Income Tax in India

An income tax is levied by the government on the income given by people and corporations during a fiscal year. The government generates revenue through taxes. The government spends this money on infrastructure development, healthcare, education, farm subsidies, and other government welfare programs. Taxes are classified into two types, and they are - direct taxes and indirect taxes. 

Direct tax, for example, is a tax levied directly on earned income. Income tax is a kind of direct tax. The tax calculation is according to the income slab rates that were in effect during that fiscal year.

Rules of Income Tax in India

The Income Tax Act of 1961 was enacted by the legislature to govern and manage income tax in the country. However - in 1962, the income tax rules were established to assist in the enforcement and application of the Act's law. Furthermore, the income tax rule can only be read in conjunction with the Income Tax Act

The Income Tax Rules are created within the framework of the Income Tax Act and are not permitted to supersede its requirements.

Who are Taxpayers?

Any Indian person under the age of 60 who earns more than Rs 2.5 lakh is required to pay income tax. Individuals above the age of 60 who earn more than Rs 2.5 lakh per year must pay taxes to the Government of India.

Under Indian income tax legislation, each of the taxpayers is taxed differently. Individual, AOP, HUF, and BOI taxpayers are taxed based on their income slab, whilst businesses and Indian companies have a fixed value of tax computed on their taxable profits.

People's earnings are classified into tax brackets or tax slabs. And the tax rate varies for each tax slab. The rate where the income is taxed rises in direct proportion to income. 

Types of Income Based on Income Tax Criteria

Everyone in India who earns or receives an income is subject to income tax. (Yes, whether you are a resident or a non-resident of India.) For ease of classification, the Revenue Tax Department divides income into five major categories:

  • Property Income: Renting a residence is taxable under this kind of income.

  • Salary Income: Salary and pension income are taxable under this category of income.

  • Business or Profession Income: Profits made by self-employed persons, businesses, freelancers, or contractors, as well as income made by professionals such as life insurance agents, chartered accountants, doctors, and lawyers who have their own practice, and tuition teachers, are taxable under this heading.

  • Capital Gain Income: Surplus income from the sale of capital assets, such as mutual funds, stocks, or real estate, is taxable under this category of income.

  • Income from Other Sources: Under this heading, income from savings bank account interest, fixed deposits, and lottery winnings is taxable.

Income Tax Rates

Individuals with an annual income of more than Rs. 5 lakhs are needed to pay income tax to the government on their earnings for the fiscal year from April 1-March 31.

The amount of tax you will be asked to pay is determined by your income tax bracket. Currently, the maximum income tax rate is set at 30%, with a surcharge and education cess applied.

The table below illustrates the taxable income in India. Individuals (and Hindu Undivided Family- HUF) and Business Entities are the two main income tax slab groups.

- Tax Rate for Individuals (below 60 years) and HUFs

Tax Slabs

Rates

Rs. 2.5 lakhs

NIL 

Rs. 2.5. lakhs - Rs. 5 lakhs

10%

Rs. 5 lakhs - Rs. 10 lakhs

20%

Rs. 10 lakhs and more

30%

- Individuals above 60 years

Tax Slab

Rates

Rs. 3 lakhs

NIL 

Rs. 3 lakhs - Rs. 5 lakhs

10%

Rs. 5 lakhs - Rs. 10 lakhs

20%

Rs. 10 lakhs and more

30%

- Individuals over 80 years

Tax Slabs

Rates

Rs. 5 lakhs

NIL 

Rs. 5 lakhs - Rs. 10 lakhs

10%

Rs. 10 lakhs and more

20%

  • If a person turns 60 or 80 during a fiscal year, their income for the entire year is taxed at the senior or super senior slab, accordingly.
  • A 10% surcharge is levied on revenues exceeding Rs.1 crore in a fiscal year.
  • The educational cess is 2%, and the SHEC (secondary and higher secondary education cess) is 1%.

Terms of Income Tax

  • Financial Year

The fiscal year is a one-year term used by taxpayers for accounting and financial reporting. It is the fiscal year in which income is earned. Such a period runs from April 1 of the calendar year to March 31 of the following calendar year. The abbreviation is "FY." For example, FY 2021-22 refers to the fiscal year beginning on April 1st, 2021, and ending on March 31st, 2022.

  • Assessment Year

The assessment year is the one-year period from April 1 to March 31, beginning immediately after the fiscal year. This period is known as the assessment year because all taxpayers must evaluate their income received throughout the fiscal year and pay taxes during this period. For example, the assessment year for revenue received during FY 2021-22 will be AY 2022-23.

  • PAN

The Permanent Account Number is abbreviated as PAN. It is a unique 10-digit alphanumeric digit assigned to Indian taxpayers by the Income Tax Department. All of a person's tax-related transactions and information are recorded using their unique permanent account number.

When paying advance tax or self-assessment tax, the individual must include his or her PAN number. Also, where the individual presents his PAN to certain businesses like banks, mutual fund firms, and so on. The income tax department receives financial information from such organizations via PAN. This enables the tax collector to associate all tax-related operations with the department. As a result, the taxman may identify all of your financial transactions simply by entering a permanent account number.

  • Assessee

An assessee is a person or group who determines his or her income and pays tax in accordance with the Income Tax Act. The assessee could be an individual, a partnership, a corporation, an Association of Persons (AOP), a trust, or any other entity.

  • Indian Residents and NRIs

In India, income tax is levied based on a taxpayer's residency status. Individuals who qualify as Indian residents must pay tax on their worldwide income in India, which includes money generated both in India and abroad.

Non-residents, on the other hand, must pay taxes only on their Indian income. For each fiscal year in which income and taxes are calculated, the residential status must be determined independently.

  • TAN

It is a one-of-a-kind ten-digit alphanumeric digit assigned by the Income Tax Department of India. All personnel in charge of a tax deduction (TDS) or collection (TCS) are responsible for getting TAN. The TAN must be included in any TDS/TCS return, payment challan, and TDS/TCS certifications.

How to Calculate Income Tax?

Individuals should calculate income tax based on the nature of their earnings. Salary earners 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 total gross income, and then compute their income tax due. In addition, the total income tax liability should be adjusted for taxes paid, such as advance tax, TDS, and so on. In addition, the taxpayer should apply the effect of the rebate under Section 87A and relief under Sections 89, 90, and 91 to determine the net amount of income tax payable.

Every source of income should be reported on your tax return. Of course, the legislation exempts some incomes, such as dividend income from an Indian company, LTCG on the listed equity shares up to Rs 1 lakh in any fiscal year, and so on.

As a result, below is a fast guideline you can possibly use to calculate taxes payable on your income-

  • List all of your earnings, whether they be salary, rental income, interest income, capital gains, or profits from your business or profession.

  • Income that is legally exempt should be removed.

  • Claim all appropriate deductions for each source of income. For example, claim a standard deduction of Rs. 50,000 from salary income, municipal taxes from rental revenue, business-related costs from business turnover, and so on.

  • Claim all eligible exemptions under each category of income; for example, the money reinvested in another house property can be claimed as an exemption from capital gains income, and so on.

  • Claim any appropriate deductions from your total income, such as the 80C, 80D, 80TTA, 80TTB, and so forth.

  • You have now calculated your taxable income. Check your tax bracket and calculate your income tax liability accordingly.
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