Understanding the Income Tax Act

In India, Income Tax remains a puzzling ordeal to regular citizens who earn and are liable to pay taxes. When you ask people around you about the implications of the tax system in India and the Income Tax Act, you will receive diverse opinions. Some may know how the Income Tax system under the Income Tax Act functions; some may say that they know very little about the tax system in India.

Whatever the case may be, understanding the Income Tax Act and how it affects the tax system in India is a little complicated but a viable topic. If you are an earning individual and want to understand the tax system in India, you must first understand the Income Tax Act.

About Income Tax Act?: Understanding the Income Tax Act in detail

The Income Tax Act of India was enacted in the year 1961 and is a comprehensive statute that explains the rules and regulations that govern the taxation system in India. The Income Tax Act provides for the calculation, collection, administration, and recovery of income tax through various defined means. The Income Tax Act contains 23 chapters and 298 sections that legally define income tax governing guidelines.

Types of Tax

The Income Tax Act defines two types of Income Tax:

  1. Direct Tax: Direct tax is a type of tax under the Income Tax Act 1961 that is paid directly by an earning individual to the government. The tax amount is calculated based on the subsequent remuneration one earns. Under the direct tax, both the liability and the burden to pay the tax falls on the same individual.

  2. Indirect tax: In this type, individuals indirectly pay through the products or services they buy. The tax is included in the prices of these products and services. GST is a prime example of such tax under the Income Tax Act.

Who are Income Tax Payers under the Income Tax Act in India?

The Income Tax Act clearly defines the taxpayers to understand the entities liable to pay Income Tax in India. The income taxpayers are:

  • Individuals
  • Hindu Undivided Family (HUF)
  • Body of Individuals (BOI)
  • Association of Persons (AOP)
  • Local Authorities
  • Corporate Firms
  • Companies
  • All Artificial Juridical Persons

If you are an Indian citizen, you must belong to any of the above and are liable to pay taxes according to your earnings. But how much income tax do you need to pay under the Income-tax Act?

The Income Tax Act has defined Income Tax Slabs to determine the amount you need to pay.

What are the income tax slabs under the Income Tax Act in India?

Here are the current tax slabs to explain income tax and understand your tax liability:

Net Income Range (Annually) Rate of Income Tax
Up to Rs 2,50,000 NIL (0%)
Rs 2,50,000 to Rs 5,00,000 5%
Rs 5,00,000- Rs 7,50,000 10%
Rs 7,50,000- Rs 10,00,000 15%
Rs 10,00,000- Rs 12,50,000 20%
Rs 12,50,000- Rs 15,00,000 25%
More than 15,00,000 30%

What are the five heads of Income Under the Income Tax Act In India?

The Income Tax Act defines five heads of income for the taxpayers to calculate their total income. If the entities mentioned above are earning from any of the below-mentioned income sources, the total of the earnings is identified as the total income. The five heads of the income under the Income Tax Act are as follows:

  • Income from salary: Includes salary, leave encashments, allowances, perquisites, pension (if retired), etc., in case you are/were a salaried employee.

  • Income from business/profession: The actual or presumptive income earned through business or profession that individuals are undertaking in their capacity.

  • Income from house property: The amount earned as rent on an owned property that is not being used for business purposes.

  • Income from capital gains: Income earned through investments in capital assets such as gold, mutual funds, SIPs, stocks, etc.

  • Income from other sources: Earnings from the interest in a savings account, FDs, pension along with income from lotteries, cash gifts, etc.

Tax Deductions under the Income Tax Act

Under the Income Tax Act, the income tax department provides various tax deductions to the taxpayers which increases your savings. If the taxpayer claims these deductions, the claimed amount is reduced from their total income to calculate the taxable income. The various sections under the Income Tax Act that provide tax deductions are as follows:

Tax Deduction Limit Applicable Section
Up to Rs 1,50,000 80C
Up to Rs 1,50,000 80CCD
Up to Rs 1,50,000 80CCD(1)
Up to Rs 1,50,000 80CCD(2)
Up to Rs 1,50,000 80CCG
Up to Rs 1,00,000 80D and 80E
Up to Rs 1,00,000 80EE
Up to Rs 1,00,000 80G
Up to Rs 1,00,000 80TTA
Up to Rs 50,000 80CCD(1B)

Conclusion

Understanding the Income Tax Act allows you to plan your taxes effectively and reduce your taxable income by investing in tax-saving investments under various sections. Remember that the taxes you pay are vital in the development of the country. Pay them every year and pay them on time.

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Frequently Asked Questions Expand All

It is the sum total of all the earnings one earns through the five income heads specified under the Income Tax Act. This does not specify or identify the taxable income.

As per the specified income tax slabs for FY 2020-21, Individual taxpayers having taxable annual income up to Rs. 5 lakh will get full tax rebate u/s 87A and therefore will not be required to pay any income tax.