What is Income tax and its Importance?
Income tax is a direct tax levied by the government on the income earned by individuals and businesses. The Income Tax Act, 1961, is the legislative framework that governs all aspects of taxation in India. This act outlines the rules for computing, applying, and collecting income tax.
Income tax is crucial for the country’s economic development for several reasons:
- It’s a primary source of revenue for the government
- It helps in wealth redistribution
- It’s used to fund public services and infrastructure
- It’s an economic tool to encourage investments
Government Use of Income Tax
In India, the primary purposes of tax collection by the government are to support the following important areas of development:
- Infrastructure: This includes the construction of airports, ports, railroads, and roadways in the country
- Social Welfare Schemes: This refers to funding for initiatives that fight poverty and promote health and education, like MNREGA, Ayushman Bharat, and Mid-Day Meal
- Defense and Security: A part of the fund is allocated to preserving and supporting the armed forces, law enforcement, and additional security personnel
- Debt Servicing: This refers to the amount allocated by the government to make interest payments on national debt and loans
- Subsidies: The government puts some funds towards offering financial assistance for fuel, food, fertilizers, and other necessities of the public
- Public Services: This includes managing government operations, upholding the rule of law, and paying overhead
The objectives of these allocations are national security, social progress, and economic growth.
Income Tax Rules in India
- You can choose your regime (old or new), basis your needs. The old regime allows various deductions, while the new tax regime has lower rates but fewer exemptions
- There is a standard deduction of ₹75,000 available to salaried individuals and pensioners
- People also get a tax Rebate under Section 87A. Individuals with taxable income up to ₹7 lakh can claim a rebate that makes their tax liability zero
- People earning above ₹2 crore a year are subject to a 25% surcharge
- Some deductions and exemptions are also available to taxpayers under sections 80C (specific investment instruments), 80D (health insurance premiums), 80E (interest on education loans)
- Individuals who fall into any of the various tax brackets have to mandatorily file Income Tax Returns (ITR)
The income tax process is a bit complex and includes a lot more rules depending on your specific income details. Please make sure you have read up on the rules that apply to you.
Who Pays Income Tax in India?
If you fall under one of the following categories, you are a taxpayer:
- Individuals – This includes all individual taxpayers, whether salaried, self-employed, or those with income from other sources above Rs 3 Lakh.
- Hindu Undivided Families (HUFs) – This is a unique entity recognized under Indian tax law, representing families that jointly own property.
- Companies – This category includes both domestic and foreign companies operating in India.
- Firms – This refers to partnerships and limited liability partnerships (LLPs).
- Local Authorities - This includes municipal corporations, panchayats, and other local governing bodies.
- Association of Persons (AOPs) – This is a group of people who join for a common purpose or a common action to produce income.
Impact of Income Tax on Individuals
Income tax directly affects the disposable income, as a portion of your earnings is allocated to taxes based on your income slab.
However, understanding the tax structure allows you to navigate your financial obligations more effectively. By utilizing available deductions and exemptions under sections like 80C and 80D, you can reduce your taxable income, thereby lowering your overall tax liability.
To manage and plan taxes better, you need to proactively plan your taxes throughout the financial year rather than waiting until the last moment. This involves estimating your expected income and identifying suitable tax-saving instruments early on, such as Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), or National Pension Scheme (NPS).
Regularly assessing your income and expenses can help you adjust your investments to maximize deductions. Moreover, filing Income Tax Returns (ITR) well before the deadline ensures accuracy and minimizes the risk of penalties.
By adopting these strategies, individuals can optimize their tax obligations while achieving their financial goals.
Types of Taxable Income:
Taxable income refers to various types of earnings that are subject to income tax. Here’s a brief overview:
- Salary Income: The most common type of income is the salary income. It is the earnings received from employment and is taxed based on the respective tax slabs.
- Income from House Property: The income from house property is the revenue generated from renting out a property or owning a property. Deductions may apply for interest on home loans and property taxes.
- Business or Professional Earnings: The profits earned from running a business or providing professional services is called business or professional services. Profits from running a business or providing professional services. Tax is calculated on net profit after deducting allowable expenses.
- Capital Gains: Capital gains are the profits earned from the sale of assets like stocks, real estate, or gold. The tax rate depends on whether the gain is long-term or short-term.
- Income from Other Sources: These sources include interest income, dividends, and winnings from lotteries or gambling. This type of income is generally taxed at the individual’s applicable rate (income bracket).
How is Income Tax Collected?
Taxes are collected through various methods. We’ve discussed about a few major ones below:
TDS (Tax Deducted at Source)
This is a method wherein tax is deducted at the source of income. TDS is a method of tax collection where the payer (e.g., an employer or financial institution) deducts tax from the payment made to the recipient (e.g., employee or contractor) is commonly applied to salaries paid to employees. In this case, an employer deducts the applicable tax from an employee’s salary before disbursing the remaining amount to the employee.
Advance Tax
This refers to paying tax in advance, in instalments, based on estimated income for the year. It’s typically applicable to those with income sources other than salary. refers to the process of forecasting your total income for the financial year based on your current and expected earnings. This estimate includes all sources of income such as salary, business profits, rental income, and any other earnings. Advance tax is paid in four instalments in a year. Individuals and businesses need to estimate their annual income and pay tax in four instalments (June 15, September 15, December 15, and March 15).
Self-Assessment Tax
This is the tax paid by the taxpayer after calculating their total tax liability, considering TDS and advance tax already paid. Self-assessment tax is the tax paid by an individual or entity on their total income after calculating the final tax liability at the end of the financial year, adjusting for TDS and advance tax already paid.
How is Income Tax Calculated?
While the nuances of tax calculations and actual final taxes will vary from one person to another, here’s a simple calculator to estimate your tax liability: Estimate your Income Taxes
Basic Steps to Calculate Income Tax
- Determine your total income from all sources before deductions.
- Apply relevant exemptions and deductions
- Arrive at your taxable income
- Apply the tax slab rates to your taxable income (check the below table for accurate tax rate)
- Add applicable surcharge and cess
- Subtract any tax already paid or deducted (TDS)
- The result is your final tax liability
Income Tax Slab FY 2024-25 as per Which the Taxes are Deducted
| Tax Slab for FY 2023-24 | Tax Rate | Tax Slab for FY 2024-25 | Tax Rate |
| Up to ₹ 3 Lakh | Nil | Up to ₹ 3 Lakh | Nil |
| ₹ 3 lakh – ₹ 6 Lakh | 5% | ₹ 3 lakh – ₹ 7 Lakh | 5% |
| ₹ 6 lakh – ₹ 9 Lakh | 10% | ₹ 7 lakh – ₹ 10 Lakh | 10% |
| ₹ 9 lakh – ₹ 12 Lakh | 15% | ₹ 10 lakh – ₹ 12 Lakh | 15% |
| ₹ 12 lakh – ₹ 15 Lakh | 20% | ₹ 12 lakh – ₹ 15 Lakh | 20% |
| More than 15 Lakh | 30% | More than 15 Lakh | 30% |
Income Tax Return (ITR)
To declare the income and the taxes you owe the government for a specific financial year, and to figure out your deductions, you can look at the Income Tax Return (ITR). This form contains information on all sources of income, including capital gains, business profits, and salaries, as well as any requested exemptions or deductions to help you estimate your payable tax and deductions clearly.
Post filing your ITR, you can receive a refund if you have paid more taxes than necessary during the year. You can also get assistance in calculating your tax and ensuring compliance with tax rules. Even if your income is less than the basic exemption limit—currently ₹2.5 lakh per annum, filing an ITR is absolutely necessary.
Filing Your ITR
Here is a step-by-step guide to file your ITR easily:
1. Gather Documents: The first step is to gather your documents carefully, and make sure they are updated with all the relevant information. Some of the documents generally required are PAN card, Aadhaar card, bank account details, Form 16 (if salaried), TDS certificates, investment proofs (for deductions under Section 80C, etc.)
2. Log in to the Income Tax E-filing Portal: Keeping all the documents ready, you can visit the website incometax.gov.in. and use your PAN as the user ID to log in with your password or register if you’re a first-time filer
3. Select the ITR Form: Based on your income, choose the appropriate ITR form (e.g., ITR-1 for salaried individuals). The portal also has a “Quick File” option that guides you
4. Fill in the Details: Next, you need to fill in some personal information like PAN, name, address, income details, and deductions on the form
5. Verify Tax Payable: The system then auto-calculates your tax liability after deductions and taxes already paid (via TDS) based on the information you have provided. If more tax is due, you’ll need to pay it online
6. Submit ITR: Once all the details are filled in, review your form and submit it electronically
7. Complete E-Verification: After submitting the form, verify your return using Aadhaar OTP, net banking, or by sending a signed physical copy (ITR-V) to the Income Tax Department
8. Receive Acknowledgment: Once verified, you’ll receive an acknowledgment from the IT department via email
This process ensures you meet your tax obligations and claim refunds if applicable.
Essential documents that are required for Income Tax Return (ITR) Filing:
- PAN Card
- Aadhaar Card
- Form 16 (for salaried individuals)
- Bank statements
- Investment certificates (proofs)
- Rent receipts (if applicable)
Important dates to remember for Income Tax Return (ITR) Filing
- For individuals not requiring an audit: 31st July
- For taxpayers requiring an audit: 31st October
- For taxpayers with international transactions: 30th November
- Belated ITR Filing: 31st December
The Ease of E-Filing: Simplifying Tax Returns
E-filing has revolutionized the tax filing process:
- Online submission of returns
- Pre-filled forms with available data
- Instant acknowledgment
- Faster processing and refunds
- Reduced paperwork and errors
- Available from any location at any time
E-filing has significantly simplified the tax filing process by enabling online submission of returns from anywhere at any time. The system automatically populates forms with available data, reducing the need for manual entry and minimizing errors. The digital approach not only cuts down on paperwork but also ensures greater accuracy and convenience, making tax filing more efficient and user-friendly.
Busting Common Myths About Income Tax
Myth 1: Tax deductions on Home Loan repayment applies to one house only
Fact: According to the Income Tax Act, under Section 80C, an allowance of ₹1.5 lakhs can be claimed on repayment of the principal amount, and an exemption of up to ₹2 lakh can be availed on repayment of interest under Section 24 by the owner. This applies for more than one home loan; however, the maximum limit for deduction shall be ₹1.5 lakh and ₹2 lakh, respectively.
Myth 2: All Incomes are Not Taxable
Fact: One of the misconceptions that’s quite common is that interest on saving account, fixed deposits, and recurring deposits are not taxed. In reality, all types of interest income are required to be shown under ‘Income from Other Sources’ while filing your income tax returns. However, you are allowed a deduction of up to ₹ 10,000 under Section 80TTA on interests earned from savings account.
Myth 3: All gifts are exempt from taxes
Fact: While gifts from relatives on occasions such as weddings are usually tax-free, not all gifts enjoy the same privilege. Any cash gift of more than ₹50,000 from non-relatives attracts taxes. However, gifts from non-relatives received on marriage are exempt from tax.
Myth 4: E-filing of taxes is optional
Fact: E-filing of returns is not compulsory for every assess who has an income greater than ₹ 5 lakh per year. The E-filing process will only be completed and you will get an acknowledgment when an ITR-V form is sent to CPC, Bangalore.
Myth 5: You can’t claim house rent deduction without HRA
Fact: You may claim deduction even if you get no HRA from your employer. If one submits Form 10BA and fulfills other requirements of staying in a rented accommodation, then they are eligible to claim exemption under Section 10(13A). “Not owning residential accommodation in a Hindu Undivided Family and in respect of proceedings specified under Sections 23(4)(a) and 23(2)(a)” are the requirement for exemptions.
The Bottom Line: Income Tax in India
The Union Budget this year has introduced some amendments that simplify tax processes, providing some relief to taxpayers, as well as to help promote investment and economic growth.
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