,500 + 10% above ₹  5,00,000
₹  7,50,001-₹  10,00,000 ₹  37,500 + 15% above ₹  7,50,000
₹  10,00,001-₹  12,50,000 ₹  75,000 + 20% above ₹  10,00,000
₹  12,50,001-₹  15,00,000 ₹  1,25,000 + 25% above ₹  12,50,000
Above ₹ 15,00,000 ₹  1,87,500 + 30% above ₹ 15,00,000

Note:

  • Between ₹ 50 Lakh to ₹ 1 Crore – A surcharge of 10% of the income tax has to be paid as well.
  • Between ₹ 1 Crore to ₹ 2 Crore – A surcharge of 15% of the income tax has to be paid as well.
  • Between ₹ 2 Crore to ₹ 5 Crore – A surcharge of 25% of the income tax has to be paid as well.
  • Above ₹ 5 Crore – A surcharge of 37% of the income tax has to be paid.
  • The maximum rate of surcharge on income from dividends or income under the provisions of Sections 111A, 112A, and 115AD is 15%
  • 4% of the income tax has to be paid as Health and Education Cess by all taxpayers irrespective of the slab they fall into.

Income Tax Slab for Businesses

For co-operative societies:

Income tax slabs Income tax rates
When income is within ₹ 10,000 10 % of the income
When income lies between ₹ 10,000 – 20,000 20 % of the amount which exceeds 10,000
Above ₹ 20,000 30 % of the amount which exceeds 20,000

For Firms and Domestic Companies:

  • The slab rates do not apply in the case of domestic companies, local authorities, and firms.
  • A tax of a flat 30% is computed on the total income.
  • A surcharge of 7% is levied on domestic companies if their total income exceeds ₹ 1 Crore.
  • A surcharge of 12% is levied on domestic companies if their total income exceeds ₹ 10 Crore.
  • An education cess of 3% of tax plus a surcharge is also charged from such entities

Filing Returns is Mandatory

  • The Income Tax Department is responsible for activities related to the taxation process.
  • At the end of the financial year, every taxpayer has to declare his income to the Income Tax Department in a form prescribed by the Govt. of India.
  • It is mandatory for individuals and entities earning income in India to file a return, irrespective of the tax being deducted at source.
  • This ITR (Income Tax Return Form) summarizes income earned in a particular financial year.
  • The income can be from business, salary, pension, income from housing property, or even income from capital gains.

Avoiding Penalties

  • By filing the ITR form (Income Tax Return form) you inform the government about your earnings and the tax paid on it.
  • When you file the Income Tax Return, it is proof of the income on which you have paid the tax.
  • As per the Income Tax Act, it is mandatory to file ITR every year.
  • Not filing Income Tax Returns can have serious implications. The IT Department may consider you a tax defaulter.
  • It can attract penalties from the Income Tax Department.
  • If you have paid more tax than required, the excess amount paid by you will be refunded.

What are the different Types of Taxable Income?

Under existing rules of the Income Tax Act 1961, the following are the key types of income that are subject to taxation as per the applicable rates:

  • Income from Salary
  • Income from Capital Gains
  • Income from House Property
  • Income from Business
  • Other income such as lottery and other legal gambling, dividend income, etc.

Advantages of Filing Income Tax Return (ITR)

Tax returns should be filed by an individual who has a taxable income. If you are below 60 years of age and have an income of up to ₹ 2.5 lakhs, you are exempted from paying income tax. It has been seen that many salaried individuals are under the impression that their employer has deducted tax at source and hence their liability is over. Filing IT returns and income tax payments are two separate obligations. Even if you do not have a tax liability, you should file your income tax returns. There are several advantages of filing tax returns:

  • Facilitates easy processing of loans
  • For VISA processing, return filing is mandatory
  • Quick registration of immovable properties is possible
  • A credit card will not be issued by the bank till an applicant files his returns regularly
  • Filing income tax returns helps set up a record with the Income Tax Department

Filing Income Tax Returns

According to the Income Tax Act, it is mandatory to file income tax returns if:

    • If your gross total income is over ₹ 2,50,000 in a financial year. This limit exceeds to ₹ 3,00,000 for senior citizens and ₹ 5,00,000 for citizens who are above 80 years.
    • You exist as a company irrespective of whether you witness a loss or profit.
    • You look forward to claiming an income tax refund.
    • Filing an income tax return is mandatory if you are a resident of India and you have assets outside India.
    • If you receive income from a property held under a trust for religious and charitable purposes, a research association, a political party, an educational institution, a news agency, medical or educational institution.
    • In the case of NRIs, income earned in India is taxable.

E-filing Income Tax

  • For the first time in the year 2006-2007, the e-filing facility was introduced by the Income Tax Department.
  • The benefit of e-filing has been extended to all assessees
  • It is mandatory for firms and companies which require statutory audit under section 44AB.
  • At present, a significant section of taxpayers is e-filing income tax returns.
  • The income tax department hopes to bring all the returns online.
  • You can e-file your income tax returns at https://incometaxindiaefiling.gov.in/.
  • e-filing returns have several advantages you don’t have to perform paperwork and waste time sorting them out.
  • With the click of a mouse, you can log in to the secured website and file income tax returns online.

Before you make your income tax payments you should have a working knowledge of how income tax is computed. This will not only give you an idea of how much you have to pay but also find out ways in which you can save tax. If you are aware of the income tax slabs, computing the tax amount is easy. The final tax which is payable is calculated by applying the tax rates which are in force and then by deducting the taxes which have been paid through TDS (tax deduction at source).

To save the maximum amount of tax, it is necessary that you examine the deductions which have been defined under the different sections of the IT Act, of 1961. Certain investment avenues such as National Savings Certificate and Public Provident Fund are eligible for deduction under section 80C of the IT Act 1961. However, most taxpayers tend to ignore a range of investment avenues that are eligible for tax concessions. Here is a quick rundown on investments that qualify for deductions under different sections of the Income Tax Act: Under section 80C, Income Tax deductions are allowed for the following:

  1.  Tax Saving Mutual Fund
  2. Tax Saving Fixed Deposit
  3. National Savings Certificate
  4. Repayment of the principal on a housing loan
  5. Life insurance policy premium
  6. Equity-Oriented Mutual Funds
  7. Contributions made to Employee Provident Fund
  8. Under section 80C, the tax exemption limit is ₹ 1.5 lakhs.

Deductions allowed under various Sections

A taxpayer can claim additional deductions under various sections. Some of these are mentioned below:

  • Under Section 80CCC, contributions to annuity plans such as LIC have been considered for tax benefits up to ₹ 1.5 lakhs.
  • Interest on savings accounts is tax-exempt up to Rs. 10,000 annually under Section 80TTA.
  • Investment in Rajiv Gandhi Saving Scheme is eligible for deduction under Section 80CCG.
  • Under Section 80D, if an individual makes a payment for medical insurance premiums for his spouse, children, or his own self, he can claim an income tax deduction for the same for ₹ 25,000. For senior citizens, the limit has been extended to ₹ 30,000. Additionally, preventive health check-ups cost ₹ 5000 per family and qualify for tax deductions.
  • Under Section 80DD, if a family member of the taxpayer is suffering from 40% disability, he can claim deductions for up to ₹ 75,000 for spending on medical treatments for disabled dependents.
  • Under Section 80DDB, a person is allowed deductions if he pays an amount of ₹ 40,000 or more on the treatment of specific diseases which includes malignant cancers, neurological diseases, chronic renal failure, hematological disorders, and AIDS.
  • If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E. However, deductions are not allowed for repayment of the principal amount of the education loan.
  • Under Section 80G, 80GGA, 80GGB, 80GGC, if a person has made donations to an approved body during a financial year, he will qualify for deductions.
  • A standard deduction of ₹ 40,000 has been introduced in Budget 2018 for the salaried class in lieu of Medical Reimbursement and Transport allowance. This deduction is allowed irrespective of expenses incurred by the employee. The assessee does not have to submit actual bills to claim this deduction.

About Income Tax Rebate

A number of confusions arise when terms like income tax rebate, income tax exemption, and income tax deduction are used. Although all these terms are beneficial to the taxpayer, they have different meanings.

  • Income tax rebate includes those items which can be claimed from the total tax payable.
  • Tax deductions and tax exemptions are claimed from the income whereas, in the case of rebates, claims are made from the tax payable.
  • You can claim an Income Tax rebate under section 87A when you file the income tax returns.
  • A rebate will be available if the taxpayer is a resident individual who has not crossed the 80-year mark and whose taxable income is ₹ 5,00,000 or less.
  • Hindu undivided Families, companies, trusts, LLP, partnership firms, and NRIs are not eligible for a tax rebate.

Difference between “Deduction” and “Exemption

  • Both tax exemption and tax deduction are tax reliefs that are extended by the government to taxpayers.
  • If an income is eligible for tax exemption, that particular income will not be liable for taxation.
  • It means that the income is completely tax-free and is not included when computing the total taxable income.
  • In the case of deductions, initially, the income is included when the total income is computed.
  • If you qualify as per the guidelines provided for a deduction, the income tax deduction will be available to you.
  • In the case of tax deduction, the income tax liability decreases by a specific amount for investing in a particular avenue.
  • In the case of deductions, a monetary ceiling may be specified whereas generally there is no limit on the exemption.

Useful Income Tax Exemptions for the Salaried

As per the Income Tax Act, Income Tax in India for salaried employees is eligible for several income tax exemptions. It is necessary that the salaried employees intimate the employer that they are claiming these exemptions. While deducting the TDS, the employer would then compute the tax on the balance income. Let’s take a look at the tax deductions in detail:

  • Most employers give their employees a house rent allowance. As per the Income Tax Act, a portion of the HRA is exempted from tax.
  • Some employers also give special allowance to the employees. A certain part of this amount is exempted from tax provided the vacation was within India.
  • In most cases, employees are eligible for leaves when they serve an organization. When they do not claim these leaves, they can encash these leaves. The amount which is received as leave encashment can also be claimed as an exemption.
  • Up to a certain limit, tax exemption is also given on pensions.
  • At times, some employees opt for voluntary retirement (VRS) before the age of retirement. In such cases, the employer pays out an amount of money to the employee. This amount received by the employee in the event of VRS is exempted from tax.
  • Several other allowances such as children’s education allowance and transport allowance are exempted from tax but only up to a certain limit.

An Insight Into Tax Planning

  • As a taxpayer, you should be aware of the tax planning strategies to minimize the tax payout.
  • Tax planning is a way by which you take full advantage of deductions, exemptions, reliefs, and rebates while strictly following the law.
  • With proper tax planning, you can reduce your tax liability and pay lesser taxes.
  • It is important that you focus on the sections in which you can save the most.
  • For a long, insurance has been a front-runner among instruments that are considered for tax saving.
  • For young earners who lie in the age bracket of 23 to 30, it is a good idea to get life insurance and health insurance coverage.
  • As it is the starting phase of their career, it is the right time to start saving for the future.
  • For tax planning, it is best to get in touch with a tax consultant.
  • Tax consultants also known as tax advisers have an understanding of the regulations regarding individual and business taxes in Income Tax in India.

Tax Planning without the help of a Consultant

  • The prime objective of tax planning should be to reduce tax liability.
  • It is every taxpayer’s wish that he has the ability to retain the maximum part of his earnings.
  • It would totally be in the interest of the assessee to plan his taxes well in advance and avail the exemptions and deductions.
  • If you do tax planning, it can be both challenging and rewarding.
  • You have the advantage of choosing a tax-saving instrument that best suits your needs.
  • At the same time, it is challenging, as a wrong decision would mean that you are stuck with an unsuitable investment for 3 to 5 years, if not more.

Avoid Tax Evasion

One of the key problems of Income Tax in India is the painfully low number of taxpayers which indicates that tax evasion takes place on a large scale. Tax evasion is termed as an illegal activity that includes not filing income tax returns or misrepresenting the tax amount which needs to be paid.

If the Income tax authorities scrutinize and discover that you have deliberately tried to reduce the tax liability, you will be penalized. The penalty can go up to almost three times the amount which has been concealed. Hence, it is best to exercise precaution when filing the income tax return, because if a return is scrutinized for an anomaly, it will have serious financial implications.


Leave a Reply