Income Tax in India

What is Income Tax in India?

Income Tax refers to a percentage of your income that you are liable to pay directly to the Government of India. The Income Tax Department, under the Ministry of Finance, oversees the administration and collection of income taxes. Compliance with income tax regulations is crucial for sustaining government functions and funding public services.

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

Types of Income Tax in India

There are two main types of income tax in India: 

• Direct Tax

• Indirect tax

1. Direct Tax:

   • Direct taxes are applied directly to the income earned by individuals, Hindu Undivided Families (HUFs), or other taxpayers.

   • Direct taxes are broadly categorized into:

     • Income Tax: Paid by individuals, HUFs, or non-corporate taxpayers on their received income, with tax rates prescribed by law. Income Tax is calculated based on specific slab rates as per the chosen old vs. new tax regime for the relevant financial year in question.

     • Corporate Tax: Paid by companies on their business profits, with specific tax rates outlined in India's income tax laws.

2. Indirect Tax:

   • A tax levied on consumption of goods and services, not directly on your income.

   • Manufacturers, wholesalers, and retailers collect these taxes and pass them on to the final consumer embedded in the price.

   • Since 2017, the Goods and Services Tax (GST) replaced multiple indirect taxes like excise duty, VAT, and service tax, simplifying the system.

Who is Liable to Pay Income Tax?

The following individuals and entities that generate income are liable to pay direct taxes:

• Individuals

• Hindu Undivided Family (HUF)

• Body of Individuals (BOI)

• Association of Persons (AOP)

• Local Authorities

• Corporate firms

• Companies

• All Artificial Juridical Persons

Types of Taxpayers

In India, individuals are broadly categorized as residents or non-residents for tax purposes. The determination of residential status is an annual process based on the individual's duration of stay in India for that financial year.

• Resident Individuals: They are required to pay taxes on their global income, encompassing earnings both in India and abroad.

• Resident Individuals are further classified into the following categories for tax assessment:

  • Individuals below 60 years of age

  • Individuals aged more than 60 but less than 80 years, also known as senior citizens

  • Individuals aged more than 80 years, also known as super senior citizens

• Non-Residents Individuals: They are obligated to pay taxes solely on income earned or accrued within India.

Types of Income under Income Tax Act

Under the Income Tax Act, 1961, there are various types of income that are categorized for taxation purposes. The key types include:

Tax Slab Rates under New Tax Regime

The new tax regime for FY 2023-24, introduced in the Union Budget 2023, aims to simplify the tax system and make it more taxpayer-friendly. The tax slab rates for new tax regime are mentioned below:

Key Features of New Tax Regime for FY 2023-24:

• Tax Rebate: The new tax regime introduced a full tax rebate on income up to Rs 7 Lakhs. This means you need not pay tax if taxable income is below this threshold.

• Standard Deduction: A standard deduction of Rs 50,000 for salaried taxpayers under the new tax regime was introduced.

• Surcharge Reduction: Reduction of the highest surcharge in the new tax regime to 25% from 37% for those earning over Rs 5 crores, resulting in a decrease in their tax rate from 42.74% to 39%.

• Default Tax Regime: The new income tax regime is the default, but taxpayers have the option to choose the old regime.

• Leave Encashment Increase: Leave encashment for non-government employees increased to Rs 25 lakhs from Rs 3 lakhs.

• TDS Rate Reduction: The TDS rate reduced to 20% from 30% on the withdrawal of EPF.

Tax Slab Rates under Old Tax Regime for FY 2023-24

For the financial year 2023-24 (Assessment Year 2024-25), the key features of the old tax regime remain largely unchanged compared to the previous year.

Key Features of Old Tax Regime for FY 2023-24:

• The old tax regime offers 3 slab rates: 5%, 20%, and 30% for different income brackets.

• You can choose to stick with the old tax regime while filing your Income Tax Returns (ITR).

• 70+ Deductions are allowed in the old tax regime, such as:

• Leave Travel Concession (LTC)

• House Rent Allowance (HRA)

• Other specified allowances

• Tax-saving investments under sections 80C to 80U (e.g., LIC, PPF, NPS, etc.)

• Standard deduction of Rs 50,000

• Deduction for interest paid on the home loan.

Income Not Covered under Income Tax Slab Rates

• Not all income is taxed on a slab basis; an exception is capital gains income.

• Taxation of capital gains depends on the type of asset and how long it has been owned.

• The holding period categorizes an asset as either long-term or short-term.

• Different assets have varying holding periods to determine their nature.

• A brief overview of holding periods, the nature of assets, and their respective tax rates is provided below.

*Indexation adjusts the purchase price for inflation, reducing the taxable gain.
Note: The above-mentioned taxes do not consist of a surcharge levied on your income tax.

What is the Financial Year (FY)?

A Financial Year (FY) is a 12-month period used by taxpayers for accounting and financial reporting.

• As per the Income Tax Act, a financial year runs from April 1 of one calendar year to March 31 of the next year.

• Abbreviated as "FY"; e.g., FY 2023-24 spans from April 1, 2023, to March 31, 2024.

What is an Assessment Year (AY)?

An Assessment Year (AY) is the year immediately following the financial year, from April 1 to March 31.

• It is referred to as the assessment year because taxpayers evaluate and pay taxes on income earned in the financial year.

• For instance, AY 2023-24 corresponds to incomes earned during FY 2022-23.

Who is an Assessee?

An assessee in the income tax system is an individual or entity assessing income and paying taxes under the Income Tax Act. It can include individuals, partnerships, companies, Associations of Persons (AOP), trusts, etc.

What is a PAN (Permanent Account Number)?

A PAN (Permanent Account Number) is a unique 10-digit alphanumeric identifier issued by the Income Tax Department to Indian taxpayers.

• It is used for recording all tax-related transactions and information.

• PAN is necessary for activities like paying advance or self-assessment tax and linking financial transactions with the tax department.

What is a TAN (Tax Deduction and Collection Account Number)?

A TAN (Tax Deduction and Collection Account Number) is a unique 10-digit alphanumeric identifier issued by the Income Tax Department for tax deduction and collection purposes.

It is mandatory for entities responsible for TDS or TCS; it is required in returns, payment challans, and certificates.

How Are the Income Tax Collected?

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

1. Taxes Deducted at Source (TDS)

   • Deduction of tax by the payer for specified payments to the recipient.

   • Employers, banks, and other payers deduct TDS from your income at the time you make your payments.

   • For example, your employer deducts TDS from your salary and deposits it with the government.

2. Taxes Collected at Source (TCS)

   • This is similar to TDS, but it is collected on certain transactions, such as the sale of certain goods or the payment of rent. 

   • For example, if you sell a property, the buyer may be required to deduct TCS from the sale price and deposit it with the government.

3. Voluntary payment by taxpayers into designated Banks

   • This is where you calculate your own tax liability and pay it directly to the government. 

   • You can do this online or through designated banks.

Advance Tax

An advance tax is the payment made in advance when the estimated income tax liability exceeds Rs 10,000. The due dates for advance tax instalments are pre-specified.

Self-Assessment Tax

The self-assessment tax is the balance tax paid on assessed income after deducting advance tax and TDS.

E-Payment of Taxes:

Taxpayers can pay advance and self-assessment tax online via the NSDL website. All you need for e-payment is net banking with an authorized bank.

What are Income Tax Returns (ITRs)?

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.

Income Tax Return (ITR) e-Filing

Income tax e-filing is mandatory for most taxpayers. However, taxpayers aged 80 and above and taxpayers with an income below Rs 5 lakhs not seeking a refund are exempt from online filing.

Features of ITR e-Filing:

Taxpayers with an income below Rs 5 lakhs, not seeking a refund, are exempt from online filing.

• Consequences of Late Filing:

• Loss carry-forward (except house property loss) is denied.

• Delay in processing refund claims.

• Difficulty in obtaining home loans.

• Late filing fee of up to Rs 10,000 under Section 234F.

• Interest levy under Section 234A if taxes are due by July 31.

Income Tax Saving Instruments in India

You can take benefit of the following tax saving instruments in India under the old tax regime:

Income Tax Deductions on Health Insurance and Medical Expenses

The Income Tax Act 1961 offers various deductions and exemptions related to healthcare costs.

Deduction on Education Loan

Individual taxpayers who have taken an education loan for themselves or for their spouse, children, or dependent parents can avail of tax benefits under Section 80E of the Income Tax Act, 1961. This section allows you to claim deductions on the interest paid on your education loan for pursuing higher studies.

Deduction on Home Loan

Home loan deductions offer significant tax benefits in India, helping you save on your taxable income. They fall under two main sections of the Income Tax Act, 1961:

Deduction on Income from Interest Earned

Deductions on income from earned interest in India are mainly covered by two sections of the Income Tax Act, 1961:

Important Dates for Payment of Income Tax in India

Summing It Up

Income Tax in India serves as a critical source of revenue for the Government, enabling the funding of essential public services and infrastructure. The progressive tax structure aims to promote equity, with various deductions and exemptions provided to encourage savings and investments. Despite its role in nation-building, ongoing reforms are essential to simplify the tax regime, enhance compliance, and ensure a fair and transparent system that fosters economic growth and development.