Income Tax in India

What is Income Tax

Income Tax refers to the tax you pay directly to the government depending on your income or profit (for companies/local authorities). The money collected by this direct tax route is used by the Government for infrastructural developments and, also, to pay the employees of central and state government bodies.

Taxes levied by the Government are of two types- Direct taxes and Indirect taxes. Indirect taxes are those that are levied on services and goods. Direct taxes, on the other hand, are levied on profits and income. For example, service tax is what you pay in a restaurant and is an indirect tax, whereas Income Tax that is deducted from your salary every month in the form of TDS, is an example of direct tax.

Income Tax Act of India, passed in 1961, governs the provisions for income tax as well as the various deductions that are applicable to it. However, since 1961, the law has been amended several times to take care of inflation and other socio-economic situations.

Income Tax Overview

Income Tax is undoubtedly the most important source of revenue for the Indian government. It is established as an inevitable imposition on the citizens in order to raise funds for fulfilling the development & defence needs of the country.

Taxes imposed on income, purchase, sale, and property help the government to run different government embodiment and machinery.

In India, the first Income Tax Act was introduced in 1860. It was implied by James Wilson to overcome heavy losses suffered by the British Government due to India’s freedom movement in 1857. The history of Income Tax in India is divided into 3 different periods:

  1. 1860-1885
  2. 1886-1914
  3. 1914 till date

Currently, the Income Tax Act 1961 is applicable in India. In 1956, the government referred the request to impose Income Tax Act. The Law Commission further submitted its report on the Income tax Act in 1958 and the same year, Chairman Shri Mahavir Tyagi, chaired the Direct Taxes Administration inquiry Commission. 

The Income Tax Act, 1961 was introduced to the public. Since then, it has undergone amendments from time to time.

Types of Taxes in India

As per the Income Tax Act, there are 2 types of taxes in India:

  1. Direct Taxes

It is borne and paid directly by the individual on whom it is imposed such as, wealth tax, income tax, gift tax, etc. The taxpayer pays this tax directly to the government without any involvement of intermediary source.

  1. Indirect Taxes

If a tax is passed on by the taxpayer to the other person, it is an indirect tax e.g. sales tax, Value Added Tax (VAT) etc. This type of tax is paid indirectly to the Income tax department.

Who are the Tax Payers?

Any Indian citizen aged below 60 years is liable to pay income tax, if their income exceeds Rs 2.5 lakhs. If the individual is above 60 years of age and earns more than Rs 2.5 lakhs, he/she will have to pay taxes to the Government of India. Additionally, the following entities that generate income are liable to pay direct taxes:

  •    Hindu Undivided Family (HUF)
  •    Body Of Individuals (BOI)
  •    Association of Persons (AOP)
  •    Local Authorities
  •    Corporate firms
  •    Companies
  •    All Artificial Juridical Persons

What are the Different Income Tax Slab Rates?

Income tax slab rates are defined on the basis of the earning of the taxpayers. Income tax slab rates are broadly categorized as follows:

For HUFs and Individuals (Male or Female) Below the Age of 60 Years Income Tax Slabs & Rates 2017-18

Income Tax Slabs

Income Tax Rates

 Income less than Rs 2.5 lakhs

Not applicable

Income greater than Rs 2.5 lakhs but less than Rs 5 lakhs

5% of the amount exceeding Rs 2.5 lakhs

Income greater than Rs 5 lakhs but less than Rs 10 lakhs

20% of the amount exceeding Rs 5 lakhs

Income greater than Rs 10 lakhs

30% of the amount exceeding Rs 10 lakhs

 

For Individuals (Male or Female) Above the Age of 60 Years:

Income Tax Slabs

Income Tax Rates

Taxable income less than Rs 3 lakhs

Not Applicable

Taxable income greater than Rs 3 lakhs but less than Rs 5 lakhs

5% of the amount exceeding Rs 3 lakhs

Taxable income greater than Rs 5 lakhs but less than Rs 10 lakhs 

20% of the amount exceeding Rs 5 lakhs

 

Taxable income greater than Rs 10 lakhs

 

30% of the amount exceeding Rs 10 lakhs

 

 

For Individuals (Male or Female) Above the Age of 80 Years:

Income Tax Slabs

Income Tax Rates

Taxable income less than Rs 5 lakhs

Not Applicable

Taxable income greater than Rs 5 lakhs but less than Rs 10 lakhs 

20% of the amount exceeding Rs 5 lakhs

Taxable income greater than Rs 10 lakhs

30% of the amount exceeding Rs 10 lakhs

 

 

For Co-operative Societies:

Income Tax Slabs

Income Tax Rates

Taxable income less than Rs. 10,000

10% of the income

Taxable income greater than Rs. 10,000 but less than Rs. 20,000 

20% of the amount exceeding Rs. 10,000.

 

Taxable income greater than Rs. 20,000

 

30% of the amount exceeding Rs. 20,000.

 

 

For Domestic Companies:

The income tax rate applicable for Domestic Companies will be @ 30%.

 

For Foreign Companies: 

Nature of Income

Rate of Tax

According to the agreement designed by Indian Government, if the foreign firms are paid by the Indian Government in the form of royalties (After March 31st ,1961 and before April 1st, 1976)

50%

According to the agreement made with an Indian concern, if the payment is done for the technical services (provided by foreign firms - After February 29th 1964, before April 1st 1976)

50%

For any other income

40%

 

For Local Authorities: 

For local authorities, the tax rate is determined as at 30%.

**Income Tax Slab Rates for the assessment year 2018-19**

How is the Income Tax Collected?

There are primarily three ways in which the Income Taxes are collected by the Government:

  • Taxes Deducted at Source (TDS)
  • Taxes Collected at Source (TCS)
  • Voluntary payment by tax payers into designated Banks 

What are the different taxable Heads of Income?

Income taxes are levied depending on the source of Income. Following are the five main income heads from which taxes are deducted.

  •  Income From Salaries

Taxable income that all employees receive from their employers is categorized under this head. As per section 192 of the Income Tax Act, the employer will withhold taxes if the employees do not come within the taxable bracket. All about tax deductions and the net paid income are detailed in Form 16 that must be provided by the employer to the employee.

  •  Income From Capital Gains

Capital gains taxation applies to earnings from the sale of capital assets held by the tax assessee. Capital assets refer to the properties such as buildings, lands, bonds, equities, debentures, jewelleries, etc. Taxes are levied on the income of the assessee when such properties are sold.

  • Income From House Property

Income Tax is levied on house property, if the house is given out on rent by the owner. However, under this head, the property cannot be used for business or professional purposes.

  • Income (Profits) From Business

As per section 30 to 43D of the Income Tax Act, the profits earned from businesses or by providing professional services are considered taxable as per applicable rates. This income head is also known as “Profits and Gains of Business or Profession”.

  • Income From Other Sources

Income from any sources other than the four listed above is categorized under this head. Some specific income coming under this head is listed below:

  •   Lottery/horse race winnings
  •   Income from dividends
  •   Pension received after the pensioner’s death.
  •   Rental income (other than house properties)
  •   Gifts received
  •   Interest on government securities, debentures, and bonds.

What are Income Tax Returns?

Every individual, who has a source of income, regular or irregular, is legally required to file their income tax returns. Even if your income is below the taxable bracket, you should file your income tax returns. There are prescribed forms through which the income earned by a person and the income tax paid thereon are informed to the Income Tax Authority. The following table shows different forms prescribed for different classes of taxpayers.

ITR Form 1

Any person who receives regular salary or pension or has an income from residential property or other sources.

ITR Form 2

This form is for those who are come under the category of Hindu Undivided Families and have income from any sources other than Profits gained from business and profession.

ITR Form 3

This form is for the Hindu Undivided Families whose income fall under the head of Profits and Gains of Business or Profession.

ITR Form 4S

This form, also known as SUGAM, is applicable to HUFs(Hindu Undivided Families) and individuals opting for SUGAM taxation scheme as per section 44 AD/ AE

ITR Form 4

This form is applicable to Hindu Undivided Families and individuals who are professionals or proprietors

ITR Form 5

This form is applicable for LLPs, Firms, BOIs, AOPs, artificial judiciary persons and local authorities.

ITR Form 6

This form is applicable to companies that claim no exemptions as per section 11 of the Income tax Act.

ITR Form 7

This form is applicable to the persons who are required to file returns as per Sections 139(4A), 139 (4D), 139 (4C), 139(4B)

ITR Form V

ITR V is provided to acknowledge that the Income Tax return has been filed.

 

Uses & Benefits of Filing Income Tax Return  

Mentioned below are the uses and benefits of Filing Income Tax Return

  1. Easy Loan Processing

Filing ITR (Income Tax Return) makes it easier for financial institutions to check the financial credibility of an individual (assesse). If a taxpayer applies for a loan, it helps in the easy processing of bank loans.

  1. Foreign Travel

The process of foreign trips’ visa procurement needs ITR proofs.

  1. Carry Forwarding of Losses

Some losses such as business loss, speculation loss, a capital loss can be carried forward only when ITR is filed before the due date.

  1. Tax Refund

 In case you have paid any additional tax, it can only be claimed if you have filed your ITR.

  1. Passport Application

Applying for a passport becomes an easier process if you have filed your ITR as it serves as a Non-ECR proof (Non Emigration Check Required). You simply need to submit a photocopy of your ITR assessment along with actual payment receipt of latest income tax return. Or else, you can also submit the income tax statement attested by IT authorities.

  1. Insurance Claim

 If there is an accidental death, the insurance company will need a proof of income to the process the claim. In case ITR is missing, it can significantly lower the amount of claim as ITR is the only document that court accepts for such cases.

  1. Government Tenders

Filing ITR also comes handy while applying for government tenders, panel registration, etc. You need to submit your ITRs of last 5 to 7 years which will be checked by the tender scrutiny committee. It is done to assess whether you (as an applicant/contractor) have worked on a tender at a particular scale or not.

  1. High Life Risk Cover

If you are planning to buy a high life cover of Rs. 50 lakhs or 1 crore, it can only be bought if you have filed your ITR. It helps the insurance providers to verify your annual income.

Income Tax Calculation

Tax calculation is done on the annual income of a person and the annual financial cycle under income tax law starts from 1st April to 31st of March of the next calendar year. The law classifies the years as “Previous Year” and “Assessment Year”.

“Previous year” is defined as the year in which income is earned, and “Assessment Year” is defined as the year in which it is charged. 

Tax Deduction

The following are the various sections of Income Tax Act of 1961, which allows reduction on one’s Taxable Income.

  • Sections 80C

    Under this section, deduction is available to individuals and HUF. On the payment made towards life insurance policies, provident Fund or superannuation, tax deduction is available up to the amount of Rs 1,50,000/-.

  • Section 80CCC

    Tax exemptions under this section are on payment made on insurance companies and LIC that are under approved pension plans. The pension policy must be taken from the individual himself and must be up to Rs 1, 50,000 out of taxable income.

  • Section 80CCD

    Tax exemption under this section is for contribution by the assessee and the employer to the new pension scheme. The tax exemption under this section is equal to the contribution, not exceeding 10% of an individual salary.

  • Section 80D

    The premiums paid on the health insurance comes under this section of income tax deduction.  Health insurance policies generally provide coverage to the insured person, spouse, and dependent children. If you pay premiums for your health insurance, then you can save your taxes up to Rs 15, 000 to Rs 20, 000. In the case of Hindu Undivided Family, the general deduction is up to Rs 15, 000 and additional deduction is Rs 5, 000.

  • Section 80DDB

    Under this section, the tax deduction is done on medical expenses that arise from the treatment of any disease or illness specified in the rule (11DD).  The tax benefit is applicable for the taxpayer, for the family member or any member of HUF.

  • Section 80E

    The interest paid on education loan in the country comes under this section of the tax deduction.

  • Section 80EE

    The first time home owners come under this section of tax benefit. Those people whose first home purchase value is less than Rs 40 lakh and the loan takes for which is Rs 25 lakh or less are applicable for the tax deduction.

  • Section 80RRB

    Under this section, the tax deduction is applicable on the income earned by way of royalties and patents. For the patent registered under the patent act, 1970 up to the amount of Rs 3, 00,000 income tax can be saved.

  • Section 80TTA

    Tax deductions are applicable on interest earned in the post office and co-operatives society and saving bank accounts. Up to Rs 10,000 of interest income individuals and HUFs can claim the deduction.

  • Section 80U

    This section of income tax deduction is applicable for disable people. To avail the tax benefit under this section, one needs to show their disability certificate. Depending on the severity of disability up to Rs 1,00,000 can be non-taxed.

  • Section 24

    The interest paid on a housing loan comes under this section of tax exemption. In addition to the deduction under section 80C, 80CCF, and 80D up to Rs 2,00,000 per year can be claimed as the deduction. For the rented properties, 30% of the received rent and municipal taxes paid are eligible for tax saving.

What is Income Tax Act?

The income tax laws in India are established under the provisions of Income Tax Act, 1961. According to these income  tax laws, the taxable categories are mentioned below.

  1. Salaries
  2. Profits & gains earned from a business or profession
  3. Income from house/property
  4. Capital gains
  5. Income from other sources

The Basics of Income Tax Calculation in India

Income Tax in India is filed annually on the basis of ‘Previous Year’ and Assessment year’.

Previous Year

According to income tax rules, ‘Previous Year’, also known as the ‘Financial Year’ begins on 1st April of the current year and ends on 31st March of the next year. It doesn’t matter in which particular month you have started earning, the financial year will end on the 31st March and the new tax year will begin 1st April onwards. Hence, it becomes necessary to plan your taxes in advance for each financial year.

Assessment year

In simple words, it is the upcoming fiscal year which comes after the ‘Previous Year’ and one has to assess and file her/his income tax returns in the ‘Assessment Year’.

Income Tax Act, 1961

The Income Tax Act comes with a wide range of sections. Each of section caters to a different aspect of taxation rules in India. Let’s have a look into various chapters of the IT Act along with the related sections and sub-sections:

  • Chapter 1

    The first section of the Income Tax Act offers a basic introduction to the IT Act.

  • Chapter 2

    This chapter deals with the commencement & the extent of the IT Act.

  • Chapter 3

    This particular chapter deals with income tax charges, dividend income, the scope of total income, income earned through working abroad, etc.

  • Chapter 4

    The Chapter 4 of Income Tax laws deals with the other forms of income that are not a part of total income like income from property, institution, trusts, political parties’ incomes, etc.

  • Chapter 5

    The chapter deals with sections about income earned from other sources such as income from capital gains, house property, businesses, etc.

  • Chapter 6

    The chapter deals with the transfer of income wherein no actual transfer of assets is involved. It also includes revocable transfer.

  • Chapter 7

    This chapter is basically about the deductions applicable on income generated from certain sources and certain payments.

  • Chapter 8

    Chapter 8 of Income tax Act deals with the rebates and how much share a member would get in a body or an association.

  • Chapter 9

    This chapter deals with the double taxation relief in detail which helps the taxpayers to get a rebate on the income tax paid.

  • Chapter 10

    This chapter deals with the special scenarios where income tax payment is avoided. This type of scenarios normally includes agreements with foreign countries. The chapter deals with the information about the particular countries that follow these kinds of agreements.

  • Chapter 10A

    This chapter deals with different types of general anti-avoidance income tax rules for the income taxpayers.

  • Chapter 12

    This chapter deals with the tax calculation under special cases.

  • Chapter 12A

    The chapter 12A of the Income Tax Act deals with the special provisions formulated for Non-Resident Indians. It includes short-term capital gains, capital gains, provident fund, etc. This chapter includes Section 110 to Section 115BBE of the income tax rules as per the Income Tax Act, 1961.

    There are various cases that belong to this section that yield tax-liable incomes such as foreign currency units, dividends, royalty, dividends, etc.

    Chapter 12B

    This particular chapter deals with special tax provisions that are designed for particular companies. It includes the Section 115J to Section 115JF of the Income Tax Act.

  • Chapter 12BB

    This chapter deals with the taxation process to convert a foreign organization into an Indian subsidiary.

    Chapter 12D

    This chapter deals with the taxation process for the profits earned by domestic companies. It also deals with the interest payable in case of non-payment of taxes by the companies or if the company is a defaulter.

  • Chapter 12DA

    This chapter deals with the income tax rules on the distributed income of an organisation.

  • Chapter 12E

    Chapter 12E of the Income Tax Act deals with the rules meant for distributed income of unit holders.

  • Chapter 12F

    This chapter deals with the taxes on income received from venture capital funds and from venture capital companies.

  • Chapter 12G

    This chapter deals with special provisions designed for the shipping companies and the involved taxation procedures.

  • Chapter 13

    This chapter deals with the information related to different income tax authorities including their jurisdiction, appointment & control, their powers and also disclosure of information.

  • Chapter 14

    Chapter 15 of the Income Tax Act deals with Section 139 to Section 152. Basically, this chapter deals with all the return filing formalities which include obtaining PAN, e-filing of ITR, accounting methods. It also includes other amendments, intimation of any loss and related cases and rectification of mistakes.

  • Chapter 14A

    Chapter 14A deals with the special provisions that help to avoid repetitive appeals. It includes the cases that are already pending in the Supreme Court or High Court.

  • Chapter 15

    This chapter deals with the liabilities for different cases which include general as well as special provisions. It also deals with the provisions meant for tax recovery from NRIs, private companies, etc.

  • Chapter 16

    Chapter 16 of the Income Tax Act deals with the firms and their taxation and assessment process. It also deals with constitution changes, succession, and their dissolution processes.

  • Chapter 17

    This chapter deals with the clauses related to tax collection & recovery. It also gives an insight of the interest charged on late tax payments or recovery cases.

  • Chapter 18

    This chapter deals with the income tax relief given to the companies for the dividends they pay to their shareholders. Chapter 18 also deals with the tax relief provided to the companies in lieu of their charitable work that they support through their foundation wings.

  • Chapter 19

    Chapter 19 deals with the tax refunds in case any extra tax is paid to the Income Tax department. It involves the cases where a taxpayer is eligible to get a refund, interest on her/his refund if there is no claim made, correctness of assessment. It includes Section 237 to Section 245.

  • Chapter 19A

    Chapter 19A deals with the settlement of cases and includes sections 245A to 245L. Different aspects of settlements such as application, abatement of proceeding, procedure, and recovery are covered under it.

  • Chapter 19B

    This chapter deals with all advance rulings. It also deals with sections from 245N to 245V. The chapter 19B includes application for power of authority, advance ruling and procedure.

  • Chapter 20

    The chapter deals with the appeals forwarded to the commissioner and deputy commissioner. Other than this, it also deals with appeals made to the Supreme Court, High Court and other general revision aspects by commissioner.

  • Chapter 20A

    The chapter 20A of the Income Tax Act includes section 269A to section 269S. This chapter basically deals with the acquisition of immovable property in certain cases to counteract tax evasion. All acquisition aspects from jurisdiction to every other related aspect are covered under this chapter.

  • Chapter 20B

    The Chapter 20B deals with different payment modes, tax evasion correction are required. It also deals with loan accepting and deposits and its corresponding modes.

  • Chapter 20C

    This chapter deals with buying of immovable property. However, the properties that are made by the central government for transfer cases. Few aspects covered under the chapter are appropriate authority, restrictions on the property, vesting of property and rectification of mistakes.

  • Chapter 21

    It includes sections 271 to 275 of the Income Tax Act. It deals with different penalties applicable to taxpayers in different cases. In short, it deals with penalties such as non-payment of taxes, non-disclosure, and failure to comply with different provisions of the income tax sections and so on.

  • Chapter 22

    This chapter includes section 275A to section 280D. These sections deal with prosecution & offenses with respect to compliance failure and other related details.

  • Chapter 23

    This chapter includes sections 281 to 298. It further deals with almost all miscellaneous topics that can’t be categorised under any other tax chapters mentioned above. It includes generic as well as special scenarios that may arise with respect to the taxation process for different taxpaying entities.

Schedules Made to the Income Tax Act

Schedules to the Income Tax Act 1961 basically consist of various annexures that were amended and added to include the scenarios that were not initially mentioned or covered. These schedules are introduced to make the Income Tax Act more comprehensive and inclusive.

Income Tax E-Filing

Over the past few years, the income tax department of India has digitized the entire process of Income Tax Collection and return filing. It has become very convenient for individuals as well as businesses to pay their taxes online, file returns and finally track the history of their payments through the various portals of the Income Tax Department.

Income Tax paid by you is directly used in nation-building activities. The tax helps the Government to improve the infrastructure of our country, provide better governance and run the various public services smoothly. All the taxpaying Indians are, therefore, in whatsoever little way contributing towards a better future for our motherland.

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