Income tax is that part of your income that you pay to the government of India to fund for the infrastructural development in the country and pay a salary of those who are employed by the state or central government.
All taxes are levied based on the passing of a law in parliament, and the law that governs the provisions for our income tax is the Income Tax Act, 1961.
India offers a well-structured income tax system for its citizens.
Let’s start off by talking about the Income Tax Slabs.
In this article
- Income Tax Slabs
- Income Tax Deduction
- Income Tax Exemptions
- Avoid Income Tax Evasion
Income Tax Slabs
1. For Indian Citizens
Income tax, in India, is levied on individual taxpayers on the basis of an income tax slab system where different tax rates have been prescribed for different income tax slabs and such tax rates keep increasing with an increase in the income.
In general, such income tax slabs tend to undergo a change year on year during every budget.
|Income Tax Slabs||General Category Citizens||Senior Citizens (60 years and above but below 80 years)||Very senior citizens (above 80 years)|
|Up to ₹ 2,50,000||Nil||Nil||Nil|
|₹ 2,50,001 – ₹ 3,00,000||5%||Nil||Nil|
|₹ 3,00,001 – ₹ 5,00,000||5%||5%||Nil|
|₹ 5,00,001 – ₹ 10,00,000||20%||20%||20%|
|Above ₹ 10,00,000||30%||30%||30%|
In addition, for income:
- Between ₹50 lakhs to ₹1 Crore income: An addition of 10% of the income tax has to be paid by individuals as well.
- Above ₹1 Crore income: An addition of 15% of the income tax has to be paid by individuals
Also, 4% of the income tax has to be paid as Health and Education Cess by all Indian taxpayers irrespective of the slab they fall into.
2. For Businesses in India
Income Tax on Co-Operative Societies
|Income tax slabs||Tax rates|
|When income is within ₹10,000||10% of the income|
|When income lies between ₹ 10,000 to ₹ 20,000||20% of the amount which exceeds ₹10,000|
|Above ₹20,000||30% of the amount which exceeds ₹20,000|
Income Tax on Firms and Domestic companies
|Income tax slabs||Tax rates||Surcharge||Extra Education Cess ( on Tax+Surcharge)|
|When total income is within ₹1 Crore||30% of the income||NIL||3%|
|When total income lies between ₹ 1 Crore to ₹ 10 Crore||30% of the income||7%||3%|
|Total income exceeds ₹ 10 Crore||30% of the income||12%||3%|
Income Tax on Foreign companies
|Income tax slabs||Tax rates||Surcharge||Extra Education Cess ( on Tax+Surcharge)|
|When total income is within ₹1 Crore||40% of the income||NIL||3%|
|When total income lies between ₹ 1 Crore to ₹ 10 Crore||40% of the income||2%||3%|
|Total income exceeds ₹ 10 Crore||40% of the income||5%||3%|
Income Tax Deduction
To save the maximum amount of income tax in India, it is necessary that you examine the deductions which have been defined under the different sections of Income Tax Act, 1961.
There certain investment avenues such as National Pension Scheme, Public Provident Fund etc. which are eligible for deduction under section 80C of the Income Tax Act 1961.
However, most taxpayers tend to ignore a range of tax saving investment avenues.
Here is a quick rundown on investments which qualify for deductions under different sections of the Income Tax Act:
1. Under Section 80C of the Income Tax Act 1961
These are several tax saving instruments available to get tax benefit under Section 80c.
Here is the comparison between popular tax saving instruments for rates, risk profile and lock-in period:
|Tax Saving Investment Avenues||Risk Profile||Interest Rates||Guaranteed Returns||Lock-in Period|
|Equity Linked Saving Scheme (ELSS)||Equity-related risk||10-13 % expected||No||3 years|
|Public Provident Fund (PPF)||Risk-free||8.00%||Yes||15 years|
|National Pension System (NPS)||Equity-related||9-12 % expected||No||Till retirement|
|Employee Provident Fund (EPF)||Risk-free||8.55%||Yes||5 years|
|Fixed Deposits (FD)||Risk-free||5.5-8 % expected||Yes||5 years|
|Unit linked Insurance Plans (ULIPs)||Equity-related risk||9-11 % expected||No||5 years|
|Sukanya Samriddhi Yojana (SSY)||Risk-free||8.10%||Yes||21 years|
|Senior Citizen Savings Scheme (SCSS)||Risk-free||8.50%||Yes||5 years|
2. Under Other Sections of the Income Tax Act 1961
Indian taxpayer can claim for additional tax deductions under various sections.
Some of these are mentioned below:
- Under Section 80CCC of IT Act 1961, contributions to annuity plans such as LIC premiums are considered for tax benefit up to ₹ 1,50,000.
- Interest on a savings account of banks qualifies for tax deduction under section 80TTA of IT Act of 1961.
- Investment in Rajiv Gandhi Saving Scheme is eligible for tax deduction under section 80CCG of IT Act of 1961.
- Under Section 80D of IT Act of 1961, if an individual makes a payment for medical or health insurance premium for self, his spouse or children, he can claim income tax deduction for the same for ₹25,000 per year.
- For senior citizens, the limit has been extended to ₹30,000. Additionally, preventive health check-up costs till ₹5000 per family per year qualify for tax deductions under 80D of IT Act of 1961.
- If a family member of the tax payer is suffering from disability of 40%, he/she can claim deductions for up to ₹ 75,000 for spending on medical treatments for his /her disabled dependents under Section 80DD of IT Act of 1961.
- Under Section 80DDB IT Act of 1961, a person is allowed deductions if he pays an amount of ₹ 40,000 or more for treatment of specific diseases which include neurological diseases, malignant cancers, chronic renal failure, AIDS and hematological disorders.
- If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E of IT Act of 1961. However, deductions are not allowed for repayment of the principal amount of the education loan.
- If a person has made donations to an approved body during a financial year, he will qualify for deductions under Section 80G, 80GGA, 80GGB and 80GGC of IT Act of 1961.
Income Tax Exemptions
In accordance with the Income Tax act, 1961, there exists a provision of income tax exemption to the citizens of India.
There are some specified incomes on which you can get an exemption from paying income tax i.e. at the time of calculating income tax, certain parameters will not be added.
The most common incomes that are exempted from income tax under exemption are listed below:
1. House Rent Allowance (HRA) Income Tax Exemption
Salaried individuals in India receive HRA from their employer.
An exemption against HRA, under Income Tax Act, is possible if the employee is living in a rented accommodation and pays rent to the owner.
The HRA exemption can also be claimed by submitting proof of rent paid to the employer of company or at the time of filing Income Tax Return (ITR).
The taxpayer just needs to find out how much exemption he can avail and then recalculate the total taxable income after adjusting the exemption.
HRA exemption is subject to the employee actually staying on rented house or flat. The amount of HTA exemption is the lower of:
- HRA received from company employer
- Actual rent paid less than 10% of basic monthly salary
- 40% of basic salary for those staying in any place except the metros cities of Delhi, Kolkata, Mumbai and Chennai. In case of people staying in these four cities, exemption can be up to 50% of basic salary.
2. Leave Travel Assistance (LTA) Income Tax Exemption
LTA received from the employer for the cost of domestic travel to hometown or for vacation once in two years by rail or by air for self and family members can be claimed as exempt income under IT Act of 1961.
This deduction can only be claimed by a person from the employer directly nd not in ITR. LTA is allowed to claim twice in the duration of four years. The current block is 2014-2018.
However, employees are now allowed to carry one unclaimed LTA to next year as well.
3. Leave Encashment
In all companies, employees are eligible to take a specific number of leaves.
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 tax exemption.
4. Voluntary Retirement Amount
Some employees opt for a voluntary retirement (VRS) before their age of retirement.
In many of those cases, the employer pays out an amount of money to the employee as a retirement benefit. This amount received by the employee in the event of VRS is exempted from tax under IT Act of 1961.
Avoid Income Tax Evasion
One of the key problems in our country is the painfully low number of income taxpayers, which indicates that tax evasion takes place at a large scale.
Income Tax evasion is termed as an illegal activity which includes not filing the income tax returns or misrepresenting the tax amount which needs to be paid to the government of India.
If the income tax authorities scrutinize and discover that you have deliberately tried to reduce your tax liability, you will be penalized.
The penalty can go up to almost three times the amount which has been concealed by an individual or a business entity.
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 on you and your family members.
Disclaimer: The views expressed in this post are that of the author and not those of Groww