What is Income Tax?

Income Tax refers to the amount you pay directly to the government which is a percentage of the total income you earn in a financial year. The Government of India, through different tax slabs, decides how much an individual must pay based on the annual earnings.

Have you ever thought about how the government pays for the salary of the employees of central and state government bodies or initiatives? The Income Tax collected from Indian citizens facilitates these payments. However, Income Tax in India is governed by numerous direct and indirect factors that can seem complex without a basic understanding.

What are the income tax slabs 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%

Once you are aware of the income tax you must pay every year, how can you identify your total taxable income?

Calculating Total Taxable Income

The government levies income tax based on your sources of income. For example, you may be a salaried employee but earning passive income by renting one of your properties. As per government norms, your total taxable income will be the sum of your salary and the total rent. To make the process more transparent, the government has created five main income heads from which taxes are deducted:

  • 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.

Who pays income tax?

The following entities are liable to pay the income tax in India:

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

Tax Deductions

Once you know how much you have earned under the various income heads, you identify your gross total income. However, this amount alone does not constitute your total taxable income as the government allows some tax deductions if you have invested in tax saving instruments such as government schemes, insurance, etc., or have donated to charities.

Here are some of the most common sections under which the government allows tax deductions:

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)

After the eligible and applicable deductions are reduced from the gross total income, the resultant amount is the final taxable income. It is this amount on which you will have to pay income tax based on the applicable tax slab.

How to file income tax returns?

There are three main methods through which the government collects income tax:

  • Tax Deducted at Source (TDS): The employer or the company deducts the tax directly from the employee’s salary and deposits it with the Income Tax Department.

  • Tax Collected at Source (TCS): The seller of a particular product or service collects the tax from the buyer and deposits it with the Income Tax Department.

  • Voluntary Payment by Taxpayers: Taxes such as advance tax and self-assessment tax are deposited by taxpayers into designated banks.

Furthermore, income tax filing requires you to fill out certain applicable forms which include:

  • ITR Form 1: For any individual who receives a regular salary or pension or earns through house property or other sources.

  • ITR Form 2: For Hindu Undivided Family which earn from any source, expect profits from business or profession.

  • ITR Form 3: For Hindu Undivided Family which earn from business or profession.

  • ITR Form 4: For Hindu Undivided Family, resident Indians and firms (other than LLP) earn up to Rs 50 lakh through business or profession.

  • ITR Form 5: For anyone that does not fall under the category of HUF, individual, company, and persons filing the ITR Form 7.

  • ITR Form 7: For anyone liable to file income tax under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) of the Income Tax Act.

Why should you pay income tax?

Among the mountain of existing personal expenses in your bucket, why should you pay income tax that can lower your in-hand salary and decrease the spending capacity? As per law, you are bound to pay regular taxes to the government and the valuable reasons include:

  • The government can successfully spend on developing the country through better healthcare, transportation, production, etc.

  • Promoting economic growth of the country; with higher spending capacity and better infrastructure facilities, the GDP rises, spurring the economy.

  • Helps in raising the standard of living of the country. With the taxpayers’ money, the government formulates financial policies for the upliftment of below-the poverty line citizens and those who are unable to earn.

  • Provides funding to crucial sectors such as agriculture, defense, scientific research, environmental protection, etc.

As an Indian citizen, your earnings are a direct result of using the country’s resources, and it is more than justified that you pay a small portion of your income as tax to allow for its development. With these insights on income tax, you can effectively file your tax returns on time. A small price to pay for a better future of our motherland!

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