Income Tax in India - Income Tax Guide

02 Oct, 2021

7 min read

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Taxes are the core source of revenue for the government. Among these, income tax has its own significance. It is crucial to understand the Income Tax system in India as a part of your personal finance planning.

Introduction

It is important for all Indian citizens to have an understanding of the taxation norms that prevail in India. Read on to gain an understanding of the basics that govern income tax laws in India, discern the classification of taxpayers and the forms of income along with the income tax slab regimes presently in existence.

Income Tax India - Understanding the Basics

Serving as a form of tax levied by the central government, income tax applies to income earned during a given financial year by individuals and businesses alike. The government employs this revenue to better serve its citizens by providing them with a number of amenities. These include infrastructure, healthcare and education along with subsidies to certain sectors and additional welfare schemes.

Broadly speaking taxes may be classified as direct tax and indirect tax. Income tax serves as a form of direct tax. Income slab rates dictate the tax applicable to a given individual or entity for a given financial year.

Forms of Income Taxpayers

The Income Tax Act of 1961 categorizes taxpayers such that different tax rates apply to different categories. These categories are as follows.

  • Individuals, Body of Individuals (or BOI), Association of Persons (or AOP) and Hindu Undivided Family (or HUF)
  • Companies
  • Firms

Individuals are also categorized in terms of their residential status.

  • Residents are required to pay taxes on their global income in the country i.e., income earned in India as well as foreign lands are taxable.
  • Non-residents are required to only pay taxes on the income they earn within the country.

Each financial year requires the residential status to be made clear separately keeping in mind tax purposes. This residential status depends upon the duration of an individual’s stay in India.

Those who qualify as resident individuals are further categorized in accordance with their age.

  • Individuals under the age of 60
  • Individuals over the age of 60 who are younger than 80
  • Individuals over the age of 80

Forms of Income

Anyone who earns income in the country is obligated to pay income tax regardless of whether they are residents or not.

The Income Tax department has categorized income into five large heads which have been listed below.

Head of Income Form of Income Included
Income from business and profession

This includes –

· Profits made by self-employed individuals, businesses, contractors, freelancers are included.

· Professionals with their own practices (doctors, lawyers, insurance agents, chartered accountant and tuition teachers are taxable here.

Income from capital gains Excess income drawn from the sale of a capital asset like mutual funds or house property are taxable here.
Income from house property Income derived from the rent of a property is taxable here.
Income from other sources Income taxed here includes income accrued via fixed deposits, interest in savings bank accounts and lotteries that have been won.
Income from salary Income derived from a salary and pension are taxable here.

Understanding Income Tax Slabs

Different taxpayers are taxed differently and in accordance with income tax laws. Although firms and domestic companies have a predetermined, fix tax applicable to their profits, taxes applicable to individuals, HUF, AOP and BOI are in accordance with the income slab they fall under.

Tax slabs determine the tax rate applicable. As an individual’s income increases so too does the tax applicable to it. 

Income tax slabs as per the new regime concern individuals along with HUFs who have lower tax rates and no deductions or exemptions applicable to them. 

Said individuals and HUFs may choose to opt to use the old regime or new regime. The new income tax regime can be opted for by choice at the time of filing income tax. 

Should you choose to continue to have your income taxed in accordance with the old regime, the deductions and exemptions applicable under it continue to hold true for you.

Income tax slabs under the new regime are as follows.

Income Tax Slabs (New Regime)   Income Tax Slabs (Pre-existing regime)  
Income from INR 2.5 – INR 5 Lakhs 5% Income from INR 2.5 – INR 5 Lakhs 5%
Income from INR 5 – INR 7.5 Lakhs 10% Income from INR 5 – INR 10 Lakhs  20%
Income from INR 7.5 – INR 10 Lakhs 15% Income exceeding INR 10 Lakhs 30%
Income from INR 10 – INR 12.5 Lakhs 20%    
Income from INR 12.5 – INR 15 Lakhs 25%    
Income exceeding INR 15 Lakhs 30%    

Most deductions and exemptions aren’t available for taxpayers that choose to use the new tax regime. That being said, the following exemptions continue to be applicable.

Transport allowances directed towards specially abled people.

Conveyance allowances directed towards conveyance expenses owed to employment.

Compensation provided to spend on travel expenses for a transfer or tour.

Daily allowances directed towards regular, ordinary charges or expenses incurred on the absence from ordinary place of work. 

Conclusion

To learn more about income tax rules and regulations and efiling of income tax in India and better understand the pre-existing tax regime, visit Angel One’s Smart Money portal today.

Frequently Asked Questions

Q1. What does HUF stand for?
A1. HUF is used to refer to Hindu Undivided Family.

Q2. Why is income tax levied?
A2. The central government levies taxes such that it can provide taxpayers with a number of amenities and services including but not limited to infrastructure, healthcare and education along with subsidies to certain sectors and additional welfare schemes. 

Q3. Are residents the only people taxed in India?
A3. Residents along with non-residents are required to pay income tax although there exist differences in what income is taxed.

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