Everything You Need To Know About Income Tax

What is Taxation?

Taxation is when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents. Since ancient times, paying taxes to governments or officials has been a mainstay of civilization.

It is used to pay government obligations and fund public services like developing infrastructure, providing healthcare, education, subsidy to the agriculture sector and other welfare schemes.

In India, the Central and State government plays a significant role in determining the taxes.

 The government collects taxes in two ways:

• Indirect Tax
• Direct Tax

Indirect tax is levied not on the income, profit or revenue but the goods and services rendered by the taxpayer. Unlike direct taxes, indirect taxes can be shifted from one individual to another. Earlier, the indirect taxes imposed on taxpayers included service tax, sales tax, value-added tax (VAT), central excise duty and customs duty.

However, the GST regime’s implementation on 01st July 2017 has replaced all forms of Indirect tax imposed on goods and services by the state and central governments.

GST has reduced the physical interface and lowered the cost of compliance with the unification of the indirect taxes.

Direct tax is imposed directly on a taxpayer by the government. One cannot pass or assign another person to pay the taxes on his behalf. Types of direct taxes are:

• Income Tax – It is the tax applicable on the income earned by an individual or taxpayer.
• Corporate Tax – This is the tax applicable to the profits made by companies from their businesses.

What is Income Tax?

Income tax is levied on income generated by individuals during a financial year within their jurisdiction.

By law, they must file an income tax return annually to determine their tax obligations. The calculation is based on the income slab rates applicable during that financial year.

In some cases, the term ‘Income Tax’ is used for individuals and businesses, but in our article, we will use it for Individuals. 

Resident individuals pay tax on their overall income earned in India and abroad. In contrast, those who qualify as Non-residents pay taxes only on income earned or accrued in India.

For every financial year, the residential status has to be determined separately based on the tenor of stay in India.

Based on age, Resident Individuals are further classified into –

• Individuals less than 60 years of age
• Individuals aged more than 60 but less than 80 years
• Individuals aged more than 80 years

How can I calculate my Income Tax?

 Steps to compute applicable taxes on your income:

• List down all your income salary, rent, capital gains, interest income or profits from your business or profession.
• Remove incomes that are exempt under the law.
• Claim all applicable deductions available under every source of income. e.g. claim the standard deduction of Rs 50,000 from salary income, claim municipal taxes from rental income, claim business-related expenses from your business turnover etc.
• Claim all exemptions applicable under a particular income head, e.g. amount reinvested in another house property can only be claimed as exemption from capital gains income etc.
• Claim deductions from your total income, e.g. the 80 deductions like 80C, 80D, 80TTA, 80TTB etc.
• After you arrive at your taxable income, check the applicable tax slab you fall under and arrive at your income tax payable accordingly.

The government keeps altering and introducing new tax slabs, schemes and benefits, so it’s a good idea to keep up with the Budget.

What are different types of Income heads?

Income from Other Sources – Income from savings bank account interest, fixed deposits, and lottery winning is taxable under this head.

Income from House Property – Income earned from renting a house is taxable under this head of income.

Income from Business and Profession – Profits earned by self-employed individuals, businesses, freelancers, or contractors & income made by professionals like insurance agents, C.A., doctors and lawyers who have their practice, and teachers are under this income head.

Income from Salary – Income from salary and pension is taxable under this Income head.

Income from Capital Gains –  Surplus Income from the sale of capital assets such as shares, mutual funds, house property etc., is taxable under this head.

All income is taxed on a slab basis, but Capital gains are taxed depending on the asset you own and the duration of ownership. An asset is short-term or long-term, depending on the holding period. The holding period to determine the nature of an asset also differs for different assets.

What is computation of income?

The process of calculating taxable income after taking into account the income from all the five heads, exemptions, deductions, rebate, set off of losses, etc.,

What are the Old Tax regime and New Tax regime?

Beginning 01st April 2020, the Government of India implemented a new optional tax rate regime (FY 2020-21). As a result, Section 115BAC of the Income Tax Act of 1961 (the Act) has been added, which provides reduced tax rates for individual taxpayers and HUFs who forego tax deductions or exemptions available in the old regime.

From FY 2020-21, you get to choose between the old tax regime (the one before 01st April 2020) and the new tax regime while filing your income tax returns.

What is the difference between Tax exemption, Tax deduction and Rebate?

• Tax Exemption refers to income, expenditure or investment on which no tax is levied. It is provided on a particular source of income(for example, income from agriculture) and not on total income.

• A tax deduction is done from the gross total income to reduce the amount of income subject to tax. Deductions can be claimed only if the taxpayer has incurred the specified expenditure or made tax-deductible investments. Then based on ‘taxable income’, the tax slab is selected.

• A tax Rebate is a refund on taxes when you have lower tax liability than the taxes paid. It reduces the tax burden on the low-income bracket.

What are exemptions available under the old tax regime?

House Rent Allowance

Salaried individuals living in rented accommodation can get HRA. If you live in non-rented accommodation but still receive HRA, it will be liable to tax. To claim this allowance, keep the rent receipts and any evidence of payment done towards rent handy. You can only claim the lowest amount of the following as your HRA exemption:

• Total HRA received in the F.Y.
• 50% of (Basic salary+DA) received in the F.Y. for metro cities and 40% for non-metros.
• (Actual Rent paid during the F.Y.) –  (10% of basic salary + DA received in the F.Y.)

Standard Deduction

The standard deduction is the portion of your income that is not subject to tax and can be used to reduce your tax liability. The standard deduction is ₹50,000. This amount is deducted from your gross income, lowering the overall taxable income.

Leave Travel Allowance

This allowance is for the travel expense incurred during your leaves. The allowance does not cover other trip expenses like shopping, accommodation, food, leisure activities, etc. You can claim it twice in a block of four years. If you have not used LTA within a block, you can carry the same to the next block. LTA only covers domestic travel. It only covers railway, air, or public transport travel.

Mobile Reimbursement

This is for the expenses incurred on mobile and telephone usage. 

Books and Periodicals

The is to claim a tax-free reimbursement on the expenses incurred on books, periodicals, newspapers, journals, etc.

Food Coupons

These food coupons are tax-free, up to ₹50 per meal.

Relocation Allowance

The employer may reimburse expenses incurred for car transportation, registration, packaging charges, accommodation for 15 days, etc. The travelling expenses are covered for the employee and their family from their current posting to the new location.

Children Allowance

A maximum of ₹100 per month as an exemption can be claimed, which is ₹1,200 per year. This is allowed for a maximum of 2 children.

Pension Products

Any Gratuity/VRS/Pension/SSY maturity/PF/60% of NPS received in the year of assessment

What are deductions available under the old tax regime?

What are exemptions and deductions available under the new tax regime?

• Transport allowances only in the case of a specially-abled person.
• Conveyance allowance received for the conveyance expenditure incurred as part of the employment.
• The compensation received for official travel or transfer.
• Daily allowance received to meet the regular expenses or expenditures you incur on account of absence from his regular place of duty.
• Deduction for employer’s contribution to NPS (Section 80CCD(2)).
• Deduction for additional employee cost (Section 80JJA).

What is Rebate u/s 87A?

 For resident Individuals, If your total income after applicable Chapter VI-A deductions (Section 80C, 80D, 80U, etc.) is less than Rs 5 lakh in a financial year, you can claim a tax rebate up to Rs 12,500. This means if your tax payable is less than Rs 12,500, then you will not have to pay any tax.

What are different Income tax slabs?

Income is grouped into different blocks called tax brackets or tax slabs. And there is a different tax rate for each tax slab.

The rate at which income is charged to tax increases with an increase in income. There are different tax brackets for different age groups.

From FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. Individuals and HUF can choose the new regime or continue with the old one.

The new tax regime is optional, and the choice should be made when filing the ITR. If the old regime is continued, the taxpayer can avail of all the deductions/exemptions available. 

What is ‘Progressive Tax’?

A tax system where the tax rate increases with an increase in the taxpayer’s income. Here, individuals who get high income pay a higher proportion of their income as tax.

A person earning 12 lakhs in the Indian tax system(without any deductions) will pay-

First 2.5 Lakhs exempted +Rs.12,500(For next 2.5 lakh 5%)+Rs.100000(next 5 Lakh 20%)+ Rs.60,000(and remaning 2 Lakh 30%.) = Rs. 1,72,500. 

What are different types of Tax Payment?

Tax Deducted at Source (TDS)

TDS is used to collect taxes from the source of income or at the time of income payout. If a person (deductor) is liable to make payment to any other person (deductee), he can deduct tax at the source and transfer the balance to the deductee. The TDS deducted will be sent to the Central Government. Deductee can check the TDS amount in Form 26AS or the TDS Certificate issued by the deductor.

Your employer deducts TDS at the applicable tax slab rate. Banks deduct TDS @10%. Or they may deduct @ 20% if they do not have your PAN information.

Advance Tax

Advance tax must be paid when the estimated tax liability for the year exceeds Rs 10,000. The government specifies the due dates for payment of advance tax instalments.

Self-Assessment Tax

The taxpayer must pay the balance tax that the taxpayer has to pay after reducing the advance tax and TDS from the total tax calculated.

*You can pay Advance tax and self-assessment tax online from the NSDL website. However, the taxpayer should have an active net banking facility.

Who all has to file ITR?

Filing of income tax returns online has been made mandatory for all classes of taxpayers, barring a few exceptions :

• If you are aged 80 and above
• If your income is less than Rs 5 lakhs, you are not claiming a refund.

What are the consequences of not filing ITR?

• You will not be able to carry forward losses (except house property loss) to future years
• Delay in Refund.
• Difficulty in getting home loans
• Levy of the late filing fee up to Rs 10,000 under Section 234F
• Interest will be charged under 234A if taxes are due on 31st July. 

What are the documents required for filing ITR?

• PAN
• Form-16 issued by your employer
• Month-wise salary slips
• Bank statement/passbook for interest earned on a savings account.
• Interest income statement for fixed deposits.
• Capital gain statement for Mutual funds and shares.
• TDS certificates issued by banks and others.
• Form 26AS
• Proof of Investments to claim deductions
• Proof of other deductions to be claimed

Terms you need to know.

Financial year

The one-year period is used for accounting and financial reporting. It is the year in which the income is earned. According to the Income Tax Act, such a period begins from 01st April of a calendar year to 31st March of the following calendar year. It is abbreviated as “FY”. For example, the financial year starting from 01st April 2022 and ending on 31st March 2023 can be written as FY 2022-23.

Assessment year

The one year from 01st April to 31st March starting immediately after the financial year is termed an assessment year. The taxpayers must evaluate their income in the financial year and pay taxes this year. For example, for income earned during the FY 2022-23, the assessment year will be AY 2023-24.

Assessee

An assessee is a person or a group who assesses their income and pays tax. The assessee can be an individual, a firm, an Association of Persons (AOP), a trust, etc.

PAN

A person’s tax-related transactions and information are recorded against their permanent account number. They must mention the PAN number when paying advance tax or self-assessment tax. One has to submit his PAN to entities like banks, mutual fund companies, etc. Thus the financial information from such entities is retrieved by the income tax department via PAN. In this way, all tax-related activities are linked with the department. Hence, the taxman can identify all your financial transactions by putting a permanent account number.

TAN

Tax Deduction and Collection Account Number. It is a unique ten-digit alphanumeric digit allotted by the Income Tax Department. Anyone responsible for deduction (TDS) or collection of tax (TCS) is accountable for obtaining TAN. It is necessary to quote the TAN in TDS/TCS return, any TDS/TCS payment challan, and TDS/TCS certificates.