What Is Income Tax? – Meaning, Types, Benefits and More

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Ever wondered where all those rupees deducted in the name of “tax” from your salary go? A significant portion goes towards Income Tax, a crucial source of revenue for the Indian government that funds essential public services like infrastructure, education, and healthcare. But what exactly is income tax, and how does it apply to you? This blog will break down the basics of income tax in India, helping you understand your tax obligations and navigate the filing process smoothly.

Understanding Income Tax in India

What Does Income Tax Mean?

Income tax is a tax that governments charge on the money earned by businesses and individuals in their area. 

People must fill out an income tax return every year to figure out how much tax they owe. This tax helps pay for public services, government debts, and other benefits for citizens. Besides the federal government, many state and local governments also collect income taxes. Some investments, such as housing authority bonds, may not be subject to income tax in certain situations.

What Is the Income Tax Act?

The Income Tax Act of 1961 is the law that regulates all matters related to income tax in India, including tax payments, deductions, and exemptions. This act provides guidelines on different types of income that are taxable, the rates that apply, special provisions for certain incomes, and detailed procedures for assessment years. It also specifies the authorities responsible for administering the tax laws and the procedures they must follow.

About the Income Tax Department Of India

The Income Tax Department is a government agency responsible for implementing the Income Tax Act, collecting taxes, and ensuring compliance with tax laws. The department is under the Department of Revenue in the Ministry of Finance and is headed by the Central Board of Direct Taxes (CBDT). The department offers services such as processing tax returns, issuing refunds, enforcing tax laws, and educating taxpayers about their tax responsibilities. There are primarily two types of income tax levied in India:

1. Personal Income Tax: This applies to the income earned by individuals, Hindu Undivided Families (HUFs), and companies with lower incomes.

2. Corporate Tax: This tax is levied on the profits earned by companies registered under the Companies Act 2013.

There are also other taxes applicable to specific types of income, such as capital gains tax on the sale of assets and wealth tax (if applicable).

Understanding Income Tax Slabs:

Indian income tax is calculated using a tiered system where different income levels are taxed at different rates. This means the higher your income, the higher the rate of tax you’ll pay. The tax rates are updated each year when the budget is released. There are three groups of individual taxpayers in India:

1. Individuals under 60 years old, whether they live in India or abroad.

2. Senior citizens who are residents of India and are between 60 and 80 years old.

3. Super senior citizens who are residents of India and are over 80 years old.

How Is Income Tax Calculated?

The calculation of income tax is based on a taxpayer’s total income after taking into account permissible deductions and exemptions. The total income is divided into different categories, such as salary, house property, business/profession, capital gains, and other sources. The tax rate applicable depends on the income slabs defined for different categories of taxpayers, such as individuals, Hindu Undivided Families (HUFs), companies, etc. The e-filing portal offers an income tax calculator tool to help users estimate their tax liability based on their income details and deductions claimed.

Also, Read: 5 Lakh Loan Without Income Proof in Smart India

Income Tax Forms List

In India, there are seven types of Income Tax Return (ITR) forms for different groups of taxpayers, whether they are individuals or businesses. Which form to use depends on your status as an individual or a business, how much you earn, and where your income comes from. Here’s a simple breakdown of the seven ITR forms:

ITR-1 or Sahaj: For individuals with income from salaries, pensions, one house property (with some conditions), and other sources (but not lottery or horse racing wins), and agricultural income under Rs.5,000.

ITR-2: For individuals and Hindu Undivided Families (HUF) with income over Rs.50 Lakh, income from various sources including foreign assets, and agricultural income above Rs.5,000.

ITR-3: For individuals and HUFs earning money from a business or profession, as partners in a firm, or from salary, pension, and other sources, including investments in unlisted shares or being a director in a company.

ITR-4 or Sugam: For individuals, HUFs, and firms with business or professional income under Rs.50 lakh, especially for those using the presumptive income option under specific sections of the Income Tax Act.

ITR-5: For entities like firms, LLPs, cooperatives, and others, except for individuals and companies, for filing their tax returns.

ITR-6: For companies to file their tax returns electronically, except those exempted under Section 11 because of income from religious or charitable trusts.

ITR-7: For companies and institutions filing returns under specific sections for charitable or religious purposes, political parties, educational or medical institutions, and other non-profit entities.

For those looking to get a personal loan, it’s important to know which ITR form to fill out. Lenders will ask for your tax returns to verify your income and assess your ability to repay the loan.

Who Needs to File Income Tax Returns (ITRs) in India?

The requirement to file Income Tax Returns (ITRs) depends on your income and taxpayer category. As per the latest budget (2023-24), individuals with a net taxable income exceeding ₹3 lakh need to file ITRs. However, there are exceptions and different rules for various taxpayer categories, including:

• Salaried Individuals: If your total income after deductions exceeds the ₹3 lakh threshold, you must file an ITR.
• Businesses and Professionals: Businesses and self-employed individuals (like freelancers and consultants) must file ITRs regardless of their income level.
• Senior Citizens: While the basic exemption limit for senior citizens (aged 60-80 years) is higher, they still need to file ITRs if their income exceeds the specified limit for their category.

Who All Have To Pay Income Tax?

The following entities must pay taxes:

• Companies, 
• Corporate firms, 
• Hindu Undivided Families (HUFs), 
• Bodies of Individuals (BOIs), Associations of Persons (AOPs), 
• Local authorities and all artificial juridical persons

Understanding Income Tax Components

The Indian income tax system follows a progressive tax structure. This means the tax rate increases as your income rises. Here’s a breakdown of the key components:

1. Financial Year (FY):

This is the period from April 1st of one year to March 31st of the next year during which taxpayers earn their income and maintain their accounts. For instance, FY 2022-23 started on April 1st, 2022, and ended on March 31st, 2023.

2. Assessment Year (AY):

This is the 12-month period following the financial year, from April 1st to March 31st, during which taxpayers calculate and pay taxes on the income earned in the previous FY. So, the AY for income earned during FY 2022-23 is AY 2023-24.

3. Permanent Account Number (PAN):

PAN is a ten-character alphanumeric identifier that the Income Tax Department issues to all judicial entities identifiable under the Indian Income Tax Act. Every tax-paying entity in India is expected to have a PAN, which is used for tracking financial transactions and filing tax returns.

4. Assessee:

An assessee is any person who is liable to pay taxes to the government against their income as per the Income Tax Act. It could be an individual, a company, a partnership, a trust, etc.

5. Indian Residents and Non-Resident Indians (NRIs):

The tax liability in India depends on one’s residency status. Indian residents pay taxes on their global income, whereas NRIs are only taxed on their income earned within India. The residency status for tax purposes is determined each FY.

6. Tax Deduction and Collection Account Number (TAN):

A TAN is a unique ten-character alphanumeric code issued by the Income Tax Department to individuals or entities who are required to deduct or collect tax at source. It must be cited in all TDS/TCS transactions, including returns, payments, and certificates.

7. Income Slabs and Tax Rates: The current income tax slabs and rates for FY 2023-24 are as follows:

Up to ₹3 lakh: Exempt

₹3 lakh – ₹6 lakh: 5%

₹6 lakh – ₹12 lakh: 20%

₹12 lakh – ₹15 lakh: 30%

Above ₹15 lakh: 30% + surcharge and cess (subject to change)

• Heads of Income: Your total taxable income is calculated by adding income from various sources like salary, interest, rent, capital gains, and business profits.
• Deductions and Exemptions: The government offers various deductions and exemptions to reduce your taxable income. Common deductions include House Rent Allowance (HRA), medical insurance premiums, investments under Section 80C (PPF, ELSS etc.), and loan interest repayments.

Also, Read: How Much Personal Loan Can I Get On Rs 25,000 Salary?

How To File Income Tax Returns Online? 

The Income Tax Department provides different ITR forms for various taxpayer categories. You can file your ITR online or offline. Timely filing of ITRs is crucial to avoid penalties.

Before filing for ITR, ensure that you have all the necessary documents.

Documents Required To File ITR Online

Below are some of the basic general documents required for filing ITR:

• PAN Card and Aadhaar Card
• Bank Statements
• Form 16
• Donation receipts
• Stock trading statements from the broker platform
• Insurance policy paid receipts related to life and health
• Bank account information linked to PAN
• Aadhaar registered mobile number for e-verifying the return
• Interest certificates from banks

Steps To File ITR Online:

Step 1: Sign In

• Go to the Income Tax e-filing portal and press ‘Login.’

• Type your PAN where it asks for ‘User ID.’

• Hit ‘Continue’.
• Make sure the security message is correct, then move on.
• Type in your password and click ‘Continue’ again to log in.

Step 2: Start Filing Your Return

Click ‘e-File’ and then ‘Income Tax Returns’. Choose ‘File Income Tax Return’.

Step 3: Pick the Correct Year

Choose ‘Assessment Year’ for the year you’re filing for, like ‘AY 2024-25’ for income of FY 2023-24. Pick ‘Online’ for how you’re filing.

Step 4: Choose Your Filing Status

Pick whether you’re filing as an Individual, HUF, or something else. If it’s for yourself, choose ‘Individual’.

Step 5: Select Your Tax Form

Decide which ITR form is right for you. Individuals and HUFs have forms ITR 1 to 4 to choose from.

Step 6: Why Are You Filing?

Tell the system why you’re filing your tax return, like having income above the tax-free limit or other reasons.

Step 7: Check Your Info

Check all the pre-filled info like your name, PAN, Aadhaar, and bank details. Make sure your bank info is correct and validated.

Step 8: Confirm and Verify

Lastly, you must verify your filing. You can do this with an Aadhaar OTP, through your bank, or by sending a signed paper form to the tax office. Remember, if you don’t verify, it’s like you never filed at all.

Income Tax Payment Details:

Tax payments can be made online through the e-Filing portal using options like net banking, debit cards, and other electronic means. Taxpayers can pay taxes in advance during the financial year or pay self-assessment tax before filing the return based on their tax calculation. After making a payment, taxpayers receive a challan identification number (CIN), which can be used to verify the status of the payment on the portal. You can checkout more details on the main website of e-filing.

Income Tax Deduction Section List

In India, under the Income Tax Act, there are several sections that allow deductions that can reduce your taxable income:

Section 80C: 

Offers deductions up to Rs. 1.5 lakh on various investments and payments like EPF, PPF, NSC, ELSS mutual funds, life insurance premiums, tuition fees for two children, principal repayment of home loan, and more.

Section 80CCC: 

Provides deductions for premiums paid towards certain pension funds, with a cap of Rs. 1.5 lakh.

Section 80CCD(1): 

Deductions for contributions to the National Pension Scheme (NPS) up to 10% of salary are allowed within the overall Rs. 1.5 lakh limit under Section 80CCE.

Section 80CCD(1B): 

Offers an additional deduction for investments in NPS up to Rs. 50,000, which is over the Rs. 1.5 lakh limit of 80C.

Section 80CCD(2): 

Deductions for the employer’s contribution to an employee’s NPS account, up to 14% of salary for government employees and 10% for others.

Section 80D: 

Allows deductions for medical insurance premiums, with limits based on age and family composition.

Section 80DD:

Deduction for medical expenses for disabled dependents.

Section 80DDB: 

Provides for deductions for medical treatment of specified diseases, with the limit up to Rs. 40,000 or Rs. 1 lakh for senior citizens.

Sections 80E to 80G: 

Offer deductions on education loan interest, donations to charitable institutions, and more.

Section 80GG: 

For individuals not receiving HRA, the deduction for rent paid is available subject to conditions.

Section 80GGC: 

Deduction for donations to political parties by individuals, HUFs, AOPs, BOIs, and firms, excluding cash contributions.

Section 80TTA: 

Deduction up to Rs. 10,000 on interest income from savings accounts for individuals and HUFs.

Section 80TTB: 

A higher limit of Rs. 50,000 for the same purpose for senior citizens.

Section 80U: 

Deductions for individuals with disability, up to Rs. 75,000 for normal disability and Rs. 1,25,000 for severe disability.

It’s important to choose the old tax regime to avail of these deductions. These deductions help to decrease the overall taxable income, potentially leading to significant tax savings.

For specific details and a comprehensive list of deductions, it’s best to consult the official tax-related resources or a tax professional.​

Investment Options for Income Tax Saving

Investment options for income tax savings in India offer a range of choices depending on one’s income and preferences. Here’s a concise overview of various tax-saving options available:

1. Unit Linked Insurance Plans (ULIPs) – These plans combine life insurance with investment options. Premiums paid up to Rs. 1.5 lakh are deductible under Section 80C, and the proceeds on maturity are tax-free if the premium is less than 10% of the sum assured.

2. Equity Linked Savings Schemes (ELSS) – ELSS are mutual funds with a focus on equities and come with a lock-in period of three years. Investments up to Rs. 1.5 lakh can be claimed for deduction under Section 80C.

3. Public Provident Fund (PPF) – This is a long-term investment with a lock-in period of 15 years. Investments up to Rs. 1.5 lakh are eligible for deduction under Section 80C, and both the interest earned and the maturity amount are tax-free.

4. Sukanya Samriddhi Yojana (SSY) – Aimed at the girl child’s future education and marriage expenses, it allows a deduction under Section 80C for deposits up to Rs. 1.5 lakh.

5. National Savings Certificate (NSC) – A fixed-income investment scheme with a lock-in period of 5 years. Investments up to Rs. 1.5 lakh qualify for a tax deduction under Section 80C.

6. Tax-Saving Fixed Deposits – These are fixed deposits with a lock-in period of 5 years, with investments up to Rs. 1.5 lakh deductible under Section 80C.

7. Senior Citizen Savings Scheme (SCSS) – A dedicated scheme for senior citizens, offering attractive interest rates with tax benefits under Section 80C for investments up to Rs. 1.5 lakh.

Additionally, purchasing health insurance offers tax benefits under Section 80D, and making investments in the National Pension System (NPS) provides tax benefits under Section 80C, with an additional deduction for investments up to Rs. 50,000 under Section 80CCD(1B). Remember, when considering these options, it’s important to consider factors such as the lock-in period, expected returns, and the degree of risk associated with the investment. Planning early in the financial year is beneficial for optimizing these investments.

Additional Points for Indian Taxpayers

TDS (Tax Deducted at Source): A portion of your income tax is deducted at the source by the payer (employer, bank etc.) This deducted amount (TDS) is credited to your tax account.

Advance Tax Payments: Certain categories of taxpayers, like businesses and professionals with fluctuating income, may need to pay advance tax installments throughout the year.

You can read our blog “How to File Income Tax Returns” for more details on it. 

3 Main Benefits of Filing Income Tax Returns

Filing your ITR on time goes beyond just fulfilling your legal obligation. It offers several benefits, including:

1. Smoother Loan Applications: A filed ITR serves as proof of income and can improve your chances of securing loans.

2. Visa Processing: Many countries require ITRs for visa applications.

3. Building A Credit History: Timely filing of ITRs helps build a positive credit history.

Understanding and fulfilling your income tax obligations is an essential part of being a responsible citizen in India. By following the steps outlined above and consulting a tax professional if needed, you can ensure a smooth filing process. 

We hope you found this blog informative!  Let us know your thoughts and any questions you may have in the comments below. Your feedback helps us create even better content for you.

For detailed information and updates on income tax rules and regulations, refer to the official website of the Income Tax Department of India.

Disclaimer: This blog is for informational purposes only and should not be considered tax advice. Always consult a qualified tax professional for personalized guidance on your specific tax situation.

FAQs:

1. What Category Does income tax fall under?

Income tax is classified as a direct tax. This classification is because it is paid directly by the taxpayer to the government entity responsible for its collection, such as the Income Tax Department. 

2. What Distinguishes Income Tax from An Income Tax Return?

Income tax is the amount of money that individuals or businesses must pay to the government based on their earnings for the year. An income tax return is a form filled out and submitted to the tax authorities, documenting one’s earnings, the tax due, and the tax already paid during the year.

3. Who is Required to Pay Income Tax?

In India, under the old tax regime, individuals under 60 years old who earn more than Rs. 2.5 lakh annually, and those above 60 with the same income must pay income tax.