Income Tax

Income Tax

Income Tax Basics

If we break down the words, “income” and “tax”, we can make out that Income Tax is a tax that is levied on the income earned by a person. The term income should not be confused with gross receipts. While your gross receipts may be higher, the only portion of your receipts that is taxed is your income. Income is calculated after deducting from the receipts all allowable expenses and deductions under the Income Tax Act, 1961. Tax is then calculated on such income at the rates specified in the Act and deposited with the government. In this article, we are going to discuss some important aspects of Income Tax in India.

Which incomes are taxed in India?

The question is what constitutes Income to get taxed? Incomes falling under the following five heads are taxable under the Income Tax Act, 1961.

Income from Salary

Incomes that form part of this head includes the income received from the employer. Apart from the basic salary that you receive, the term salary also includes wages, pension, gratuity, perquisites, commission, and allowances as well as retirement benefits. You need to offer the salary that is due to you during the year along with any advance salary that you received in the year.

Income from House Property

This head covers in its ambit income earned by the owner from the commercial as well as residential house property by the way of letting out of such house property. In case a person owns more than one house property which he claims to be occupying or using for self-purposes, the person needs to calculate notional rent as income for such houses not rented, over one.

Profits and Gains from Business or Profession

All incomes that are earned from a business or a profession carried out by a person fall under this head. The income is calculated after deducting all expenses that are incurred to earn the revenue. One should also check for the allowance of the expenses under the Income Tax Act, to ensure that they are not disallowed.

Income from the Head Capital Gains

Profits that are made on the transfer of any capital asset (such as property, bonds, shares, etc.) form part of income under this head. The income is generally taxed in the year in which the transfer of the capital asset takes place. Also, there are two types of capital gains, namely short-term and long-term. The classification is done based on the period of holding of the capital asset.

Income from Other Sources

Any income which is taxable, but doesn’t fall under any of the above heads of income constitutes income from other sources. This could include interest on bank deposits, gifts received, lottery income, and so on. Also, the incomes which are exempt as per the Income Tax Act are not be included in this head and the same are to be shown separately.

Who should pay income tax?

The Income Tax Act mandates every person to pay tax on his incomes in India. This means, every

  • Individual,
  • HUF,
  • Company,
  • Firm,
  • AOP or BOI,
  • Local authority, and
  • Artificial Juridical Persons are required to pay income tax on their taxable income.

Tax on foreign incomes

Do you require to pay tax on the incomes earned from foreign sources (such as rental income from your property situated in the UK)? Section 5 of the Income Tax Act describes the scope of the total income of taxpayers based on their residential status.

  • A resident is taxed in India on his total global income, irrespective of where it is earned.
  • A resident who is not-ordinarily resident is not required to pay tax on incomes that accrue or arise to him outside India unless the same is derived from a business controlled or a profession set up in India.
  • A non-resident person needs to pay tax only on the income that he receives or is deemed to receive in India or that arises or is deemed to accrue or arise in India.

Income tax rates

The incomes of different kinds of taxpayers are taxed at different rates. Also, some taxpayers are granted the benefit of slab rate and are taxed according to such slabs applicable to them. Let us go through the income tax rates applicable for AY 2020-21 for different taxpayers.

Individuals

The rates of tax for individuals also depends on their age. Below is the table that describes the rate for individuals.

For Individuals (Other than Resident Senior Citizens or Super Citizens)
Income Slab Rate (In Rs.)Rate
0-2,50,000Nil
2,50,0001- 5,00,0005%
5,00,0001-10,00,00020%
Above 10,00,00030%
For Resident Senior Citizens (Having age of 60 years or more)
Income Slab Rate (In Rs.)Rate
0-3,00,000Nil
3,00,001-5,00,0005%
5,00,001-10,00,00020%
Above 10,00,00030%
For Resident Super Senior Citizen (Having age of 80 years or more)
Income Slab Rate (In Rs.)Rate
0-5,00,000Nil
5,00,001 to 10,00,00020%
Above 10,00,00030%

 

In addition to basic income tax as per the above rates, a surcharge is also levied on the income tax based on the income level of the individual. Also, health and education cess is further levied at 4% on the aggregate of income tax and surcharge. You may refer to the Income Tax Website for viewing the surcharge rates and tax rates for other years.

HUF, BOI, AOI and Artificial Juridical Person

The income tax rates for the above-mentioned taxpayers are as follows:

Income Slab Rate (In Rs.)Rate
0-2,50,000Nil
2,50,0001- 5,00,0005%
5,00,0001-10,00,00020%
Above 10,00,00030%

The surcharge and cess rates are the same for these taxpayers as applicable for individuals.

Partnership Firm and Local Authority

The rates applicable to a partnership firm and local authority are as follows:

  • Income Tax Rate: 30%
  • Surcharge: 12% when the total income exceeds Rs. 1 crore.
  • Cess:4% on the aggregate of income tax and surcharge.

Domestic Company

The tax rate applicable to a domestic company whose turnover or gross receipts does not exceed Rs. 400 crores for FY 2017-18 is 25%. For other domestic companies, the tax rate is 30%. Further, the applicable surcharge of 7% or 12% is levied on the tax based on the total income. The amount of tax and surcharge is further raised by 4% by way of cess.

However, there are special tax rates that can be opted by companies under Sections 115BA, 115BAA, and 115BAB.

Foreign Company

Tax is levied at the rate of 40% on the incomes of foreign companies. Surcharge and cess are levied in addition to the tax.

Income tax deductions

A taxpayer is allowed various deductions from the Gross Total Income to compute Total Income chargeable to tax. Some of the most common deductions are discussed below:

  • Section 80C: A total deduction of Rs. 1,50,000 is allowed to individuals and HUF for amounts paid in respect of eligible life insurance premiums, deferred annuities, contributions to provident fund, subscription to prescribed equity stocks, and so on.
  • Section 80CCD:Deduction is provided to individuals for amounts invested in prescribed pension schemes such as the New Pension Scheme (NPS) up to a total amount of Rs. 50,000.
  • Section 80D:This section provides for a deduction to Individuals and HUFs for amounts paid as health insurance premiums. A deduction of up to Rs. 25,000 (Rs. 50,000 in case the age of the insured person is 60 years or more) is allowed for health insurance premium paid for self and family. Out of this limit, Rs. 5,000 is allowed to be spent on preventive health checkups. Further, a similar deduction is also available for the amounts paid for parents. In case no policy is taken and the age of the insured person is 60 years or more, the actual amount spent on medical expenditure up to Rs. 50,000 is allowed. It is to be noted that a total amount of Rs. 50,000 is allowed as a deduction under this section.
  • Section 80G: Under this section, amounts paid as donations are allowed as deductions, either by the whole amount or by 50%.

How to pay income tax?

Making the payment of income tax is not a headache these days as the same can easily be paid online. You need to visit the NSDL web page and select Challan 280 for payment for income tax. You will be then prompted to fill in your particulars after which the page will direct you towards the bank login for entering the final payment details.  Alternatively, if you wish to make offline payment, you can visit the branches of authorized banks with a copy of Challan 280. The bank will provide you an acknowledgment of the payment made.

Income Tax Forms

Based on the purpose they serve, there are different forms for different kinds of taxpayers and their incomes. These are:

You must ensure to file your returns within the prescribed time. The returns can be filed online through IndiaFilings.com

Post by Niti Gupta

Niti Gupta is a Chartered Accountant who has experience working with different industries. She loves to write about anything and everything, but majorly research and write about finance and taxation.