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Everything You Should Know About INCOME TAX In India

Updated: Dec 8, 2019

Income Tax is a tax you pay directly to the government basis your income or profit collected by the Government of India. The Constitution of India → Schedule VII → Union List → Entry 82 has given the power to the Central Government to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961.


A government agency that undertakes the direct collection of tax in India is the Income Tax Department. All operations of the department are handled by the Central Board for Direct Taxes (CBDT). Taxes in India can be categorized as direct and indirect taxes - Direct tax is a tax you pay on your income directly to the government whereas indirect tax is a tax that somebody else collects on your behalf and pays to the government eg restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail.


Direct Taxes are broadly classified as :


  1. Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed.

  2. Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India.

Income Tax Rules

The legislature enacts the Income Tax Act, 1961, to administer and govern income tax in the country, but the Income Tax Rules, 1962, were created in order to help in the application and enforcement of the law constituted in the Act. Moreover, the Income Tax Rules can only be read in conjunction with the Income Tax Act.


Income

Income has been very widely defined in the Income-tax Act. In simple words, income includes salary, pension, rental income, profits out of any business or profession, any profit made out of the sale of any specified asset, interest income, dividends, royalty income, etc.


Taxpayers

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

How is the Income Tax Collected?

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

  1. Taxes Deducted at Source (TDS)

  2. Taxes Collected at Source (TCS)

  3. Voluntary payment by taxpayers into designated Banks

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.



Income Tax Slabs

In India, we have four tax brackets each with an increasing tax rate -

  • Income earners of up to 2.5 lakhs - Nil [Tax Rate]

  • Income earners of between 2.5 lakhs and 5 lakhs - 5% of the amount exceeding Rs.2.5 lakh [Tax Rate]

  • Income earners of between 5 lakhs and 10 lakhs - Rs.12,500 + 20% of the amount exceeding Rs.5 lakh [Tax Rate]

  • Those earning more than Rs 10 lakhs - Rs.1,12,500 + 30% of the amount exceeding Rs.10 lakh [Tax Rate]

This is the income tax slab for FY 2017-18 for taxpayers under 60 years. There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.



Important Dates

The important dates to remember for individuals who fall under the bracket to pay Income Tax for the year(FY 2019-20 & AY 2020-21) is mentioned below:

  • Before January 31 - Individuals must submit their proof of investment.

  • Before March 31- It is deadline before which any investments under Section 80C of the Income Tax Act, 1961 must be made.

  • Before 31 July - Due date to file income tax return.

  • Between October and November - Tax returns must be verified by this time.


Income Tax deductions

These are either in the form of:

  • Various deductions available under Section 80 of the Income Tax Act which can be claimed from the Total Income or

  • Deductions that are specific to each source of income.

Deductions for your taxable amount are available under various sections of the Income Tax Act, 1961. Deductions will have to be mentioned in the relevant ITR form at the time of e-filing income tax returns.


Section 80C:


Deductions under this section are only available to individuals and HUF. This section allows for certain investments like NSC, etc. and expenditures to be exempt from taxation up to the amount of Rs.1.5 lakh


Section 80CCC:


Deductions under this section are on payments made to LIC or any other approved insurance company under an approved pension plan. The pension policy must be up to Rs.1.5 lakh and be taken for the individual himself out of the taxable income.


Section 80CCD:


Deductions under this section are for contributions to the New Pension Scheme by the assessee and the employer. The deduction is equal to the contribution, not exceeding 10% of his salary.


The total deduction available under Section 80C, 80CCC and 80CCD is Rs.1.5 lakh. However, contributions to the Notified Pension Scheme under Section 80CCD are not considered in the Rs.1.5 lakh limit.


Section 80D:


This is the section that deals with income tax deductions on health insurance premiums paid. In the case of individuals, the insurance policy can be taken to cover himself, spouse, dependent children – for up to Rs.15,000 and parents (whether dependent or not) – for up to Rs.15,000. An additional deduction of Rs.5,000 is applicable if the insured is a senior citizen. In the case of HUF, any member can be insured, and the general deduction will be for up to Rs.15,000 and an additional deduction of Rs.5,000.



A total of Rs.2.0 lakh can be claimed as deductions whether the assessee is an individual or a HUF.


Section 80DDB:


This section is for deductions on medical expenses that arise for treatment of a disease or ailment as specified in the rules (11DD) for the assessee, a family member or any member of a HUF.


Section 80E:


This section deals with the deductions that are applicable to the interest paid on education loans for education in India.


Section 80EE:


This section deals with tax savings applicable to first-time home-owners. Applies for individuals whose first home purchased has a value less than Rs.40 lakh and the loan taken for which is Rs.25 lakh or less.


Section 80RRB:


Deductions with respect to income by way of royalties or patents can be claimed under this section. Income tax can be saved on an amount up to Rs.3.0 lakh for patents registered under the Patents Act, 1970.


Section 80TTA:


This section deals with the tax savings that are applicable to interest earned in savings bank accounts, post office or co-operative societies. Individuals and HUFs can claim a deduction on an interest income of up to Rs.10,000.


Section 80U:


This section deals with the flat deduction on income tax that applies to disabled people, when they produce their disability certificate. Up to Rs.1.0 lakh can be non-taxed, depending on the severity of the disability.


Section 24:


This section deals with the interest paid on housing loans that are exempt from taxation. An amount of up to Rs.2.0 lakh can be claimed as deductions per year and is in addition to the deductions under Sections 80C, 80CCF and 80D. This is only for self-occupied properties. Properties that have been rented out, 30% of rent received and municipal taxes paid are eligible for tax exemption.



Income Tax Return

If an individual needs to claim an income tax refund, he/she will need to first file his/her income tax return. Depending on the income assessment group, the individual will need to submit one of the ITR forms -


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 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 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 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.


Advance Tax

Self-employed people must do the calculation themselves and pay the tax to the Government periodically every quarter. The deadlines are:

  • On or before 15th June -15% of advance tax

  • On or before 15th September - 45% of advance tax

  • On or before 15th December - 75% of advance tax

  • On or before 15th March - 100% of advance tax

Calculation of advance tax:


Step – 1: An individual will be required to find his/her estimated total income by finding out the sum of all the invoices which have been received along with the future payments which he/she will be received till the end of the financial year, i.e. 31 March.


Step – 2: The direct expenses related to the business and the investments under Section 80C are to be deducted from the estimated total income to derive the total taxable income.


Step – 3: The next step is to determine the total tax liability for the financial year.


Step – 4: The TDS or tax deducted at the source should be deducted from the total tax liability.


Step – 5: In case the amount of tax liability after deducting the TDS is more than Rs.10,000, the individual will be required to pay advance taxes on the basis on or before the due dates which are mentioned above.



Income Earned Abroad

An NRI’s income taxes in India will depend upon his residential status for the year. If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India.

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