Income Tax is levied by the Income Tax Department of India, a government institution. The IT department charges two kinds of taxes on income – Direct Tax and Indirect Tax. In case of direct taxes, entities need to directly pay their income tax returns to the IT Department; while in case of Indirect Taxes, an entity collates the tax on behalf of another and pays it to the IT Department.
The direct taxation system is prevalent across the entire nation and is applicable to every earning entity – individuals, Hindu Undivided Family (HUFs), Body of Individuals (BOI), Association of Persons (AOP), firms, companies, businesses. These entities need to file their taxable income to the IT Department at the end of each Assessment Year through Income Tax Return Form.
However, income tax for individuals, HUFs, AOPs, BOIs, firms and corporate bodies vary. Along the same lines, Indian citizens and foreigners’ incomes are also taxed differently. Indian citizens are required to include the entire corpus of their income from India as well as overseas during tax filing; whereas, foreigners are taxed only on their income originating from India.
Incomes of different nature and volumes of entities other than corporate bodies are stacked under different income heads and slab rates.
The income heads under Income Tax laws are – Income from Salary, Income from Other Sources, Capital Gains, Income from Business and Profession, and Income from House Property. When filing an Income tax return, the pertinent bodies/entities need to mention their income in a financial year from different sources under relevant heads.
The applicable income tax rates across different volumes of income are – 5%, 20%, 30%. However, Capital Gains are taxed under separate tax rates.
Income under Different Heads
The segregation of income kinds under different heads is demonstrated in the table below
|Income Heads||Kinds of Income|
|Income from Salary||Wages, salary, pension, gratuity, annuity, EPF and EPS contributions, balance transfer and annual accretion into a Provident Fund enfranchised by EPFO are all considered Salary Income|
|Income from Other Sources||Interest and dividend earned from bank deposits, securities, mutual funds, royalty income, race winnings, lottery winnings, gifts received.|
|Capital Gains||Long-term Capital Gains and Short-term Capital Gains earned from sale or transfer of capital assets – house property, Mutual Funds, shares, and stocks. It also includes Long-term Capital Loss and Short-term Capital Loss which are set off against Capital Gains.|
|Income from Business/Profession||Profits or losses from businesses including bonuses, salary, or interest paid to a partner in a firm.|
|Income from House Property||Rent earned on properties acquired or possessed by the taxpayer but not occupied by him/her. In case no actual rent is received on such a property, notional rent on it is considered under this head.|
Taxpayers need to be careful while assessing the source of their income to properly place them under relevant heads while filing Income Tax Return as specific heads carry specific exemptions, which would be otherwise unavailable to them.
Also, in case an individual considers capital asset transactions as his/her main source of income, he/she would require to include income earned from the same under the head “Income from Business Profession” and not Capital Gains.
Example 1 – Mr. G has earned Rs. 50,000 from a bet he placed on a horse race in Financial Year 2018-19. He further earned Rs. 30,000 from the sale of equity funds in the same year. He earns Rs. 10,000 as house rent from a property he does not occupy. Other than that, he works as a stockbroker and earns Rs 3,00,000 yearly.
In accordance with the income heads, his income from horse race would go under Income from Other Sources. Further, his income from the sale of equity funds would be placed under Income from Business and Profession as he is a professional stockbroker. Similarly, it would also include Rs. 3,00,000 which he earned as a stockbroker. The house rent of Rs. 10,000 would go under Income from House Property.
Slab Rates for Income Tax Return
As per the latest budget, the applicable tax rates for general citizens on varying income volumes are illustrated in the table below.
|Taxable Income||Income Tax Rate||Tax Payable|
|Up to Rs. 250,000||Nil||Nil|
|Within Rs. 2.5 – 5 Lakh||5%||5% of the taxable income|
|Within Rs. 5 – 10 Lakhs||20%||Rs. 12,500 + 20% of taxable income|
|Above Rs. 10 Lakhs||30%||Rs. 112,500 + 30% of taxable income|
Note: Foreigners are also subject to the same tax rates on their incomes from India
The applicable tax rates for taxpayers above 60 years of age, i.e. Senior Citizens are given in the table below
|Taxable Income||Tax Rate||Payable Tax|
|Up to Rs. 300,000||Nil||Nil|
|Within Rs. 300,000 – 500,000||5%||5% on taxable income|
|Within Rs. 500,000 – 1,000,000||20%||Rs. 10,000 + 20% on taxable income (maximum Rs. 1 Lakh)|
|Above Rs. 1,000,000||30%||Rs. 110,000 + 30% on taxable income|
The applicable tax rates for taxpayers above the age of 80 years, i.e. Super Senior Citizens are shown below
|Taxable Income||Tax Rate||Payable Tax|
|Up to Rs. 500,000||Nil||Nil|
|Within Rs. 500,000 – 1,000,000||20%||20% on taxable income (maximum Rs. 100,000)|
|Above Rs. 1,000,000||30%||Rs. 100,000 + 30% on taxable income|
Example 2 – Mr. H turned 60 years after the AY 2018 – 19. His total income filed through online Income Tax Return in that respective year was Rs. 550,000. His taxable income after exemptions and rebates was Rs. 450,000.
As he turned 60 after the AY 2018-19, he will be taxed as a general citizen. The first Rs. 250,000 of his taxable income would be exempted from any tax as per the IT laws. The next Rs. 200,000 would attract a 5% tax rate. Therefore, he would have to pay Rs. (5% * 200,000) i.e. Rs 10,000 as tax in that year.
Tax Rate on Capital Gains
As Capital Gain taxation is done differently during Income Tax Return filing, it attracts different tax rates.
The following table demonstrates the income tax structure on long-term capital gains and short-term capital gains
|Conditions||Long-term Capital Gains||Short-term Capital Gains|
|Sale or transfer of capital assets other than securities||20%||Is added to taxable income and taxed as per the slab rate|
|Sale or transfer of securities||Amount exceeding Rs. 100,000 is taxed at 10%||15%|
The holding period of capital assets determines whether a particular transaction of the same would be considered a long-term or a short-term capital gain. In cases of transaction of housing properties, a holding period above 24 months or 2 years is considered as long-term capital gain and any period below that is short-term. Taxation on the same is done after indexation.
In the case of fixed income instruments, debt funds, debt-oriented hybrid funds, and unlisted equity shares and funds, such a holding period is 36 months or 3 years. Taxation on it includes the indexation facility.
In case of equity funds, equity-oriented balanced funds, and equity shares that holding period is 12 months or 1 year.
Before Finance Bill 2018, long-term capital gains from equity instruments were not considered for Income Tax Return.
Under Section 80, taxpayers can get exemptions on certain forms of income and expenditures. These are – 80C, 80CC, 80CCD, 80TTA, 80GG, 80E, 80EE, 80CCG, 80D, 80DD, 80DDB, 80U, 80G, 80GGB, 80GGC, 80RRB, 80TTB. Other than these, there are exemptions on capital gains, which are – 54, 54F, 54EC, 54B.
Income and expenditure kinds which attract tax exemptions are demonstrated in the table below –
|80C||PPF Investment Contribution to Provident FundNSCsEquity-linked Savings SchemeULIPSFive Year Deposit SchemeSenior Citizens Savings SchemeChildren’s Tuition FeesInvestment in pension funds by Mutual FundsInvestment in notified securities/ deposit schemesInvestment in NABARD bondsInvestment in equity shares and debentures under-recognised stock exchanges||The maximum exemption limit is Rs. 150,000|
|80CCC||Deposited amount in annuity plans of LIC||No limit|
|80CCD||Employer and employees’ contribution in NPS.||Rs. 150,000 in case of employee’s contribution to NPS.|
|80TTA||Interest earned from Savings Account||Rs. 10,000|
|80TTB||Interest earned by Senior Citizens||Up to Rs. 50,000|
|80GG||Payment of rent when an individual does not receive HRA||Lower of – Rent paid – 10% of total incomeRs. 5000 per month25% of total income|
|80E||Interest paid on education loan||Paid for a maximum of 8 years|
|80EE||Home loan interest for first-timers||Rs. 50,000|
|80CCG||Investment in equity products under the Rajiv Gandhi Equity Scheme||Least of – 50% of the investment amount in equity sharesRs. 25,000|
|80D||Medical Insurance for family and self||If for parents above 60 years of age, then Rs. 50,000. If for self, spouse, or children, then Rs. 25,000|
|80DD||Medical Treatment for a handicapped and dependent family member||If the handicapped person has bodily or mental disablement of 40 – 80% then Rs 75,000If the bodily or mental disablement is more than 80% then Rs. 125,000|
|80DDB||Medical expenses for family and self under Rule 11DD||If for individuals of age below 60 years, then up to Rs. 40,000If for individuals of age above 60 years of age, then up to Rs. 100,000|
|80U||Exemption for handicapped individuals||Rs. 75,000 in case of physical disability or mental retardationRs 125,000 if suffering from severe disability|
|80GGC||Contribution to political parties||Nil for payment methods other than cash|
|80RRB||Royalty income on patents||Up to Rs. 300,000|
Individuals can lower their taxable income during Income Tax Return in India by opting for investment options which attract deductions and exemptions u/s 80C and 80U as stipulated by IT laws while also substantially increasing their wealth. Under Section 80C, an individual can avail exemptions up to Rs. 1.5 Lakh. An individual can invest in the following options for availing the exemption –
Income Tax Return Forms
ITR forms are segregated according to classes of taxpayers. These are demonstrated in the table below.
|ITR Forms||Class of Taxpayer|
|ITR Form 1||Salaried Individuals|
|ITR Form 2||HUFs and individuals with income from sources other than business and profession|
|ITR Form 3||HUFs with income from business or profession|
|ITR Form 4||Individuals and HUFs with income from house property|
|ITR Form 4S||A special taxation scheme for HUFs u/s 44AD/AE|
|ITR Form 5||AOPs, artificial judiciary entities, Firms, LLPs, and local authorities|
|ITR Form 6||Companies which do not claim exemptions u/s 11 of the IT Act.|
|ITR Form 7||Individuals falling u/s 139(4D), 139(4B), 139(4C)|
Income Tax Return can be filed online through these forms. An individual would also require to verify their Form 26AS for TDS and other deductions during the e-verify process. You can check your Income Tax Return Status through their official website. When the process is successful, a confirmation message would be sent to your e-mail and PAN registered mobile number.