What is Income Tax?
Income tax is a sort of tax that the central government levies on the income received by people and corporations throughout a fiscal year. Taxes are the government’s primary source of revenue. The government uses this cash to build infrastructure, provide healthcare and education, subsidise farmers and the agriculture sector, and fund other government social programmes. Taxes are classified into two types: direct and indirect taxes. Direct taxation is a type of taxation that is levied directly on earned income. Income tax is a form of direct taxation. The tax calculation is made using the applicable income slab rates for that fiscal year.
Direct Taxes are broadly classified as :
Income Tax: This is the tax on income received by an individual, a Hindu Undivided Family, or any other taxpayer other than corporations. The legislation establishes the tax rate on such income.
Corporate Tax: This is a tax that businesses pay on the profits they generate from their operations. The income tax laws of India have established a specific rate of tax on corporations.
Suggested Reading: General FAQs on Income Tax
Who should pay Income Tax?
The Income Tax Act classifies taxpayers into categories in order to apply different tax rates to distinct groups of people.
Taxpayers are classified as below:
- Hindu Undivided Family (HUF)
- Association of Persons (AOP)
- Body of Individuals (BOI)
Individuals are also divided into two groups: residents and non-residents. Individuals who live in India must pay tax on their worldwide income, which includes money received both in India and abroad. Non-residents, on the other hand, are only required to pay taxes on income earned or accrued in India. For tax purposes, the residence status must be decided separately for each financial year based on the length of stay in India.
For tax purposes, resident individuals are further divided into the following categories:
- Individuals less than 60 years of age
- Individuals aged more than 60 but less than 80 years
- Individuals aged more than 80 years
Suggested Reading: FAQs on Income Tax for Senior Citizens
Types of Income / Heads of Income
|Head of Income||Nature of Income covered|
|Income from Other Sources||Income from savings bank account interest, fixed deposits, winning in lotteries is taxable under this head.|
|Income from House Property||Income earned from renting a house property is taxable under this head of income.|
|Income from Capital Gains||Surplus Income from sale of a capital asset such as mutual funds, shares, house property etc is taxable under this head of Income.|
|Income from Business and Profession||Profits earned by self employed individuals, businesses , freelancers or contractors & income earned by professionals like life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers are taxable under this head.|
|Income from Salary||Income earned from salary and pension is taxable under this head of income|
Income Tax Slabs
The Indian income tax laws apply differently to each of these taxpayers. Individuals, HUF, AOP, and BOI taxpayers are taxed based on their income slab. While firms and Indian companies have a fixed rate of tax computed on their tax profits, individuals, HUF, AOP, and BOI taxpayers are taxed based on their income slab. Tax brackets or tax slabs are used to categorise people’s earnings. And the tax rate varies depending on the tax slab. With an increase in income, the rate at which income is taxed rises. Individuals and HUF taxpayers are subject to a ‘New tax regime’ implemented in Budget 2020.
What is New Income Tax Regime vs Old Income Tax Regime?
Old Income Tax Regime
The old tax structure imposed income tax at three slab rates: 5%, 20%, and 30% for various income levels. Individuals have the option of continuing with the previous tax regime, which allows them to deduct allowances such as Leave Travel Concession (LTC), House Rent Allowance (HRA), and some other allowances. Additionally, deductions for tax-saving investments as defined in sections 80C (LIC, PPF, and NPS, among others) through 80U may be claimed. Rs 50,000 as a standard deduction for interest paid on a house loan.
Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:
|Income Range||Tax rate||Tax to be paid|
|Up to Rs.2,50,000||0||No tax|
|Between Rs 2.5 lakhs and Rs 5 lakhs||5%||5% of your taxable income|
|Between Rs 5 lakhs and Rs 10 lakhs||20%||Rs 12,500+ 20% of income above Rs 5 lakhs|
|Above 10 lakhs||30%||Rs 1,12,500+ 30% of income above Rs 10 lakhs|
There are two additional tax brackets for people aged 60 and up, as well as those aged 80 and up. A word of caution: Many people believe that if they make Rs.12 lakhs, they will have to pay 30% of that amount, or Rs.3,60,000, in taxes. This is not the case. A person earning 12 lakhs will pay Rs. 1,12,500 plus Rs. 60,000 = Rs. 1,72,500 under the progressive tax structure.
New Income Tax Regime
Individuals and HUFs will be able to benefit from a new tax regime with lower tax rates and zero deductions/exemptions beginning in FY 2020-21. Individuals and HUF have the choice of choosing between the new and old regimes. The new tax regime is optional, and you must choose between it and the old one when completing your ITR. If the old regime is maintained, the taxpayer will be able to take use of all applicable deductions and exemptions. The following are the income tax slabs under the new tax system:
New regime slab rates
|Existing regime slab rates|
|Income from Rs 2.5 lakh to Rs 5 lakh||5%||Income from Rs 2.5 lakh to Rs 5 lakh||5%|
|Income from Rs 5 lakh to Rs 7.5 lakh||10%||Income from Rs 5 lakh to Rs 10 lakh||20%|
|Income from Rs 7.5 lakh to Rs 10 lakh||15%||Income above Rs 10 lakh||30%|
|Income from Rs 10 lakh to Rs 12.5 lakh||20%|
|Income from Rs 12.5 lakh to Rs 15 lakh||25%|
|Income above Rs 15 lakh||30%|
Most deductions, such as deductions and exemptions, are not available to taxpayers who choose the New Tax regime. However, under the new regime, the following exemptions and deductions are available:
- Transport allowances in case of a specially-abled person.
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
- Any compensation received to meet the cost of travel on tour or transfer.
- Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
Income Tax Slab Exceptions
It’s important to remember that not all income can be taxed on a slab basis. This regulation does not apply to capital gains income. Capital gains are taxed based on the asset and the length of time you’ve owned it. The length of time an asset is held determines whether it is long or short term. The holding period used to identify the asset’s type varies depending on the asset. Below is a quick rundown of holding periods, asset types, and tax rates for each of them.
Suggested Reading: FAQs on Capital Gains
|Type of capital asset||Holding period||Tax rate|
|House Property||Holding more than 24 months – Long Term Holding less than 24 months – Short Term||20% Depends on slab rate|
|Debt mutual funds||Holding more than 36 months – Long Term Holding less than 36 months – Short Term||20% Depends on slab rate|
|Equity mutual funds||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% 15%|
|Shares (STT paid)||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||Exempt (until 31 March 2018)Gains > Rs 1 lakh taxable @ 10% 15%|
|Shares (STT unpaid)||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||20% As per Slab Rates|
|FMPs||Holding more than 36 months – Long Term Holding less than 36 months – Short Term||20% Depends on slab rate|
Payment of Income Tax
Tax Deducted at Source (TDS)
When making payments to the recipient of income, the payer deducts tax at source for certain amounts. By reconciling the TDS amount with the ultimate tax liability, the income receiver can claim the TDS amount as a credit.
When a taxpayer’s expected income tax burden for the year exceeds Rs 10,000, he must pay tax in advance. The government has set payment deadlines for advance tax instalments.
The balance tax is the tax that the taxpayer must pay on his or her assessed income. After subtracting the advance tax and TDS from the total income tax calculated on the assessed income, the self-assessment tax is calculated.
The NSDL website allows taxpayers to pay advance tax and self-assessment tax online. The taxpayer must, however, have a net banking account with an authorised bank.
Filing of Income Tax Return
With a few exceptions, all classes of taxpayers are required to file their income tax returns online.
- Taxpayers above the age of 80 do not have to file their returns online.
- Taxpayers with an income of less than Rs 5 lakhs who are not demanding a refund are not required to file an online return.
Online filing is mandatory for the rest. It’s worth noting that there are also deadlines for filing returns. The deadline for most individual taxpayers to file an income tax return is the 31st of July following the fiscal year in question.
Income Tax Return
Every year, the individual must file an income tax return using the ITR forms provided by the IT Department. The government has created seven ITR forms for taxpayers to use when filing their income tax returns. The taxpayer must fill out the necessary ITR forms and submit his tax return.
Income Tax Forms
The seven ITR forms are:
- ITR-1: Individuals (residents) having income from salary, one house property, other sources, agricultural income less than Rs 5,000 and with a total income of up to Rs 50 lakh
- ITR-2: Individuals/HUFs not having any business or profession under any proprietorship
- ITR-3: Individuals/HUFs having income from a proprietary business or profession
- ITR-4: Individuals/HUFs having presumptive income from business or profession
- ITR-5: Partnership firms or LLPs
- ITR-6: Companies
- ITR-7: Trusts
Documents Required for ITR Filing
Form 16, Form 26AS, Form 16A, proof of tax saving investments made, bank account details etc are some of the crucial details / documents that you need to be ready with before filing your return. Further the documents you are going to need to file your tax return are largely going to depend on your source of income.
Income Tax Calculation
Individuals should compute their income tax based on the type of income they receive. The salaried individual might make use of the available exclusions for various allowances. Individuals and HUFs can take a deduction under Sections 80C through 80U, subtract it from their gross total income, and figure out their tax due. In addition, the taxes paid, such as advance tax, TDS, and so on, should be deducted from the overall income tax liability. To arrive at the net amount of income tax payable, the taxpayer should also apply the effect of the rebate under Section 87A and relief under Sections 89, 90, and 91.
Suggested Reading: FAQs on computation of income tax
Every source of income you get should be reported on your tax return. Of course, the legislation exempts some incomes, such as dividend income from an Indian company, long-term capital gains on listed equity shares up to Rs 1 lakh in any financial year, and so on.
Here’s a quick formula you may use to figure out how much tax you owe:
- Make a list of all your sources of income, including your salary, rental income, capital gains, interest income, and profits from your business or profession.
- Remove incomes that are exempt under law
- Make a claim for all relevant deductions under each source of income. eg claim standard deduction of Rs 50,000 from salary income, claim municipal taxes from rental income, claim business related expenses from your business turnover etc
- Claim all eligible exemptions for each type of income, such as money re-invested in another residence as a capital gains exemption, and so on.
- Claim all appropriate deductions from your total income, such as the 80C, 80D, 80TTA, 80TTB, and other deductions.
- You’ve now calculated your taxable income. Check your tax bracket and calculate your income tax liability accordingly.
It’s a good idea to keep up with the Budget because the government is always introducing and changing tax slabs, programmes, and tax perks.
e-Filing Income Tax Return
The individual must file his or her income tax return electronically through the Income Tax e-filing portal. The taxpayer must first register at www.incometax.gov.in in order to file an income tax return. After that, the taxpayer can access the internet and file his tax return. In addition, there is no need to manually email the acknowledgement of return to the income tax department. The income tax department now offers e-verification of ITRs in a variety of methods.
Income Tax Saving Instruments
Tax planning enables the taxpayer to save money on taxes. Tax planning can be accomplished by investing in tax-saving instruments. It contributes to the reduction of income tax liability. Sections 80C through 80U of the Income Tax Act allow for a deduction from total calculated income for certain expenditures and investments. Several prominent Section 80C investments include the following:
Popular Section 80C Investments
|ELSS||PPF||NSC||5-Year Tax Saving FD||SCSS|
|Section 80C Benefit||Yes||Yes||Yes||Yes||Yes|
|Type of InvestmentType of Investment||Equity||Fixed Income||Fixed Income||Fixed Income||Fixed Income|
|Lock-in Period||3 Years||15 Years||5 Years||5 Years||5 Years|
|Maximum Investment||No Max Limit||Rs 1.5 lakh||No Max Limit||Rs 1.5 lakh||Rs 15 lakh|
Health Insurance and Medical Expense Deduction
Apart from the Section 80C deduction, a taxpayer may also deduct health insurance premiums and medical expenses for themselves, family, and parents under Section 80D.
|Person insured||Maximum deduction Below 60 years||Maximum deduction 60 years or older|
|You, your spouse, your children||Rs. 25,000||Rs. 50,000|
|Your parents||Rs. 25,000||Rs. 50,000|
|Preventative health checkup||Rs. 5,000||Rs. 5,000|
|Maximum deduction (includes preventive health checkup)||Rs. 50,000||Rs. 1,00,000|
Education Loan Deduction
The taxpayer may deduct interest paid on a loan taken for higher education under Section 80E. There is no upper limit on the amount of such a deduction that may be claimed on an income tax return.
Home Loan Deduction
A taxpayer may claim a deduction for interest paid on a housing loan during the relevant fiscal year under Section 24. The deduction amount will vary depending on whether the house is self-occupied or rented. Additionally, the taxpayer may deduct the principal amount of the loan up to Rs 1.5 lakh under Section 80C.
Suggested Reading: FAQs on Income From House Property
|Deduction on||Maximum allowed (for self-occupied house property)||Maximum allowed (for property on rent)|
|Stamp duty and registration + principal||Rs. 1,50,000 within the overall limit of Section 80C||Rs. 1,50,000 within the overall limit of Section 80C|
|Deduction on home loan interest under Section 24||Rs. 2,00,000||No cap (but rental income must be shown in the income tax return) Further, maximum loss from house property capped at Rs 2 lakhs|
|Deduction for first-time homeowners under Section 80EE *certain conditions apply||Rs. 50,000||–|
Deduction for Interest Income
Additionally, the taxpayer may deduct interest on bank accounts under Section 80TTA of the Income Tax Act. Individuals may claim a deduction of up to Rs 10,000 under the said clause.