Theme: Money

Income tax is a tax levied by the Government of India on the income of every person. The Income Tax Act, 1961, covers legal provisions regarding the collection of income tax. ​ There are some important points you will need to keep in mind to understand income tax, such as:

Persons filing Tax

It is mandatory for every person to pay income tax. Income tax law defines the term ‘person’^{(( Section 2(31), Income Tax Act, 1961))} to include individuals, Hindu Undivided Family etc. Read more here.

Calculating Taxable Income

​​The Income Tax Department taxes you based on your income from categories such as income from salaries etc. The total income calculated from these heads is called the gross total income. It is from this amount that deductions are made. Read more here.

Entities and Income exempt from Tax

Certain entities as well as certain kinds of income are exempt from tax. In other words, income tax will not be charged to such entities and incomes. Some examples include agricultural income, income for scholarships for higher education etc. Read more here.

Deductions with respect to tax

A deduction is an expense that is subtracted from an individual’s gross total income to reduce the amount which is going to be taxed. Deductions can be less than, more than or equal to the amount of income. If the amount deductible is more than the amount of income, then the resulting amount will be taken as a loss while calculating taxes.^{(( Section 80A, Section – 80AA, Section – 80AB, Section – 80AC, Section 80B, Section 80C, Section 80CC, Section 80CCA, Section – 80CCB of the Income Tax Act, 1961))} Some of the deductions for individuals include income from a loan taken for house property, income from loans taken for higher education etc. Read more here.

Tax Collection

Taxes are collected by the Government through:

Banks in India

Taxpayers can voluntarily pay income tax by going to designated banks. For example, taxpayers can pay advance tax and self-assessment tax in authorized bank branches such as ICICI Bank, HDFC Bank, Syndicate Bank, Allahabad Bank, State Bank of India, etc.

Taxes deducted at source [TDS]

When tax is collected from the very source of income of the person receiving income, it is known as ‘taxes deducted at source’ or TDS.^{(( Tax Deducted At Source, Income Tax Department, available at https://www.incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx For example, if you are a professional earning a retainership fee in a company, a certain amount may be deducted by your company as tax when it is given to you. The company will deposit the deducted money to the government. The person whose tax has been deducted at source will get a Form 26AS or TDS Certificate. This will be given to the person by the entity or person deducting the tax. For example,  XYZ Company will deduct an amount for tax before giving Aman his monthly salary, and provide Aman with the TDS Certificate.}

Taxes collected at source [TCS]

Tax collected at source (TCS)((Section 206C, Income Tax Act, 1961))

is the tax payable by a seller, which he collects from the buyer at the time of sale. For example, in a parking area of a shopping mall, along with the parking fee, the mall will charge a tax amount for a parking lot. Some other instances where sellers collect TCS are for liquor, while selling a motor vehicle, jewellery, etc.

It is mandatory for a taxpayer to have a PAN Card as well as an Aadhar Card while filing taxes.

The Income Tax Department taxes you based on your income from the categories given below^{(( Section 14, Income Tax Act, 1961))}. Gross total income is the total income calculated based on these categories. It is from this amount that deductions are made.

Income from Salary 

Income from salary is taxable in India. Salaried income which is taxable consists of:

• Salary due from the employer (including a former employer) to the taxpayer during the previous year. The salary will be taxed even if it has not yet been paid.
• Salary paid by the employer (including the former employer) to the taxpayer during the previous year, before it became due. For example, if the employer pays the salary for a project in advance.
• Any arrears or pending salary paid by the employer (including the former employer) to the taxpayer during the previous year. This happens only if tax was not charged to this amount in an earlier year.

The following break-ups within your salary are fully taxable:

Income from Capital Gains

Income from capital gains^{(( Capital Gains, Income Tax Department, available at https://www.incometaxindia.gov.in/Tutorials/15-%20LTCG.pdf. is charged only in the following conditions: There should be a capital asset((Section 2(14),Income Tax Act, 1961))}. In other words, this refers to any property held by a taxpayer.

• During the previous year, the capital asset is transferred by the taxpayer.
• There should be profits or gains as a result of transfer. Read more here to understand which transactions are not considered to be “transferred” by the taxpayer.

Some transactions not taxed are:

• Distribution of assets^{(( Section 46(1), Income Tax Act, 1961))} in a company to the shareholders at the time of liquidation
• Distribution of capital assets ^{(( Section 47(1), Income Tax Act, 1961))}on a partition of a Hindu Undivided Family

Income from House Property 

A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between a commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. This includes property you own. Income from house property is taxable if:^{(( Section 22, Income Tax Act, 1961))}

• The house property should consist of any building or land attached with it
• The taxpayer should be the owner of the property
• Business or profession is not carried on by the taxpayer in the house property

Income from Business and Profession 

Remuneration, bonus or commission received by a partner from the firm or anyone working independently in a business or profession, is not taxable as ‘Income from Salaries’. Rather, it would be taxable as ‘Income from a Business or Profession’ ^{(( Section 17, Income Tax Act, 1961))}. Tax is charged  on the following from a business or profession^{(( Section 28, Income Tax Act, 1961;Section 41, Income Tax Act, 1961; Section 43 , Income Tax Act, 1961))}:

• Any compensation or other payment owed to or received by any specified person.
• Income derived from a trade, profession or any specific services performed for its members, like an income made by a contractor.
• Cash assistance (by whatever name it is called) received or receivable by any person against exports under any scheme of Government of India.
• Value of any benefits arising from a business or a profession.
• Interest, salary, bonus, commission or remuneration owed to or received by a partner from partnership firm.

Read more examples on which income is charged here.

Income from Other Sources 

Any income which is not chargeable to tax under any other heads of income, but which is not to be excluded from the total income, is chargeable to tax under the head “Income from Other Sources”.^{(( Section 56, Income Tax Act, 1961))} Some examples of these are:

• Dividends
• Income from winning lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any form or nature.

The following amounts fall under the head “income from other sources”. Amounts not taxed under the head of ‘Profits and Gains from Business or Profession’, fall under this category. This is applicable only if

• Any money received by an employer from his employees as a contribution towards PF (Provident Fund), ESI (Employee State Insurance), Superannuation Fund, etc.
• Interest on securities
• Income from machinery, plant or furniture belonging to taxpayer and let on hire
• Composite rental income from letting of plant, machinery or furniture with buildings
• Any sum received under Keyman Insurance Policy (including bonus)

The rates of income-tax and corporate taxes are available in the Finance Act passed by the Parliament every year. You can also check your tax liability and calculate the amount of income tax you have to pay by using the free online tax calculator available at the Income Tax Department website.

The Budget 2020 has given taxpayers the option to choose between:

• existing income tax regime with applicable income tax exemptions and deductions or
• a new tax regime with slashed income tax rates and new income tax slabs, but no tax exemptions and deductions.

Given below are the income tax rates  for individuals:

Old/existing tax rates

 

New reduced tax rates^{(( The Finance Act, 2020 (Rates applicable from April 1, 2020))}

 

Income Tax for Senior Citizens

Senior Citizens are those who are above the age of 60 years or more during the previous year.

 

Income tax for Super Senior Citizens

Super senior citizens are those who are above the age of 80 during the previous year (year in which income is earned)

Read more on income tax rates for a partnership firm, Hindu Undivided Family,  etc.