Income Tax in India

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. On the other hand, direct taxes are levied on profits and Income. Here is a detailed guide for Income Tax in India that will help you understand the tax implications on your income.

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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:

Type of Income Description
1. Salary Compensation from employment, including perks and bonuses
2. House Property Rental income from owned property
3. Business or Profession Income from business activities or professional services
4. Capital Gains Profits from the sale of capital assets
5. Other Sources Miscellaneous income not covered by other categories

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:

Tax Slabs Income Tax Rates (in % p.a.)
0 - Rs. 3 lakhs NIL
Rs. 3 lakhs – Rs. 6 lakhs 5%
Rs. 6 lakhs – Rs. 9 lakhs 10%
Rs. 9 lakhs – Rs. 12 lakhs 15%
Rs. 12 lakhs – Rs. 15 lakhs 20%
Rs. 15 lakhs & above 30%

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.

Income Range Tax Rates (in % p.a.)
Individuals (Age < 60 years) Resident Senior Citizens (Age ≥ 60 to < 80 years) Resident Super Senior Citizens (Age ≥ 80 years)
0 - Rs.2.5 lakhs NIL NIL NIL
Rs. 2.5 lakhs – Rs. 3 lakhs 5% NIL NIL
Rs. 3 lakhs – Rs. 5 lakhs 5% 5% NIL
Rs. 5 lakhs – Rs. 10 lakhs 20% 20% 20%
Rs. 10 lakhs & above 30% 30% 30%

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.

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

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.

Type of Investment Holding Period for Long-Term Gain LTCG Tax Rate STCG Tax Rate
Stocks > 1 year 10% 15%
Unit Linked Insurance Plan (ULIP Funds) > 1 year 10% 15%
Equity-Oriented Mutual Funds > 1 year 10% 15%
Rest of the Mutual Funds > 3 years 20% with indexation* Per applicable slab rates
Government and Corporate Bonds > 3 years 20% with indexation* Per applicable slab rates
Gold > 3 years 20% with indexation* Per applicable slab rates
Gold ETF > 3 years 20% with indexation* Per applicable slab rates
Immovable Property > 2 years 20% with indexation* Per applicable slab rates
Movable Property > 3 years 20% with indexation* Per applicable slab rates
Privately held Stocks > 1 year 10% 15%

*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.

ITR Form 1 Any person who receives a regular salary or pension or has an income from residential property or other sources.
ITR Form 2 This form is for those who come under the category of Hindu Undivided Families and have income from sources other than profits gained from business and profession.
ITR Form 3 This form is for the Hindu Undivided Families whose income falls 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 the 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 to LLPs, Firms, BOIs, AOPs, artificial judicial 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.

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:

Tax-Saving Instrument Tax Benefits
Unit Linked Insurance Plans (ULIP)
  • Up to Rs. 1.5 lakhs deduction on premiums under Section 80C.
  • The maturity returns are tax-free under Section 10(10D)
Capital Guarantee Plans
  • Deduction on premiums under Section 80C from taxable income of up to Rs. 1.5 lakhs.
  • The returns are tax-free under Section 10(10D)
Life Insurance
  • Deduction of up to Rs. 1.5 lakhs on premiums under Section 80C.
  • Returns are tax-free under Section 10(10D).
New Pension Scheme (NPS)
  • Deduction of up to Rs. 1.5 lakhs on premiums under Section 80CCD(1).
  • Additional deduction of up to Rs. 50,000 under Section 80CCD(1B)
Equity-Linked Tax Saving Scheme (ELSS) Up to Rs. 1.5 lakhs deduction on premiums under Section 80C
Public Provident Fund (PPF) Up to Rs. 1.5 lakhs deduction on premiums under Section 80C
National Saving Certificates (NSC) Up to Rs. 1.5 lakhs deduction on premiums under Section 80C
Senior Citizen Savings Scheme (SCSS) Up to Rs. 1.5 lakhs deduction on premiums under Section 80C
Sukanya Samriddhi Yojana (SSY)
  • Up to Rs. 1.5 lakhs deduction on premiums under Section 80C.
  • Returns are tax-free under Section 10(10D)
Tax-Saver Fixed Deposit (Tax-Saving FDs) Up to Rs. 1.5 lakhs deduction on premiums under Section 80C

Income Tax Deductions on Health Insurance and Medical Expenses

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

Person Insured Maximum Deduction
Age < 60 years Age ≥ 60 years
You, Your Spouse, Dependent Children Rs. 25,000 Rs. 50,000
Preventative Health Check-up Rs. 5,000 Rs. 5,000

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:

Tax Benefit Sections Section 24(b): Home Loan Interest Section 80C: Principal Repayment
Deductible Amount Maximum Rs. 2 lakh/year on home loan interest for self-occupied property. Maximum Rs. 1.5 lakh/year on the principal amount repaid on the home loan.
Eligibility Applicable to individuals and HUFs. Applicable to individuals and HUFs.
Joint Loan Each borrower can claim Rs. 2 lakh individually. Both borrowers can claim Rs. 1.5 lakh each.
Conditions Property must be used for residential purposes by the owner or close family members. -
Additional Benefits - Other Section 80C investments (e.g., PPF, ELSS) contribute to the total limit of Rs. 1.5 lakh.

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:

Tax Benefit Sections Section 80TTA Section 80C
Deduction Type Up to Rs. 10,000 deduction on interest income from savings. Deductions for various investments and expenses, including specific government bonds.
Eligibility Available to all individual taxpayers and HUFs. Applicable to all individual taxpayers and HUFs.
Applicable Accounts Savings accounts, recurring deposits, and certain fixed deposits. Includes interest earned on specific government bonds.
Deduction Limit Entire interest income (up to Rs. 10,000) if total interest income is less. Limited by the overall Section 80C limit of Rs. 1.5 lakh.
Tax-Free Interest - Certain government bonds (e.g., NSC, KVP, SCSS) offer tax-free interest.
Overall Limit Impact - Interest earned on these bonds contributes to the Rs. 1.5 lakh limit in Section 80C.

Important Dates for Payment of Income Tax in India

Deadline Action Required
June 15, 2023 First instalment of advance tax due for FY 2023-24
July 31, 2023 Income tax return filing for FY 2022-23 (individuals and entities not under tax audit, no international or specified domestic transactions)
September 15, 2023 Second instalment of advance tax due for FY 2023-24
September 30, 2023 Submission of the audit report (Section 44AB) for AY 2023-24 for taxpayers under audit
October 31, 2023 ITR filing for audited taxpayers (no international or specified domestic transactions)
October 31, 2023 Submission of the audit report for AY 2023-24 for taxpayers with transfer pricing and specified domestic transactions
November 30, 2023 ITR filing for audited taxpayers (no international or specified domestic transactions)
December 15, 2023 Third instalment of advance tax due for FY 2023-24
December 31, 2023 Last date for filing belated or revised returns for FY 2022-23

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.

FAQ's

  • Who pays 30% tax in India?

    Individuals and companies in India pay 30% tax under specific circumstances, depending on which tax regime they choose (old or new):
    • Individuals under the Old Tax Regime: Those with an aggregate income exceeding Rs. 10 lakhs fall under the 30% tax bracket. The advantage of choosing the old tax regime vs the new tax regime is that there are many deductions available under it, making the taxable amount marginally less compared to the new tax regime.

    • Individuals under the New Tax Regime: Those with an aggregate income exceeding Rs. 12 lakhs fall under the 30% tax bracket. 

  • What is the new tax slab 2023 - 24?

    There are actually two sets of tax slabs in India for the financial year 2023-24, depending on whether you choose the old or new tax regime:
    • Old Tax Regime:

      Income Slab Tax Rate
      Up to Rs. 2.5 lakhs Nil
      Rs. 2.5 lakhs to Rs. 5 lakhs 5%
      Rs. 5 lakhs to Rs. 10 lakhs 20%
      Above Rs. 10 lakhs 30%
    • New Tax Regime:

      Income Slab Tax Rate
      Up to Rs. 7 lakhs Nil
      Rs. 7 lakhs to Rs. 10 lakhs 5%
      Rs. 10 lakhs to Rs. 12.5 lakhs 10%
      Rs. 12.5 lakhs to Rs. 50 lakhs 20%
      Above Rs. 50 lakhs 30%
  • How to calculate income tax for 2023- 24?

    Calculating your income tax for 2023-24 involves these steps:
    • Choose your tax regime among the old tax regime and new tax regime

    • Calculate your gross income

    • Deduct eligible expenses

    • Calculate your taxable income

    • Apply the applicable tax rate

    • Calculate surcharge (if applicable)

    • Pay the tax

  • What is the current income tax regime in India?

    India offers two tax regimes:
    • Old Tax Regime: Provides multiple deductions and exemptions but has higher tax rates, making it little more efficient compared to the new tax regime.

    • New Tax Regime: Offers lower tax rates but no deductions and exemptions.

  • How is income tax charged in India?

    Income tax in India is a complex system with nuances, but here's a breakdown of its core principles:
    • Individuals can choose between old and new tax regimes

    • Determining taxable income using gross income, deductions, and taxable income

    • Each regime has income slabs (ranges) with specific tax rates.

    • Additional taxes on higher income brackets in both regimes.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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