To delve deeper into income tax, we need to first understand what tax is.
The government needs funds to carry out public expenditures or conduct government activities. In other words, it needs financial contribution from the public for running the country. For this sake, the government imposes a tax in the form of a compulsory financial contribution on the income, profits, occupation, property, etc. to keep its ship sailing.
In India: Taxes can be levied by the Central or State Government or Local Bodies. They have to be in accordance with the laws passed by the State Legislature and Parliament.
Taxes can be broadly classified into two types: Direct and Indirect.
These taxes, as the name suggests, include taxes that need to be paid by you directly. They cannot be transferred to anyone else. The Central Board of Direct Taxes or CBDT overlooks this category of taxes. There are different acts that govern different aspects of direct taxes, some of which are discussed below:
Income Tax Act: The Income Tax Act or the IT Tax of 1961 is the one responsible for setting rules that regulate income tax in India. Income can be derived from various sources like salary, businesses, income from property, investment gains etc. The tax slabs and tax savings through investments are decided by the Income Tax Act as are the tax benefits available on life insurance premiums or fixed deposits.
Wealth Tax Act: The Wealth Tax has been abolished since April 01, 2015. The Wealth Tax Act of 1951 was responsible for taxation pertaining to the net wealth of an individual, company or HUF (Hindu Undivided Family). It has been replaced by a surcharge amounting to 15% to those who earn more than 1 crore annually. Likewise, it applies to companies with a revenue of more than 10 crores annually.
Gift Tax Act: The Gift Tax Act came into being in 1958 and was abolished in 1998. According to this act, if an individual received a gift in the form of money and other valuables, he had to pay a tax on the gifts. As per the act, there was no tax on giving but only on receiving gifts. It was set at 30%. Finally, it was re-introduced in the year 2004 under the head income from other sources. Now, if a person receives over INR 50,000 worth of gifts, it will be taxed as income in the hands of the receiver, with some exemptions, of course.
Expenditure Tax Act: The Expenditure Tax Act of 1987 is concerned with the expenses that an individual incurs when he or she avails the services of a restaurant or hotel. It is not applicable in Jammu and Kashmir. Some expenses are chargeable under the act if they go over INR 3,000 in a hotel and all the expenses in a restaurant.
Interest Tax Act: The Interest Tax Act of 1974 deals with taxes payable on interest earned in specific situations. Later on, it was amended to exclude the interest tax on interests earned after March 2000.
Direct taxes can be categorized into the following:
1. Income Tax: The tax levied on one’s annual income or profits that are paid directly to the government is the income tax. It is dependent on the annual income and is required to be paid to the government directly.
Anyone and everyone who earns an income in India is bound to pay their Income Tax. This includes Indian citizens below 60 years earning more than INR 2.5 lakhs per annum as well as those above 60 years earning more than INR 3 lakhs per annum. The other entities liable to pay taxes are HUF or Hindu Undivided Family, AOP or Association of Persons, BOI or Body of Individuals, Corporate Firms, Local Authorities, Companies and all Artificial Juridical Persons.
| Income Tax Slab Rates for FY 2018-19 (AY 2019-20) | ||
|---|---|---|
| Age | Income Tax Slab (as per taxable income) | Income Tax Rate (as a percentage) |
| < 60 years | < 2.5 L | NA |
| > 2.5 L < 5 L | 5% of the sum that exceeds 2.5 L | |
| > 5 L < 10 L | 20% of the sum that exceeds 5 L | |
| > 10 L | 30% of the sum that exceeds 10 L |
| Age | Income Tax Slab (as per taxable income) | Income Tax Rate (as a percentage) |
|---|---|---|
| > 60 years | < 3 L | NA |
| > 3 L < 5 L | 5% of the sum that exceeds 3 L | |
| > 5 L < 10 L | 20% of the sum that exceeds 5 L | |
| > 10 L | 30% of the sum that exceeds 10 L |
| Age | Income Tax Slab (as per taxable income) | Income Tax Rate (as a percentage) |
|---|---|---|
| > 80 years | < 5 L | NA |
| > 5 L < 10 L | 20% of the sum that exceeds 5 L | |
| > 10 L | 30% of the sum that exceeds 10 L |
Surcharge: 10% of income tax, where total income is greater than Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income is greater than Rs.1 crore.
Health & Education Cess: 4% of Income Tax.
| Type | Income Tax Slab (as per taxable income) | Income Tax Rate (as a percentage) |
|---|---|---|
| Cooperative Society | < 10,000 | 10% of the income |
| > 10,000 < 20,000 | 20% of the income | |
| > 20,000 | 30% of the income |
| Domestic Company | Income tax rates = 30% for each of them |
| Local Authorities |
| Type | Income Tax Slab (as per taxable income) | Income Tax Rate |
|---|---|---|
| Foreign Company | When the Indian Government pays royalties to foreign firms (agreement entered between 31.03.1961-31.03.1976) | 50% |
| When foreign firms pay for technical services (agreement entered between 29.02.1964-31.03.1976) | 50% | |
| All other incomes | 40% |
2. Corporate Tax: When companies pay income tax, it qualifies as a corporate tax. It is paid out of the revenues that they earn based on the slab they fall under. This tax further branches out into the following:
Minimum Alternative Tax or MAT: This tax was introduced through Section 115JA of the Income Tax Act. Through a MAT, the companies pay the Income Tax Department. The minimum tax is currently at 18.5%. Companies that are into infrastructure, as well as power sectors, are exempt from paying this tax.
Fringe Benefit Tax: This tax, as the name indicates, is applied to nearly every fringe benefit that an employee receives from his employee. It includes LTA, accommodation, employee welfare, entertainment, expenses related to commute, ESOPs and an employer’s contribution to a retirement fund.
Dividend Distribution Tax: This tax is levied on companies, it is based on the dividends that they pay to the investors. It is applicable on the gross or net income that an investor receives from an investment. The current rate is 15%.
Banking Cash Transaction Tax: This tax was operational from the year 2005 to 2009 but has now been abandoned by the Government of India. As per this tax, every bank transaction had to be taxed at 0.1%.
3. Prerequisite: The taxes levied on the perks and benefits provided by a company to its employees constitutes the prerequisite tax, wherein the purpose and use, personal or official, has to be defined.
4. Capital Gains: A chunk of money received through an investment or by selling a property is subjected to the capital gains tax. It could be from short or long-term capital gains from investments. It includes any exchange made in kind weighed against its value.
5. Securities Transaction: This is for those who trade in the stock market as well as trade in some securities. The price of the share is calculated and the tax is levied to that amount. The tax is also associated with the securities that are traded on the Indian Stock Exchange.
Indirect taxes are the taxes that are imposed on all goods and services. They are deemed indirect as they are collected by the source that sells the product. These taxes are added to the price of the services and products, thereby increasing the product’s cost.
All the other small cess taxes that are minor revenue generators fall under this category, like the ones below:
Professional Tax: This is the employment tax that is levied by the Government of India on those who earn a salaried income or practice a profession such as lawyers, doctors, chartered accountants etc. The rate of this tax differs across states and all the states do not levy this tax.
Property Tax: This tax goes by many names like Municipal Tax or Real Estate Tax. This tax is levied by city-wise local municipal bodies for the upkeep and maintenance of basic civil services. Owners of commercial and residential properties are subject to this tax.
Stamp Duty, Registration Fees, Transfer Tax: A stamp duty, transfer tax or registration fees is collected as a supplement to the property tax owing to the additional charges than an employee pays at the time of purchasing a property.
Entertainment Tax: Entertainment tax is the tax that is levied on feature films, exhibitions, television series etc. For the purpose of tax, the gross collection from earnings is taken into account.
Education Cess: This tax was introduced in India to take care of educational programs sponsored by the government. The rate is 2% of a person’s income.
Toll Tax and Road Tax: This self-explanatory tax is one that you pay for the use of infrastructure of any sort that is developed by the government. The negligible tax is used for the upkeep and maintenance of the facilities.
Entry Tax: An entry tax is collected by certain states such as Gujarat, Assam, Madhya Pradesh, and Delhi etc. by charging 5.5-10% tax on all the items that enter the state through e-commerce establishments.
In case of non-payment of taxes, penalties of various types can be imposed on the citizen or organization ranging from fines to imprisonment, depending on the severity of the case. It depends on the type of tax not paid. You might end up paying the amount you owe in taxes along with an additional sum in the form of a fine and interest.
How much income tax do I need to pay?
The Parliament passes the Finance Act each year. Thus, the corporate and income tax rates are available in the Act. Additionally, you can navigate to this link www.incometaxindia.gov.in to check your tax liability.
What are the various heads under which a taxpayer is taxed?
There are 5 different heads that fall under Section 14 of the Income Tax Act. They are:
What is the best way to calculate the taxes I need to pay?
Add your income from different heads to get the gross total income. Keep a tab on your deductions under Sections 80C to 80U. Once you determine your total income through this, check for a rebate under Section 87A and subtract it. This will show you your tax liability after the rebate. To this, you have to add surcharge to get the tax liability after surcharge. Finally, add the applicable cess and arrive at your tax liability.
Can a rebate be claimed under Section 87A?
Yes, it can be claimed by the residents of India whose total income is lesser than INR 3.5 lakhs. The claim limit can go up to INR 2,500.
What is the difference between total taxable income and gross total income?
