Taxes applicable in India can be primarily divided into two types, direct and indirect taxes. Indirect taxes are duties levied on purchase on any type of goods and services, whereas direct taxes are levied on an individual’s earnings as well as profit gained from sell or transfer of any asset. Income tax (IT) is categorised as a direct tax, levied on Indian citizens based on their annual remunerations.
It is a percentage of one’s income that he or she is liable to repay directly to the Government of India. The money is collected by the Income Tax Department of India via Tax Deducted at Source (TDS), Tax Collected at Source (TCS), and voluntary payment by taxpayers. The money is utilised for various government services and facilities, like building infrastructure, amassing salary for Central and State Government employees, etc.
Both residential and non-residential Indians are liable to pay IT in accordance with the Income Tax Act of India, 1961. It details various provisions for this direct tax, along with criteria for any tax exemptions applicable to one’s tax slab.
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Who are Liable to Pay Income Tax?
Individuals earning more than the income threshold of Rs. 2.5 Lakh per annum and within 60 years of age are liable to pay income tax in India. The IT department breaks down the income into 5 different categories or heads. Any individual earning above the exempted threshold from any of the following 5 heads are liable to pay to IT on their income.
The five different categories are as follows –
|Head||Nature of income|
|Income from salary||Salaried individuals and pensioners are earning from a steady source of financing.|
|Income from other sources||Interest earned from savings accounts, fixed deposits, etc.|
|Income from residential property||Primarily money earned from rent as well as money earned from the property sale|
|Income from capital gain||Income earned from the sale of capital assets, such as Mutual Funds, shares, etc.|
|Income from business or self-employment||Income earned from freelancing, contracting, working as insurance agents, CA, doctors, lawyers, tuition, and business.|
The payable tax will vary depending on an individual’s annual income and profession. Following is a breakdown of the income tax percentage as well as the total payable amount according to one’s annual salaried income.
|Income range||Rate of tax||Payable tax|
|Up to Rs. 2.5 Lakh/annum||Nil||Not applicable|
|Rs. 2.5 Lakh to Rs. 5 Lakh/annum||5%||5% of one’s total taxable income|
|Rs. 5 Lakh to Rs. 10 Lakh/annum||20%||Rs. 12,500 + 20% of the total earning above Rs. 5 Lakh|
|More than Rs 10 Lakh/annum||30%||Rs. 1,12,500 + 30% of the total earning above Rs. 10 Lakh|
The payable tax levied by the Income Tax Department on income range of Rs. 5 Lakh to Rs. 10 Lakh and more than Rs. 10 Lakh is calculated on a progressive basis.
Residents older than 60 years of age will also be levied IT if their annual income exceeds Rs. 3 Lakh/annum.
Income Tax Levied on Other Entities
The Government of India levies IT on certain entities, which are the following –
- Body of Individuals.
- Association of Persons.
- Corporate firms.
- Hindu Undivided Family (HUF).
- Any artificial juridical person.
Each of the following entities is directly taxed under the IT laws enforced by the Government of India. The tax slab also varies depending on the type of organisation or co-operative body. For example, co-operative societies are taxed at three different tax slabs; income less than Rs. 10,000 will be taxed at 10%, whereas income greater than Rs. 10,000 to Rs. 20,000 will be taxed at 20%. If the taxable income is greater than Rs. 20,000, it will be calculated at 30% on the amount exceeding Rs. 20,000.
Similarly, partnership firms and local authorities are liable to pay 30% direct tax to their respective income tax office. Domestic companies will also have to pay 30% of their annual revenue as IT, provided the gross receipt of that company exceeded Rs. 250 Crore in the previous year (if gross receipt stayed within that threshold, the IT slab would be reduced to 25%.)
How to File Income Tax?
Every individual meeting the minimum earning threshold is legally responsible for filing their IT returns within the due date (taxpayers above the age of 80 and with an income less than Rs. 5 Lakh and not claiming a refund do not need to file returns online). It may vary depending on the taxpaying entity; for example, individuals, HUFs, etc. have to file their income tax online within July 31st of that assessment year, whereas the rest of the entities should file the returns within September 30th of that assessment year. For assesses who need to furnish the reports under Section 92E, the due date is extended till November 30th of an assessment year.
The Government of India enforces several penalties for individuals not filing their IT returns on time. They will be liable to pay a late filing fee of up to Rs. 10,000 under Section 234F, the amount may also be charged interest in accordance with Section 234A.
Filing income tax online is quicker and easier compared to traditional methods as the taxpayer can verify all the details and returns online in the same application portal. A taxpayer can also find all the forms necessary for different classes of taxpayer online.
The following table contains the different forms required for different classes of taxpayers.
|ITR Form 1||Individuals with a regular source of income (salary, pension, rent, or other sources)|
|ITR Form 2||Hindu Undivided Families and income from sources other than business and profession.|
|ITR Form 3||Hindu Undivided Families that earn from business or self-employed profession.|
|ITR Form 4||Individuals and HUFs who earn by proprietorship|
|ITR Form 4S||This form is known as SUGAM, a special taxation scheme for HUFs in accordance with Section 44AD/AE|
|ITR Form 5||LLPs, Firms, AOPs, artificial judiciary persons and local authorities need to follow ITR Form 5|
|ITR Form 6||Companies that claim no tax exemptions as per Section 11 of the IT Act|
|ITR Form 7||Individuals who fall under Section 139(4A), 139(4D), 139(4C), 139(4B)|
|ITR Form V||It acts as an acknowledge form to confirm the successful filing of income tax return.|
Deductions on Income Tax
Individuals can lower their tax liability by investing in various avenues to enjoy income tax exemptions. The Income Tax Department of India allows tax exemptions in accordance with the guidelines mentioned in Section 80C to 80U of the IT Act.
Section 80C allows an individual to lower their tax liability by reducing their taxable income by up to Rs. 1,50,000. There are a few investment options that an individual can utilise for this purpose.
- Mutual Funds or ELSS – Under Section 80C, Equity Linked Savings Schemes, or ELSS, is exempted from IT for up to Rs. 1.5 Lakh. Such tax saving Mutual Funds have gained immense popularity in recent years, as these have maintained a steady performance and have gained good returns on the sum invested. Moreover, a 3-year lock-in period of ELSS allows individuals to avail their capital within a relatively short time frame.
- PPF – PPF, or Public Provident Fund, is another popular investment tool for reducing tax liability. An individual can deposit a minimum of Rs. 500 to a maximum of Rs. 1,50,000 every year, which is also tax-deductible under Section 80C of the Income Tax Act, 1961. It is a traditional and safe investment option that offers good returns.
- Fixed Deposits – Fixed Deposits with a minimum investment tenor of 5 years will earn tax benefits under Section 80C. However, only the capital is tax exempted, its interest is tax-deductible.
It is important for every Indian resident to understand what is income tax, pay the same and also file for income tax exemptions. The fund is essential for the growth and prosperity of India, as it helps improve the infrastructure of the nation and create a better future.