Understanding the Types of Income Tax in India

When people hear the term " income tax ", they generally think about the direct taxes they pay to the government, usually in the form of TDS . This income tax is paid every year and is based on the income slab of the taxpayer. There are also many different types of income tax returns which the taxpayers are required to submit to get their returns assessed by the IT department and receive the refund if any.However, apart from this standard income tax, you are also required to pay taxes on your income in other different ways.

1. Wealth Tax

If you want to know about the different types of income tax , start with the wealth tax. It is a type of direct tax which you are required to pay if you own any kind of property, irrespective of whether your property is earning any sort of income.Wealth tax is levied on individuals, companies, HUFs (Hindu Undivided Families) and the tax liability is as per the residential status.

2. Corporate Tax

As per the IT Act of 1961, national as well as international corporate organisations are also required to pay corporate tax . This tax is levied on domestic companies that exist as separate entities from the shareholders. Even the foreign companies which earn or are deemed to earn income in India are required to pay corporate tax.The corporate tax also includes other income tax types such as FBT (Fringe Benefits Tax), MAT (Minimum Alternative Tax), STT (Securities Transaction Tax), and more.

3. Capital Gains Tax

Another type of income tax in India is capital gains tax. It is a tax which is imposed on any income that is derived from the sale of assets or investments. This includes property, cars, machinery, businesses, art, bonds, and shares. It applies to individual taxpayers as well as businesses. Depending on how long you held the investment or asset, you will be required to either pay short-term capital gains (STCG) tax or long-term capital gains (LTCG) tax.

The income tax or direct tax that the government collects is used for national development. Thus, it is essential for every taxpayer to pay the applicable taxes every year. Understand the different types of ITR and income taxes in detail to avoid any confusion and ensure that your taxes are correctly paid on time. Non-payment could result in severe penalties and prosecution.

Salaried individual taxpayers can file ITR-1 if their total income is up to Rs. 50 lakhs.
The taxpayer has to file ITR-3 if, in addition to income from salaries, the individual also has income from house property, capital gains, and other sources.

While it is a good practice to file annual returns, the income tax regulations make it mandatory for salaried individual taxpayers to file their returns only if they cross a certain threshold of annual income.For FY 22-23, if a person’s gross annual income crosses Rs. 2,50,000 in the financial year, it is mandatory to file annual income tax returns. This gross annual income includes income from all sources, not just salary. It is to be noted that filing annual returns is different from paying taxes. A person may file NIL returns, which means returns are filed, and the taxpayer has proved that since the taxable income is below the basic exemption limit, no tax is required to be paid.

Taxpayers should keep the following documents handy at the time of filing income tax returns.

• PAN Card is required to file income tax returns and even register or log in to the portal.
• Monthly salary slips or Form 16 for income from salaries.
• Proof of expenses to claim HRA and LTA.
• TDS certificate from all parties that have deducted TDS from your income.
• Form 26AS should be downloaded and verified.
• Proof of investments/expenses to claim deductions under Chapter VI ( Section 80C to Section 80U). This would include loan documents, repayment schedules, insurance premium payment proof, medical bills, etc.
• Books of accounts for income from businesses.
• Rental receipts from the rented-out property for income from the house property.
• Proof of sale for capital gains.
• Proof of income from other sources like interest income, income from winnings, etc., if applicable.

Assuming that the taxpayer has no other income apart from the Rs. 9,00,000 salary, here is what the income tax computation would look like.

If the taxable income is below Rs. 5,00,00, there is a rebate available, and the taxpayer will not have to pay any tax.There are ways in which the taxable income of Rs. 8,04,400 can be reduced.

• If the taxpayer pays rent and the salary break-up includes an HRA component, a house rent allowance can be claimed. The maximum rent that can be claimed is annual rent reduced by 10% of the annual salary, or actual HRA received, whichever is lower.
• If the taxpayer receives food coupons or food allowance, it is tax-free up to Rs. 26,400 per year.
• If the taxpayer has an LTA (Leave travel allowance) component and has travelled domestically, this LTA component will be tax-free. LTA can be claimed only twice in 4 years. The deduction is lower of the actual expense, or LTA received.
• The taxpayer should now make investments to claim deductions under Section 80C to Section 80U. Available deductions include investing in EPF , ELSS , and Pension Fund . Further, life insurance premiums can also be claimed as a deduction. The taxpayer can also claim the deduction if the taxpayer has any outstanding home or education loans.

Assuming that the taxpayer has no other income apart from the Rs. 16,00,000 salary, here is what the income tax computation would look like.

If the taxable income is below Rs. 5,00,00, there is a rebate available, and the taxpayer will not have to pay any tax. The taxpayer can also try and reduce the taxable income before Rs. 10,00,000 to avoid paying tax in the higher tax bracket.There are ways in which the taxable income of Rs. 15,04,400 can be reduced.1. If the taxpayer pays rent and the salary break-up includes an HRA component, a house rent allowance can be claimed. The maximum rent that can be claimed is annual rent reduced by 10% of the annual salary, or actual HRA received, whichever is lower. HRA is usually 40% to 50% of the basic pay therefore, the higher the salary, the higher the HRA available.2. If the taxpayer receives food coupons or food allowance from the organisation, it is tax-free up to Rs. 2,600 per year.3. If the taxpayer has an LTA (Leave travel allowance) component and has travelled domestically, this LTA component will be tax-free. LTA can be claimed only twice in 4 years. The deduction is lower of the actual, or LTA received.4. The taxpayer should now make investments to claim deductions under Section 80C to Section 80U. Available deductions include investing in EPF, ELSS, and Pension Fund.5. Life insurance premiums can also be claimed as a deduction.6. The taxpayer can also claim the deduction if the taxpayer has any outstanding home or education loans.7. Medical insurance premiums can be claimed as a deduction for self, spouse and dependent children.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.