Income Tax: Contribution to the Nation

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What Is Income?

Income is money (or some equivalent value) that an individual or business receives, usually in exchange for providing a good or service or through investing capital. Income is used to fund day-to-day expenditures. Investments, pensions, and Social Security are primary sources of income for retirees. For individuals, income is most often received in the form of wages or salary. Business income can refer to a company’s remaining revenues after paying all expenses and taxes. In this case, income is referred to as “earnings.” Most forms of income are subject to taxation.

What is Tax?

Tax is one of the most common financial terms. Taxes are one of the primary sources of income for the government through which it fulfils various projects and initiatives. They are levied by the central and state governments.

What is Income Tax?

Taxes applicable in India can be primarily divided into two types, direct and indirect taxes. Indirect taxes are duties levied on purchase on any type of goods and services, whereas direct taxes are levied on an individual’s earnings as well as profit gained from sell or transfer of any asset. Income tax (IT) is categorised as a direct tax, levied on Indian citizens based on their annual remunerations.

It is a percentage of one’s income that he or she is liable to repay directly to the Government of India. The money is collected by the Income Tax Department of India via Tax Deducted at Source (TDS), Tax Collected at Source (TCS), and voluntary payment by taxpayers. The money is utilised for various government services and facilities, like building infrastructure, amassing salary for Central and State Government employees, etc.

Both residential and non-residential Indians are liable to pay IT in accordance with the Income Tax Act of India, 1961. It details various provisions for this direct tax, along with criteria for any tax exemptions applicable to one’s tax slab

Who is liable for income Tax?

As per Section 2(31) of Income Tax Act, 1961, unless the context otherwise requires, the term “person” includes:

  • an individual,
  • a Hindu undivided family,
  • a company,
  • a firm,
  • an association of persons or a body of individuals, whether incorporated or not,
  • a local authority, and
  • every artificial juridical person, not falling within any of the preceding sub-clauses.

Which Income is chargeable?

Everyone who earns or gets an income in India is subject to income tax. (Yes, be it a resident or a non-resident of India). The Income Tax Department breaks down income into five heads:

Nature of Income covered

Head of Income

Income from salary and pension

Income from Salary

Income from savings bank account interest, fixed deposits, winning Lottery

Income from Other Sources

Rental Income form residential and non-residential property.

Income from House Property

Income from sale of a capital asset such as mutual funds, shares, house property

Income from Capital Gains

If you are self-employed, work as a freelancer or contractor, or you run a business. Life insurance agents, CA Services, doctors and lawyers who have their own practice, tuition teachers.

Income from Business and Profession

Income Tax Slab: The new income tax regime has come into effect from April 1, 2020. This gives an individual taxpayer the option to either continue with the existing tax regime (with tax-exemptions and deductions) or opt for the new tax regime (without 70 tax-exemptions and deductions). Salaried individuals, who have no business income, will have to choose between the existing and new tax regimes every financial year, as per their convenience.

New Tax Regime*: Given below are the income tax slabs that are applicable in the new tax regime for individuals from FY 2020-21:

Income Tax Slab Tax Rate
Up to Rs 2.5 lakh NIL
Rs 2.5 lakh to Rs 5 lakh 5%
Rs 5 lakh to Rs 7.5 lakh 10%
Rs 7.5 lakh to Rs 10 lakh 15%
Rs 10 lakh to Rs 12.5 lakh 20%
Rs 12.5 lakh to Rs 15 lakh 25%
Rs 15 lakh and above 30%
*Tax payer opts for New regime does not allow to avail certain specified deduction:

(a) Clauses referred in section 10 as follows:
(i) Clause (5) – Leave travel concession;
(ii) Clause (13A) – House rent allowance;
(iii) Clause (14) – Special allowance detailed in Rule 2BB (such as children education allowance, hostel allowance, transport allowance, per diem allowance, uniform allowance, etc.);
(iv) Clause (17) – Allowances to MPs/MLAs;
(v) Clause (32) – Allowance for clubbing of income of minor;
(b) Exemption for SEZ unit under section 10AA;
(c) Standard deduction, deduction for entertainment allowance and employment / professional tax as contained in Section 16;
(d) Interest under section 24 in respect of self-occupied or vacant property (loss under the head IFHP for rented house shall not be allowed to be set off under any other head and would be allowed to be c/f as per extant law);
(e) Additional depreciation under section 32(1)(iia);
(f) Deductions under sections 32AD, 33AB and 33ABA;
(g) Various deductions for donation or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii), of sub-section (1) or sub-section (2AA) of section 35;
(h) Deduction under section 35AD or 35CCC;
(i) Deduction from family pension under clause (iia) of section 57;
(j) Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

Existing (Old) Tax Regime:

 Individual (resident or non-resident), who is of the age of less than 60 years on the last day of the relevant previous year:

Net income range

Income-Tax rate

Up to Rs. 2,50,000

Nil

Rs. 2,50,001- Rs. 5,00,000

5%

Rs. 5,00,001- Rs. 10,00,000

20%

Above Rs. 10,00,000

30% 

  
  1. Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year:

Net income range

Income-Tax rate

Up to Rs. 3,00,000

Nil

Rs. 3,00,001 – Rs. 5,00,000

5%

Rs. 5,00,001- Rs. 10,00,000

20%

Above Rs. 10,00,000

30%

3.Resident super senior citizen, i.e., every individual, being a resident in India, who is of the age of 80 years or more at any time during the previous year:

 

Net income range

Income-Tax rate

Up to Rs. 5,00,000

Nil

Rs. 5,00,001- Rs. 10,00,000

20%

Above Rs. 10,00,000

30%

Rebate U/s 87A

The amount of rebate u/s 87A for FY 2020-21 (AY 2021-22) has been kept unchanged under both old and new income tsax regime. A resident individual having taxable income upto Rs 5,00,000 will get a tax rebate of Rs 12,500 or equal to the amount of tax payable (whichever is lower).