Income Tax
What is Income Tax?
Income Tax is a financial and legal obligation in India. All citizens earning above a certain amount are required to pay income tax on their earned income. The income tax rates, income slabs, and rules are regulated by the government and are subject to change from time to time. It is also important that all the taxpayers are responsible for accurately reporting their income and filing their taxes on time, failing to do so can result in penalties and fines.
History of Income Tax
In the year 1850, Sir James Wilson formally introduced the tax in India. He was the finance minister of the pre-independent India. The Indian Income Tax of 1860 is the landmark moment for taxation in India. It is through act that centrally organised taxation began in India. The act was introduced to recover the losses the government suffered from the 1857 military mutiny.
Under this act, the taxation was divided into four subgroups. The incomes from land, professions or trade, salaries were taxed under this new tax. The Indian Income Tax act formed the basis of taxation laws in India. Over a period of time, it has been revised and replaced over the course of decades. The law was revised in 1886 to improvise on some categories for which tax can be levied. The new categories included net salaries and profits from businesses.
The next revisions came in 1918 and 1922. The act of 1918 repealed the 1886 act and formed many new important changes. The act of 1922 is extremely important since it has since then that India started to have an operational Income Tax Department. This act distinguished various departments of the Income-tax authorities. Over the years the act became more and more complicated over the years due to the amendments made by various governments over the course of decades. The act of 1922 remained in effect in India till 1961. The act was brought by the British and later in 1956 Government of India referred to a law commission to make it simpler.
The Indian Income Tax act of 1961 came into effect after consultation with the Ministry of law. It was brought into force in April 1962. All citizens of India are bound by this act. Since 1962 many amendments have been made to the act annually by the Union Budget. The bills become acts after it is passed by both upper and lower houses of parliament and get presidential assent to it. Currently, five categories of income are considered for tax. They are as follows: salary, property, capital gains, profits from businesses and other sources of income.
Also Read: India’s Union Budget 2024-25 Key Highlights And Analysis
Table of Contents
Types of Income Tax
Citizens have to pay taxes in various forms. The manner in which they are paid to the taxation authorities, these are categorised into Direct and Indirect Taxes. The taxes details are as follows:
Direct Tax:
- A simplified definition of direct tax can be derived from its name, which implies that this tax is directly paid to the government by the taxpayer.
- Some common examples of this type of tax in India are Income and Wealth Tax.
- From the government’s perspective, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.
Indirect Tax:
- Indirect Taxes are different from Direct Tax as it is collected a bit differently and these are consumption-based taxes that are applied to goods or services when they are bought or sold.
- The government receives indirect tax payments from the seller of the goods or service. The seller in turn, passes the tax on to the end user i.e. buyer of the goods and service.
- Some common examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.
Step-by-Step Process to Login and Register into Income Tax Portal:
Income Tax Login Procedure:
- Step 1: Visit the income tax department homepage: Visit the income tax portal and click on the ‘Login’ button on the top right corner.
- Step 2: Enter the Details: Enter your credentials to login into your account. Note: User ID is your PAN card number.
- Step 3: Confirm secure access message and enter password: After proceeding further, confirm your secure access message and enter teh correct password. then , click on ‘Continue’ and it will take you to the dashboard page.
Income Tax Registration Procedure:
Before registering on the income tax portal, one must ensure they have following details:
- Valid PAN Card
- Valid Mobile Number
- Valid Current Address
- Valid Email Address
Step 1: Visit Income Tax Department Portal: On the homepage, click ‘Register’ on the top right hand side of the page.
Step 2: Enter your PAN: Enter PAN and click on ‘validate’. Select ‘Yes’ if you are filing as an individual and click on ‘continue’.
Step 3: Enter the basic details: Enter the basic details such as first name, middle name and last name. And select gender and residential status.
Step 4: Provide contact details: Here details such as, mobile number, Email ID, Postal Address details are required. After correctly entering all details, click on ‘Continue’.
Step 5: Verification: On submitting the form, a six-digit OTP will be sent to your registered mobile number and the email id provided. Enter the OTP correctly to successfully verify the details.
Step 6: Verify the Details entered: After validating the OTP, you will get a new window to verify the entered details. If you want to make some corrections, you can go back to the previous screen, do the necessary corrections, and validate the information with the OTP.
Step 7: Set Password: After verification, set a password for your account and set up a secure login message. The password should be a combination of upper case letters, lower case letters, and special characters.
Step 8: Click on ‘Register’: Click on the ‘Register’ button and you will receive an acknowledgement number after successful registration.
How can I Calculate Income Tax?
Choosing the Head of Income: The income of a person can accrue from one or more of five sources of income. Here are the five heads of income under which tax is charged:
- Income from salary
- Income from Business and Profession
- Income from House Property
- Income from other sources
- Income from capital gains
Steps involved in calculating Income Tax:
- Aggregating the income from all heads: Once the assessee has determined his/her income under each head, he/she will need to make an aggregate of all these incomes before proceeding. Together, all the income from these five heads will constitute the gross income of the assessee. After this he/she can go for deductions like HRA and LTA.
- Providing deductions under Section 80 C- 80 U: After an assesses has arrived at the figure of gross income, he can make certain deductions from such income which are termed as deductions under section 80 C – 80 U of the Indian Income Tax Act. Each section which falls under this range, provides for a deduction from the gross income of the assessee, which is meant to give him a form of relief in the form of reducing his total income, thus reducing his income tax liability. These deductions include reductions such as payment for house construction, payment towards education loan, payment for the treatment of a disabled person, payment for any recognised contributions, income from royalty, income from interest on savings bank account, income from industry located in special economic zone and much more.
- Arriving at Total Income: Once the assessee has determined his quantum of deductions, he can subtract them from his gross total income to arrive at the figure of total income. This is the income on which income tax is charged.
- Reduction of advance tax and prepaid taxes: Once the assessee has calculated the amount of income tax payable by him on the amount of total income, he shall reduce the amount of such tax by any prepaid taxes and advance taxes by him. Then the calculation of income tax shall be made as per the applicable tax slab.
- Adding taxes for other incomes: Apart from this calculation, an assessee may also be under an obligation to pay taxes on various other incomes such as casual income, which is taxed at a flat of 30%. This income is not added to the normal income and is treated separately for the purpose of calculating income taxes. Similarly, income from shares and equity oriented schemes are also subject to taxes at a rate, other than the normal rate of tax.
Who needs to Pay Income Tax?
Under the existing rules of the IT Act, any individual or business with income irrespective of the amount earned is liable to file income tax returns. But, currently tax on income is payable only if the net taxable income for a fiscal exceeds Rs. 2.5 lakh. The following are the key types of individuals and entities who are liable to pay tax provided their net taxable income for the financial year exceeds the prescribed limit:
- Salaried individuals
- Self-employed individuals or professionals
- Hindu Undivided Family (HUF)
- Legally recognised artificial persons
- Body of Individuals (BOI)
- Association of Persons (AOP)
- Companies and Corporate firms
- Local Authorities
Benefits of Income Tax
Income Tax is one of the important aspects in any country’s economic architecture, it is not merely a financial obligation but a crucial contributor to the nation’s progress. Here are some benefits of Income Tax that support in the economic development:
- Claim Tax Refund: One of the primary advantages of income tax is the provision for taxpayers to claim a tax refund. The process ensures fairness by allowing individuals who have overpaid their taxes to reclaim the excess amount.
- Availing Loans and Credit Cards: Another significant benefit lies in the ease of availing loans and credit cards. Consistent and responsible payment of income tax enhances an individual’s financial credibility, making them more attractive to lenders. Financial institutions view a positive tax payment history as a sign of financial stability and reliability. Thus, in turn, simplifies the process of securing loans and credit cards, offering individuals access to financial instruments for personal and professional endeavours. To know more about the different loan schemes, interest rates and comparison between the banks, applicants can visit online financial marketplaces like OneNDF for such information.
- Business Credibility: Boosting business credibility emerges as a pivotal advantage within the domain of the benefits of income tax. Paying taxes responsibly enhances businesses’ reputations.
- Credit Score Improvement: It also helps in improving the credit score of the individual. Consistent and responsible income tax payments contribute to a positive credit history. Thus, it improves the individuals’s creditworthiness, opening doors to favourable loan terms, lower interest rates and overall financial flexibility.
- Government Subsidies: An inherent benefit of paying income tax in India is the eligibility for various government subsidies and benefits. People and companies who pay their taxes on time are frequently in a position to be eligible for government-run initiatives and subsidies. Subsidies for housing, education, agriculture, and other industries that support the country’s general socio-economic growth may be among them.
What are Income Tax Slab Rates
Income in India is taxable according to prescribed income tax slab rates that vary based on the net annual income of the tax assessee. The slab rates for taxation of income are progressive in nature i.e. the slab rate increases with the net annual income of the individual. The slab rates for the tax on income are liable to be changed periodically and are announced as part of the Union Budget announcement. The income slab rates for the financial year 2024-25 (AY 2025-26) are as follows:
Income Tax Slab for Individuals
- General Category (Less than 60 years):
| Old Tax Regime | New Tax Regime | ||
|---|---|---|---|
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 2,50,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 2,50,001 – Rs. 5,00,000 | 5% above Rs. 2,50,000 | Rs. 3,00,001 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001 – Rs. 10,00,000 | Rs. 12,500 + 20% above Rs. 5,00,000 | Rs. 7,00,001 – Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% above Rs. 10,00,000 | Rs. 10,00,001 – Rs. 12,00,000 | 15% |
| — | — | Rs. 12,00,001 – Rs. 15,00,000 | 20% |
| — | — | Above Rs. 15,00,000 | 30% |
- Senior Citizens (60 years and above but below 80 years)
| Old Tax Regime | New Tax Regime | ||
|---|---|---|---|
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 3,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 3,00,001 – Rs. 5,00,000 | 5% above Rs. 3,00,000 | Rs. 3,00,001 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001 – Rs. 10,00,000 | Rs. 10,000 + 20% above Rs. 5,00,000 | Rs. 7,00,001 – Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,10,000 + 30% above Rs. 10,00,000 | Rs. 10,00,001 – Rs. 12,00,000 | 15% |
| Rs. 12,00,001 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
- Very Senior Citizens (80 years and above)
| Old Tax Regime | New Tax Regime | ||
|---|---|---|---|
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 5,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 5,00,001 – Rs. 10,00,000 | 20% above Rs. 5,00,000 | Rs. 3,00,001 – Rs. 7,00,000 | 5% |
| Above Rs. 10,00,000 | Rs. 1,00,000 + 30% above Rs. 10,00,000 | Rs. 7,00,001 – Rs. 10,00,000 | 10% |
| Rs. 10,00,001 – Rs. 12,00,000 | 15% | ||
| Rs. 12,00,001 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
Income Tax Slab For Businesses
Income Tax Slab for Domestic Companies:
| Condition | Income Tax Rate (excluding surcharge and cess) |
|---|---|
| Total Turnover or Gross Receipts during the previous year does not exceed Rs. 400 crores | 25% |
| When opted for Section 115BA | 25% |
| When opted for Section 115BAA | 22% |
| When opted for Section 115BAB | 15% |
| Any other Domestic Company | 30% |
Income Tax Slab for Foreign Companies:
| Condition | Income Tax Rate |
|---|---|
| Royalty from an Indian concern or Government in pursuance of an agreement made with the Indian concern after 31st March 1961, but before 1st April 1976, or fees for rendering technical services in pursuance of an agreement made after 29th February 1964 but before 1st April 1976 and where such agreement has, in either case, been approved by the Central Government | 50% |
| Any other income | 40% |
What is Taxable Income?
Taxable income means the income which is chargeable to income tax, and it is calculated to decide how much tax an individual or a company owes to the government in a particular tax year. It is generally described as the gross total income or total income. To arrive at the total income, you have to consider any deductions or exemptions allowed in that tax year.
Different types of Taxable Income
- Income from Salary: Any income that you receive in terms of the service you provide on a contract of employment is applicable for the taxation under this head. This includes salary, advance salary, perquisites, gratuity, commission, annual bonus and pension.
- Income from House Property: An individual’s income from his/her property or land belonging to such property is taxable under the head of income from house property.
- Income from Business: The profits that you earn from any kind of business are taxable under this head. Just subtract your expenses from the total income in order to determine the amount on which tax is chargeable.
- Income from Capital Gains: When you earn profits by transferring or selling an asset that was held as an investment, that income is taxable under the head of income from capital gains. A large number of assets, like gold, bonds, mutual funds, real estate, stocks, etc, fall under capital assets.
- Income from Other Sources: This category falls under Section 56 sub-section(2) of the Income Tax Act and include income from dividends, interest, rent on plant and machinery, lottery, bank deposits, gambling, card games, sports rewards, etc.
What is Income Tax Return (ITR)
An Income Tax Return (ITR) is a form that taxpayers submit to the income tax department, providing information about their income and tax payments. It informs the government about an individual’s income, investments, and tax payable during a specific financial year.
Advantages of Filing Income Tax Return (ITR)
Tax returns should be filed by an individual who has a taxable income. If you are below 60 years of age and have an income up to Rs. 2.5 lakh, you are exempted from paying income tax. It has been seen that many salaried individuals are under the impression that their employer has deducted tax at source and hence their liability is over. Even though there are several advantages of filing tax returns:
- Facilities easy processing of loans.
- For VISA processing, return filing is mandatory.
- Quick registration of immovable properties is possible.
- A credit card will not be issued by the bank till an applicant files his/her returns regularly.
- Filing income tax returns helps set up a record with the Income Tax Department.
Also Read: 7 Steps to File ITR Without Form 16 For FY 2023-24?
What is E-Filing Income Tax?
For the first time in the year 2006-07, the E-Filing facility was introduced by the Income Tax department. The benefit of e-filing has been extended to all assessees, also it is mandatory for firms and companies which require statutory audit under the section 44AB.
At present, a significant section of tax payers are e-filing income tax returns and the income tax department hopes to bring all the returns online. Assess can e-file your income tax returns at https://incometaxindiaefiling.gov.in/.
There are several advantages of e-filing returns, like you don’t have to perform paperwork and waste time sorting them out. With the click of a mouse, you can log in to the secured website and file income tax returns online.
Also Read: How to e-Verify Income Tax Return
Deductions Allowed under Various Sections
A taxpayer can claim for additional deductions under various sections. Some of them are mentioned below:
- Under Section 80CCC, contributions to annuity plans such as LIC are considered for tax benefit up to Rs. 1.5 lakh.
- Interest on savings account is tax exempt up to Rs. 10,000 annually under Section 80TTA.
- Investment in Rajiv Gandhi Saving Scheme is eligible for the deduction Section 80CCG.
- Under Section 80D, if a family member of the taxpayer is suffering from 40% disability, he can claim deductions for up to Rs. 75,000 for spending on medical treatments for disabled dependents.
- Under Section 80DDB, a person is allowed deductions if he pays an amount of Rs. 40,000 or more on treatment of specific diseases which includes malignant cancers, neurological diseases, chronic renal failure, haematological disorders and AIDS.
- If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E. However, deductions are not allowed for repayment of the principal amount of the education loans.
- Under Section 80G, 80GGA, 80GGB, 80GGC, if a person has made donations to an approved body during a financial year, he will qualify for the deductions.
- A standard deduction of Rs. 50,000 has been introduced in Budget 2022 for the salaried class. This deduction is allowed irrespective of expenses incurred by the employee. The assessee does not have to submit actual bills to claim this deduction.
What is Income Tax Rebate?
A number of confusions arise when terms like income tax rebate, income tax exemption and income tax deduction are used. Although all these terms are beneficial to the tax payer, they have different meanings.
- Income tax rebate includes those items which can be claimed from the total tax payable.
- Tax deductions and tax exemptions are claimed from the income whereas in case of rebates, claims are made from the tax payable.
- You can claim an Income Tax rebate under section 87A when you file the income tax returns.
- A rebate will be available if the taxpayer is a resident individual who has not crossed the 80 year mark and whose taxable income is Rs. 5,00,000 or less.
- Hindu undivided Families, companies, trusts, LLP, partnership firms and NRIs are not eligible for tax rebate.
Difference between “Deduction” and “Exemption”
| Feature | Deduction | Exemption |
|---|---|---|
| Meaning | Reduces taxable income | Income becomes tax-free in the hands of taxpayer |
| How it works | Subtracts certain expenses from gross income | Excludes certain income from the tax calculation |
| Examples | Medical expenses, 80C deduction | Agricultural income, scholarships |
What are the Exemption for Salaried Individuals?
As per the Income Tax Act, salaried employees are eligible for several income tax exemptions. It is also important to know that, the salaried employees intimate the employer that they are claiming these exemptions. Also deducting the TDS the employer would then compute the tax on the balance income. Below are mentioned some of its details:
- Most employers give their employees a house rent allowance. As per the Income Tax Act, a portion of the HRA is exempted from the tax.
- Some employers also give special allowance to the employees. A certain part of this amount is exempted from tax provided the vacation was within India.
- In most cases, employees are eligible for leaves within when they serve an organisation. 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 exemption.
- Up to a certain limit, tax exemption is also given on pensions.
- At times, some employees opt for a voluntary retirement (VRS) before the age of retirement. In such cases, the employer pays out an amount of money to the employee. This amount received by the employee in the event of VRS is exempted from the tax.
- Several other allowances such as children education allowance and transport allowance are exempted from the tax but only up to a certain limit.
Also Read: TDS Return Due Date For FY24-25: Know How To Make TDS Payment Online
How to Avoid Tax Evasion
One of the key problems in India is the painfully low numbers of tax payers which indicates that tax evasion takes place at a large scale. 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.
If the Income tax authorities scrutinize and discover that you have deliberately tried to reduce the tax liability, you will be penalized. The penalty can go up to almost three times the amount which has been concealed. 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.
FAQs
You are eligible to get an income tax refund from the government if you have paid taxes in excess of your financial liability for the applicable financial year. Your applicable refund amount will be calculated at the time of filing ITR and credited to you as and when the refund has been processed by the income tax authorities.
Income Tax Return (ITR) is a method to report gross taxable income from different sources, claiming tax deductions and declaring net tax liability to the Income Tax Department. It is filed by salaried or self-employed individuals, Hindu Undivided Families (HUF), companies or firms. A taxpayer can file the ITR online on the e-portal of the Income tax department.
As per section 139(1) of the Income Tax Act, 1961, any individual whose total income in the financial year exceeds the income tax exemption limit is liable to file the income tax return. Apart from that, any private or public company based out of India or doing business in India, firms, Hindu Undivided Family (HUFs), Association of Persons (AOP), Body of Individual (BOI) etc. are also liable to declare net profits/losses of the year and pay their tax liability by filing ITR.
It is not possible to file Income Tax Return without providing PAN. However, this is expected to change with the interoperability of Aadhar and PAN in the coming years.
Professional tax is a state level tax applied on the income earned by individuals within the specific state. Currently professional tax is applicable only to individuals located in specific states in India that collect professional tax and the rate of professional tax as well as exemption limit varies from state to state. On the other hand, income tax is a central tax i.e. it is payable to the central government tax authorities by the tax assessee and rate of taxation is the same all over India. It is also notable that the amount paid in lieu of professional tax gets deducted from income tax liability of the tax assessee at the time of Income Tax filing.
Yes, you can file return of income voluntarily even if your income is less than basic exemption limit.
The five heads of income are Income from Other Sources, Income from House Property, Income from Capital Gains, Income from Business and Profession, and Income from Salary.
The government collects income tax for various reasons, including paying off the salaries of the state and central government employees and meeting infrastructural expenses. The income tax collected by the government acts as a source of income based on which the nation’s development is taken care of.
The Budget 2022 proposed to introduce an ‘Updated’ return that can be filed within 24 months of the end of the relevant AY, on the payment of additional tax. Even if you have not filed original return before the due date specified in the Income Tax Act, you can file the ‘updated’ return.
As per the new tax regime, majority of the deductions are not allowed. However, standard deduction of up to 50,000 is allowed, family pension, and deduction for employers contribution to NPS account is allowed.
Yes, you can switch between old and new tax regime every year if you do not have income from business and profession. However, if you have income from business or profession you can only switch once in your lifetime.
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