Taxes are an essential part of a functioning economy and an important source of revenue for the government. Income tax is one form of taxation levied on individuals, businesses and other entities based on their income or profits. In India, the Central Board of Direct Taxes (CBDT) administers taxes such as personal income tax, corporate taxes and wealth taxes. In this article, we’ll explore what is income tax in India and how it works.
What is income tax?
Income Tax is a tax levied by the government on the income earned by individuals or corporations during a financial year. The government earns revenue through taxes, which is utilized for the development of basic infrastructure, healthcare, education, agricultural subsidies, and other welfare programs. Taxes are categorized into two types: Direct Tax and Indirect Tax.
Direct Tax or Pratyaksha Kar is the tax levied directly on the income earned by an individual or corporation. Income Tax is an example of a direct tax.
In India, income tax is collected by three different levels of government: central, state, and local. The central government taxes income from salaries, property, and investments. State governments tax income from professional services, trade, and commerce. Local governments tax income from agriculture and other sources.
Individuals are responsible for paying income tax on their entire income from any source, while companies are responsible for paying corporate tax on their profits. The rate of income tax is determined by the amount of income earned and the taxpayer’s residential status.
In India, income tax is a progressive tax system where higher-income earners are taxed at higher rates than lower-income earners. The tax rates vary from 0% to 30%, with the highest rate of 30% being applied to incomes above Rs 1 crore (10 million).
To calculate your income tax liability in India, you must first identify your taxable income, which encompasses all earned and unearned income such as salaries, wages, interest, dividends, pensions, rents, and royalties. After determining your taxable income, you can apply the relevant tax rate to compute your income tax liability.
Income Tax Rules
The Income Tax Act of 1961 was enacted by the legislature to regulate and administer income tax in the country. In 1962, Income Tax Rules were established to assist in the implementation and application of the Act. Income Tax Rules can only be read in conjunction with the Income Tax Act and cannot override its requirements. The rules are framed within the framework of the Income Tax Act and cannot contravene its provisions.
Who are Taxpayers?
Any individual below 60 years of age who earns more than 2.5 lakh within a financial year (F.Y.) is liable to pay taxes to the Indian government. Individuals above the age of 60 years who earn more than 2.5 lakh are also required to pay taxes to the Indian government.
Under the Indian Income Tax law, each taxpayer is subject to different tax rates. Individual, HUF, AOP, and BOI taxpayers are taxed based on their income slabs, while businesses and Indian companies have a fixed value for calculating taxes on their taxable profits.
People’s income is classified into tax brackets or tax slabs, and different tax rates apply to each tax slab. The tax rate applied to income increases in direct proportion to the income.
Types of Income Based on Income Tax Criteria
In India, all earned or received income is subject to Income Tax, regardless of whether you are a resident or non-resident of India. To simplify categorization, the revenue department divides income into five major categories.
- Salary Income: Income earned as salary or pension falls under this category and is subject to income tax.
- Property Income: Income earned from property, including rental income from a house or building, is taxable.
- Business or Profession Income: This category includes income earned by self-employed individuals, businesses, freelancers, or contractors, as well as income earned by professionals such as life insurance agents, chartered accountants, doctors and lawyers who have their own practice, and tuition teachers, and is taxable under this heading.
- Capital Gain Income: This category includes income from the sale of capital assets such as mutual funds, stocks, or real estate, and is subject to tax on the remaining income.
- Income from other sources: This category includes income from sources such as interest earned on savings bank accounts, fixed deposits, and lottery winnings, and is subject to tax.
Tax slab rates for FY 2022-23 (AY 2023-24) – New and old tax regimes
| Old Tax Regime Slab Rates for FY 22-23 (AY 23-24) | New Tax Regime Slab Rates | ||||
| Resident Individuals & HUF < 60 years of age & NRIs | Resident Individuals & HUF < 60 years of age & NRIs | Resident Individuals & HUF > 80 years | Before Budget 2023 (until 31st March 2023) | After Budget 2023 (From 1st April 2023) | |
| ₹0-₹2,50,000 | NIL | NIL | NIL | NIL | NIL |
| ₹2,50,000 -₹3,00,000 | 5% | NIL | NIL | 5% | NIL |
| ₹3,00,000-₹5,00,000 | 5% | 5% (tax rebate u/s 87A is available) | 5% | 5% | |
| ₹5,00,000-₹6,00,000 | 20% | 20% | 20% | 10% | 5% |
| ₹6,00,000-₹7,50,000 | 20% | 20% | 20% | 10% | 10% |
| ₹7,50,000-₹9,00,000 | 20% | 20% | 20% | 15% | 10% |
| ₹9,00,000-₹10,00,000 | 20% | 20% | 20% | 15% | 15% |
| ₹10,00,000-₹12,00,000 | 30% | 30% | 30% | 20% | 15% |
| ₹12,00,000-₹12,50,000 | 30% | 30% | 30% | 20% | 20% |
| ₹12,50,000-₹15,00,000 | 30% | 30% | 30% | 25% | 20% |
| >₹15,00,000 | 30% | 30% | 30% | 30% | 30% |
Terms of Income Tax
- Financial Year
A financial year is a period of one year used by taxpayers for accounting and financial reporting purposes. It is the year in which income is earned and it runs from 1st April of a calendar year to 31st March of the next calendar year. It is commonly referred to as “FY”. For example, the financial year 2021-22 refers to the period starting from 1st April 2021 and ending on 31st March 2022.
- Assessment Year
The determination year is a period of one year from April 1 to March 31 immediately following the financial year. It is referred to as the determination year because all taxpayers are required to assess their income for the entire financial year and pay taxes during this period. For example, the assessment of revenue earned during the financial year 2021-22 will be done in the determination year 2022-23.
- PAN -Parmanent Account Number
Permanent Account Number (PAN) is an unique 10-digit alphanumeric number assigned to Indian taxpayers by the Income Tax Department. It is used to record all tax-related transactions and information for an individual.
A person should include their PAN number while making payments for advance tax or self-assessment tax. Additionally, some organizations such as banks and mutual fund firms require individuals to submit their PAN. The Income Tax Department obtains financial information from such organizations through PAN, enabling taxpayers to link all their tax-related activities with the department. As a result, by entering only one permanent account number, the taxpayer can identify all their financial transactions.
- Assessee
Assessees are individuals or groups who determine their income and pay taxes according to the Income Tax Act. An assessee can be an individual, a partnership, a corporation, an association of persons (AOP), a trust, or any other organization.
- Indian Residents and NRIs
In India, Income Tax is levied based on the residential status of a taxpayer. Individuals who qualify as residents in India are required to pay taxes on their global income, which includes income earned both in India and abroad.
On the other hand, non-residents are only required to pay tax on their Indian income. The residential status should be determined independently for each financial year, in which income and taxes are calculated.
- TAN
TAN (Tax Deduction and Collection Account Number) is a ten-digit alphanumeric code designated by the Income Tax Department of India. All employees responsible for TDS (Tax Deducted at Source) or TCS (Tax Collected at Source) are responsible for obtaining a TAN. TAN should be included in any TDS/TCS return, payment challan, and TDS/TCS certificate.
How to Calculate Income Tax?
Individuals should calculate their income tax based on the nature of their earnings. Salaried individuals can make use of various available deductions for different allowances under Old Tax Regime.
Individuals can claim deductions under Sections 80C to 80U of the Income Tax Act, which can be subtracted from their total income and then used to calculate their taxable income. In addition, the total tax liability should be adjusted for taxes already paid, such as advance tax and TDS. The taxpayer should also apply the relief and exemptions under Sections 87A, 89, 90, and 91 to determine the net amount of tax payable.
All sources of income should be reported in your tax return. Although, the law provides some exemptions on certain types of income, such as dividends from an Indian company, LTCG on listed equity shares up to INR 1 lakh in a financial year, and so on.
Therefore, below is a quick guide that you can use to calculate your tax liability based on your income.
- Create a list of all your income sources, whether they are salary, rental income, interest income, capital gains, or profits from your business or profession.
- Income that is legally exempt should be excluded.
- Claim all applicable deductions for each source of income. For example, claim the standard deduction for rupees. Claim the municipal tax on rental income, business-related expenses from trading, and so on, for salary income up to 50,000, and likewise for other sources of income.
- Claim all eligible deductions for each category of income; for example, funds reinvested in another property can be claimed as a capital gains exemption, and so on.
- Claim all eligible deductions for each category of income; for example, investment income reinvested in another property can be claimed as a capital gains exemption, and so on.
- Now that you have calculated your taxable income, check your tax bracket and calculate your income tax liability accordingly.
How to file income tax returns in India?
It’s essential to file your income tax return (ITR) in India every year, regardless of whether you have any taxes to pay or not. This is the only way to keep a record of your tax payments and be eligible for refunds, if applicable.
In India, various ITR forms are available based on your income and sources of income. ITR-1 or Sahaj is the most widely used form for individuals with a salary or pension income, whereas those with income from other sources like property, business, interest or dividends need to use a different ITR form.
Filing your ITR in India can be done online through the Income Tax Department website https://www.incometax.gov.in or a registered e-filing agent. The procedure is straightforward and fast, requiring basic personal and financial information. You will receive an acknowledgement number after filing, which can be used to monitor the status of your return.
Read More:-How to file Income Tax Return for AY 2023-24?- Online easily
What are the benefits of paying income tax in India?
The Income Tax Act, 1961 mandates that individuals earning an annual income exceeding Rs. 2.5 lakh must pay income tax in India. The government utilizes the revenue collected from income tax to finance public welfare and development initiatives. There are several advantages to paying income tax in India, including:
1. One of the significant advantages of paying income tax in India is that it aids in the nation’s development. The government uses the revenue generated from income tax to fund various developmental projects such as healthcare, education, transportation, and infrastructure, which require substantial investment and contribute to the overall progress of the country.
2. Another advantage of paying income tax in India is that it promotes employment generation. The government’s Make in India and Skill India initiatives, which aim to generate employment opportunities, are funded by taxes collected from citizens, including income tax. Therefore, by paying our income taxes, we are indirectly contributing to employment generation in the country.
3. Paying income tax in India is beneficial in maintaining social security. A significant portion of the income tax collected is allocated towards providing social security benefits such as old-age pension and health insurance for senior citizens and differently-abled individuals. This helps in creating a safety net for these sections of society in case of any unforeseen events.
4. Income tax is a vital source of revenue for the Indian government, as taxes contribute significantly to the revenue pool. Income tax, being a major contributor to this pool, is crucial in financing various government expenditures.
What happens if I don’t pay my income taxes?
Failure to pay income taxes in India can lead to enforcement actions by the Income Tax Department, including wage levies or property seizures. You may also be subject to interest and penalties. Additionally, if you fail to file your return, you could face a failure-to-file penalty, which can range from 100% to 300% of the outstanding tax amount.
Conclusion
In summary, income tax in India is a significant and complicated matter that requires careful attention. While it can be challenging to determine the taxes owed and how much to pay, it is crucial to make the effort. By being aware of the Indian taxation laws and regulations, you can ensure that your finances remain compliant with the law. Seeking assistance from professional accountants or financial advisors can be helpful in finding the most effective solution for filing your income tax returns on time while minimizing any potential liabilities.
FAQ’s
What is ITR-V in reality?
The document ITR-V is an Income Tax Return Verification form that is generated after taxpayers file their returns and submitted to the Income Tax Department. ITR-V should be e-verified or submitted to CPC Bangalore for verification. Only after its verification is complete, the ITR processing can begin.
What is Rebate?
Section 87A provides relief to taxpayers by reducing their income tax liability. If you are a resident individual and after claiming deductions under Chapter VI-A (Section 80C, 80D, 80U, etc.), your total income for a financial year is not more than Rs. 5 lakhs, then you can claim a tax rebate of up to Rs. 12,500/-. This means that if the tax payable is less than Rs. 12,500/-, you will not have to pay any tax.
Can I file a return after the end of the Assessment Year?
The Budget 2022 proposes an ‘updated’ return that can be filed within 24 months from the end of the relevant assessment year for payment of additional tax. You can file an ‘updated’ return even if you have not filed the original return by the due date specified in the Income Tax Act.
What is Income Computation in actual?
Income computation refers to the process of calculating taxable income after adjusting for all five categories, deductions, exemptions, rebates, set-offs, and similar accounting for income. After income computation, an individual can calculate their income tax liability under the Income Tax Act.