What is Income Tax in India? Details You Should Know

Direct tax is among the most important revenue generators for governments, and India seems to be doing well in this.According to the Ministry of Finance, Government of India, gross direct tax revenue recorded a 20% year-on-year growth at Rs. 19.68 lakh crore for 2022-23.Apart from showing economic growth, it also reflected improved tax administration and compliance. Plus, given that income tax is a key direct tax, the data also points to tax compliance.

Before we delve further into Income Tax (IT) , let us get a clear picture of key terms associated with it.

• Financial Year The Financial Year (FY) refers to the 12 months or one year that the taxpayers are accounting and reporting for. It refers to the year in which income is generated. In India, a financial year begins on 1 Apr and ends on 31 Mar.
• Assessment Year The Assessment Year (AY) refers to the one-year period from 1 Apr to 31 Mar. It begins immediately after the fiscal year. It is called the assessment year, as all taxpayers must assess the income generated throughout the financial year and pay taxes.For example, for FY 2022-2023 the AY will be 2023-2024.
• PAN The Permanent Account Number (PAN) is a unique 10-digit alphanumeric code provided by the Income Tax Department to all Indian taxpayers. All tax information is recorded under your unique PAN. A PAN number is required to open bank accounts, for mutual funds and other transactions.
• Assessee An assessee refers to a person or group assessing their income and paying tax following the Income Tax Act. The assessee can be an individual, a firm, a partnership, a company, a corporation, a trust, an Association of Persons (AOP), or any other entity.
• Indian Residents and NRIs In India, an Indian resident must pay tax on their worldwide income generated here. It covers money earned both in India and abroad. Non-residents must pay taxes only on their income is generated in India. The residential status must be determined for each FY.
• TAN Tax collection/deduction Account Number (TAN) is a unique ten-digit alphanumeric code provided by the Income Tax Department of India. It is assigned to personnel in charge of a tax deduction or collection, and TAN must be quoted in all payment challans, TDS/TCS returns, and TDS/TCS certifications.

Income tax in India is the mandatory contribution levied by the government on personal income or profits in a financial year. As stated by the Income Tax Act 1961, the portion of income to be paid in taxes differs according to taxable income, exemptions, and other applicable factors elaborated in the following sections.

Income tax plays a crucial role in promoting social welfare and economic development. It helps the government to:

• Provide essential services such as healthcare, education, and defence.
• Redistribute wealth and reduce economic disparities by imposing higher taxes on higher income earners.
• Influence the economy by adjusting tax rates to control inflation, encourage investment, and promote economic growth.

Tax deductions are provisions in the income tax in India’s law that allow taxpayers to reduce their taxable income by claiming certain expenses or investments. These deductions encourage desirable financial behaviours and provide relief from specific financial burdens.Some common tax deductions in India include investments in:

• Specified financial instruments e.g., Public Provident Fund, life insurance premiums, National Savings Certificates, etc. - Section 80C
• Long-term infrastructure bonds - Section 80CCF
• Health insurance policies for self, family, and parents - Section 80D
• Education loans - Section 80E
• Housing loans - Section 24(b)
• Donations to charitable institutions- Section 80G

Taxpayers can reduce their tax liability and optimise their tax planning by availing these deductions.

Tax exemptions are specific incomes that are entirely excluded from the calculation of taxable income. Some common tax exemptions in India include the listed below:

• House Rent Allowance (HRA) for employees who receive it as part of their salary
• Leave Travel Allowance (LTA) for employees on domestic travel
• Long-term capital gains arising from the sale of specified assets, such as a residential house
• Agriculture income as defined under the Income Tax Act
• Certain allowances for children’s education, conveyance, medical expenses, etc. (up to prescribed limits)

Taxable income refers to a person’s earnings that is eligible for tax payment. Salaries, business profits, capital gains, and rental income fall under taxable income.Conversely, the income earned that are exempt from income tax is called non-taxable income. For example, agricultural income, certain allowances, dividends from mutual funds, income scholarships and awards, etc.Taxpayers must determine their taxable and non-taxable income . This will help them to comply with the nation’s tax laws, avoid penalties.

The Indian government charges a percentage of taxable income as income tax. This percentage is called the income tax rate. In India, income tax rate is a progressive one, wherein higher income levels are charged higher tax rates.The income tax rate applies to distinct income slabs or categories. The income tax rate increases as a person’s income level grows.

The income tax rates in India for the financial year (FY) 2023-2024 is given in the table below:

A 4% health and education cess is also levied on the total tax payable to support healthcare and education initiatives.The government can change tax rates with changes in policies. This is usually announced in the annual budget.

Every person, Hindu Undivided Families (HUFs) , any business, and other entities must pay income tax when they earn money. However, Government gives a cushion with exemption limit and when total income is above the limit you must pay income tax.In India, individuals, Hindu Undivided Families (HUFs), partnership firms, companies, and other entities are mandated to pay income tax when their total income is above the exemption limit announced by the government.

Residential status

The taxable income differs based on whether or not the taxpayer is physically residing in India. Therefore, there are separate laws for NRI taxation.

• NRIs are taxed only on India-sourced income. So, all income earned outside of India becomes non-taxable here.
• The taxation rules for dividend income and the sale of unlisted securities also differ for NRI individuals and firms.

Age

There are specific tax slabs and exemption limits applicable for individuals who are below 60 years in age and are residents. These are different from the ones that apply to senior citizens (aged 60-80 years) who are residents.Similarly, resident super senior citizens, who are above 80 years, have their own separate tax slabs and exemption limits.

Super senior citizens are not eligible to avail of income tax deductions under section 87A.

Income sources

Individuals and entities earning from salaries, businesses, capital gains, house property, and other income must pay income tax in India according to the applicable tax rates.

The minimum salary threshold or the basic exemption limit is the annual income below which individuals are not liable to pay tax. The basic exemption limit is Rs. 2.5 lakh for FY 2023-24.

You must compute income tax based on the nature of income and include all income earned. The salaried individual can claim eligible exemptions for various allowances offered. Individuals/HUF can use Sections 80C to 80U for deduction and then compute the income tax liability.After calculating the total income tax liability, you must adjust it with the taxes paid (like TDS, advance tax, etc.) and apply for applicable relief under Sections 89, 90, and 91 and rebate under Section 87A to compute the net income tax payable.You can use this quick guideline to arrive at net income tax payable:

• List down all your income from various sources (salary, profits from business/profession, capital gains, rental income, interest income, etc.)
• Take out incomes exempted under the law (house rent allowance, gratuity, leave allowances, etc.)
• Claim all applicable deductions (like standard deduction, rent paid, municipal taxes, business expenses, deduction under section 80, etc.)
• Claim all applicable exemptions (like money reinvested in another property)
• Now calculate your net taxable income
• Check your applicable tax slab and arrive at the income tax payable
• Always be aware of changes in the Budget

Income tax in India is paid annually. Taxpayers must file their income tax returns for every financial year (1 Apr-31 Mar). The Government has set the last date for filing income tax returns as 31 July of the assessment year. The government may give an extension for specific categories of taxpayers.

If you want to know the basics of income tax in India, you must learn about ITR and what it means for a taxpayer. ITR or Income Tax Returns are documents stating that you have paid your taxes for the FY.These documents report your income and outline information about applicable tax deductions, exemptions, etc. If you meet a specific income criterion, it is a legal mandate to file ITR annually as either an individual taxpayer, a firm, a partnership, HUF, etc.There are seven types of ITR forms (ITR-1 to ITR-7). The form to be selected depends on the category of the taxpayer (individuals, HUF, type of company, etc), the income earned, and its sources.

The ITR serves multiple purposes:

• Income disclosure By filing income tax returns, taxpayers disclose their total income from various sources such as salary, business or professional income, capital gains, rental income, interest, dividends, etc.
• Calculation of tax liability Taxpayers compute their tax liability by applying the applicable income tax slab rates to their taxable income.
• Claiming deductions and exemptions Taxpayers can claim deductions/exemptions under various sections of The Act when filing ITR.
• Compliance and transparency Filing income tax returns ensures compliance with the tax laws of the country. It promotes transparency in financial transactions and helps the government monitor income, tax payments, and economic activities.
• Refund claims If taxpayers have paid more tax than required through taxes withheld at source or advance tax payments, filing income tax returns enables them to claim a refund for the excess tax paid.
• Loan/visa applications Income tax returns act as proof of income for various purposes. They are required when applying for loans, credit cards, visas, or other financial transactions, as they provide evidence of financial stability and income history.
• Carrying forward losses Filing income tax returns allows taxpayers to carry forward certain losses incurred in a particular financial year, such as capital losses or business losses, to offset future profits.
• Avoiding penalties Failure to file income tax returns or filing them after the due date may attract penalties, including late filing fees, interest on tax dues, or legal consequences. Timely and accurate filing helps taxpayers avoid such penalties.

You can file your return online through the official e-filing website of the Income Tax Department ( www.incometaxindiaefiling.gov.in ) or seek the assistance of a tax professional. The following steps would help:

1. Gather all relevant documents Paperwork provided by employers, such as Forms 16 and 16A, your bank statements and investment proofs, etc., should be in order before you initiate the ITR-filing process.
2. Calculate taxable income Calculate your total income for the financial year by considering income from all sources and deducting eligible expenses and exemptions.
3. Choose the appropriate form Select the correct income tax return form based on your income sources and category of taxpayer. The government provides different forms for individuals, HUFs, partnership firms, companies, and other entities.
4. Fill in the details Fill in the required details in the form accurately and provide information regarding your income, deductions, and tax payments.
5. Verify and file the return Verify the details entered in the ITR form and file the return electronically through the income tax department's website or by using an authorised intermediary.
6. Pay any remaining tax If any tax is payable after considering deductions and advance tax payments, pay the balance before filing the return.
7. Keep a record Preserve a copy of the filed return and the acknowledgment receipt for future reference and as proof of filing.

After filing your income tax return, you need to pay any tax amount due. You should check if your employer has deducted any tax from your monthly salary (the details should be highlighted in your pay slip as TDS or tax deducted at source).According to the Income Tax Department, “the concept of TDS was introduced with the aim to collect tax from the very source of income.“As per this concept, a person (deductor) who is liable to make a payment of a specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.“The deductee from whose income tax has been deducted at source would be entitled to get a credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.”

You can use the following ways to pay income tax in India :

1). Online

The Income Tax Department's e-payment portal supports various online payment modes. On the website www.incometaxindia.gov.in , you can choose net banking, debit card, credit card, UPI, etc., to initiate the payment process.

2). In-person

Several banks have been designated by the IT Department to collect in-person tax payments. You can visit the authorised bank branches and make a payment in cash or via cheque. For in-person payments, it is also important to use the appropriate challan (ITNS 280) and mention your PAN and other relevant details.After paying your tax, remember to verify your income tax return. You can do so via methods specified by the tax department – using an Aadhaar OTP, net banking, and so on.

Income tax in India is a crucial aspect of the country’s financial landscape. Therefore, understanding its fundamentals is essential for every taxpayer.By adhering to tax regulations, leveraging tax deductions, and accurately filing income tax returns, individuals and businesses can fulfil their obligations, optimise their tax planning, and contribute to the nation's overall growth and prosperity.Ready to make the most of your money? Start your tax planning journey now!