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.

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.

 

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 1^st April to 31^st 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.

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.