Siddharth was a regular junior college, science student. After college lectures were over, one could mostly find him giving treats to his friend at the local restaurant near college. His friends knew him as someone, who would spend lavishly and buy new things without thinking twice. Everyone knew he came from a well-to-do family and would get pocket money regularly from his dad.
After a few months, his dad reduced Siddharth’s pocket money significantly. Siddharth asked his dad about it. His father told him, that he needs to spend his money wisely and when he sees a change in Siddharth’s behavior with regard to money, only then he will give him more money.
Siddharth’s dad also mentioned that his work was not going well, and he was facing salary cuts. He also added that income tax this year for his income slab has increased, and it will take a while for him to increase Siddharth’s pocket money.
Government collects income tax and uses it to fund various activities like developing public infrastructure, sponsoring social welfare programs, providing healthcare facilities, etc.
Nobody likes to hear the word tax, and especially not with hard-earned money. People generally dislike paying income tax, as they believe, the Government is not providing enough services with income tax that they charge on ordinary citizens.
What is Income Tax?
We can define income tax is a tax that is charged by Central Government on income of individuals or business entities during a financial year. We know that taxes are broadly categorized as Direct and Indirect Taxes. Direct taxes are paid directly to government by person or business entity to whom it is imposed. In Indirect taxes, tax is paid indirectly to government when a person or a business entity consumes goods and services.
Income Tax falls under direct tax category, as tax is paid directly by the individual to whom it is imposed. According to Income Tax Act 1961, the responsibility of collecting Income Tax is with the Central Government.
Every year during presentation of the Union Budget, the central government can change the tax rate for various income slabs. Tax rate is the amount of income that has to be paid as tax. Income Slabs are the various ranges of income on which different tax rates are charged.
The Income Tax Act was introduced in India in 1860. During India’s freedom movement, which started in 1857. The British Government suffered financial losses during this freedom movement and hence, James Wilson introduced the Income Tax Act.
Types of Income Tax
Income Tax is not only charged on salaries, but on host of other things as well. The Income Tax Department classified different types of Income Tax. They are Income from salary, income from property, income from other sources, income from Capital Gains, income from business and profession, etc. In the table below, we discuss these types of income in further detail:
|Income Type||Nature of Income Type|
|Income from Salary||Income from pension, basic salary, allowances is taxable under this income type.|
|Income from house property||Income received from renting houses is taxable under this income type.|
|Income from capital gains||Surplus Income received from selling capital assets like mutual fund units, securities, stocks, property, gold are taxable under this income type.|
|Income from business and profession||Profits earned by individuals and businesses and income earned by professionals like doctors, lawyers with their own practice are taxable under this income type.|
|Income from other sources||Income from betting, lotteries, savings bank account interest, deposits are taxable under this income type.|
Income Tax Slabs
Different people charged different percentage of tax on the basis of their income. The general rule is that the higher your income is, the more you charged. However, the rules could be different in every country depending on the policy they follow. Countries have the option of choosing between three types of tax rate. These rates could be Progressive, Regressive or Proportional tax rates.
In Progressive Tax Rate, the higher a person’s income is, the more tax is charged. Most countries use the progressive tax system.
In Regressive Tax Rate, as a person’s income rises, their tax rate falls.
In Proportional Tax Rate, everyone is charged the same level of tax rate.
India follows the Progressive Tax Rate system. People’s incomes are grouped together in blocks called slabs, and each slab has a different percent of tax charged. Lets look at the tax regime for financial year 2020-21 for better understanding about tax rates.
As we can see from below table, individuals with income more than INR 15 Lakhs charged the highest tax rate of 30% and individuals with income upto only INR 2.5 Lakhs are exempted from paying taxes.
People with income between INRs 2.5 Lakhs- INR 5 lakhs are charged 5% tax. Those income is between INR 5 Lakhs- INR 7.5 Lakhs and INR 7.5 Lakhs-INR 10 Lakhs have a tax rate of 10% and 15% respectively.
Finally, people with income between INR 10 Lakhs – INR 12.5 Lakhs and INR 12.5 Lakhs – INR 15 Lakhs are taxed 20% and 25% respectively.
|Income Range||Tax Rate|
|INR 0 – INR 2.5 Lakhs||Nil|
|INR 2.5 Lakhs – INR 3 Lakhs||5%|
|INR 3 Lakhs – INR 5 Lakhs||5%|
|INR 5 Lakhs – INR 7.5 Lakhs||10%|
|INR 7.5 Lakhs – INR 10 Lakhs||15%|
|INR 10 Lakhs – INR 12.5 Lakhs||20%|
|INR 12.5 Lakhs – INR 15 Lakhs||25%|
|> INR 15 Lakhs||30%|
Under new tax regime for financial year 2020-21, few tax exemptions are allowed. People whose income is upto INR 2.5 Lakhs are exempted from paying taxes. Senior citizens who are 60 years and above with an income upto INR 3 Lakhs are also exempted from paying taxes.
Some other tax exemptions are compensation received for travelling cost, conveyance allowance, transport allowance for special individuals, mobile reimbursements, house rent allowance, relocation allowance, etc.
Tax Saving Options In India
There are various tax saving options in India that can help citizens reduce their financial burden. The government provides various income tax waivers. Some of these tax saving options include buying health insurance policy, undertaking investments, donating to charity, saving money in government schemes, supporting political parties, etc.
A waiver is usually given by the government when it voluntarily gives up a claim. A tax waiver would mean when the government gives on tax claim from the individual. A tax exemption is also another word that is used when the government provides tax relief to an individual by providing complete or partial relief from paying taxes.
Buying Health Insurance Policy-
The Central Government of India gives tax benefits to people who buy health insurance to get good medical facilities in lower charges. With the help of section 80D the Income Tax Act, individuals can claim tax deductions on their income for money spent on health insurance.
Depending on the age of person buying the insurance, different amounts of tax are exempted from annual income of the person. Tax deduction of health insurance for a person below the age of 60 is usually upto INR 25,000. Tax deductions are higher for elderly people.
Undertaking various investments-
An individual can reduce their tax burden by making investments in stock market or other investment tools like equity linked savings schemes(ELSS) . Some of these investment tools are mentioned in section 80C under the Income Tax Act. Investors can get higher returns and tax saving benefits through such schemes. Investment in tools like ELSS can give tax waiver of up to INR 1.5 Lakhs.
Donation to charities-
A person can obtain tax exemptions if he or she donated to various charity organizations. Tax waivers related to charity organizations are mentioned under Section 80G the Income Tax Act. Tax waiver up to INR 2,000 rupees can be availed by individuals under section 80G.
Investing in Government Schemes like National Pension Scheme, Public Provident Fund can allow an individual to get tax exemptions and higher returns under section 80C the Income Tax Act. Tax waiver upto INR 1.5 Lakh can be availed through Government Schemes.
Supporting Political Parties-
Under Section 80GGC, all donations made to political parties are eligible for tax waivers, the party is registered under Representation of People Act 1951, Section 29A.
These donations cannot be made through cash. They have to pay through bank transfer.
Income Tax is a type of direct tax that is imposed by the Central Government of India. Income is not only charged on salary but also on other earnings that include income from Capital Gains, income from House Property, income from Business and Profession and income from other sources like lotteries and betting.
In India, we have tax slabs based on income of the person. So, different income groups are charged different tax rates. There are various tax exemptions and tax saving opportunities provided by government as well.
FAQs about Income Tax
When someone files their Income Tax Returns online, they get a 10 digit alphanumeric code called the Electronic Verification Code. This code is sent to their registered mobile number of the tax filer to verify the identity of the person.
The EVC code generated is valid for only 72 hours from the time that it is generated.
No, it is not necessary to e-verify while filing a tax return. If a return is filed online, then it must be e-verified. If you file a paper return, you must sign return of income for verification and submit same in the income office.
People whose income is upto INR 2.5 Lakhs are exempted from paying taxes. Senior citizens who are 60 years and above with income upto INR 3 Lakhs are also exempted from paying taxes.
James Wilson introduced the Income Tax Act in 1860. This was during India’s freedom movement, which started in 1857. The British Government had suffered financial losses during this freedom movement.
Countries have the option of choosing between three types of tax rate. These rates could be Progressive, Regressive or Proportional tax rates.
A taxpayer can log-in to the Income Tax Department Portal online and register with their user ID which is their PAN number. In the download section, there will be a mention of e-filing under the assessment year, after which the Income Tax Form needs to be selected.
Income Tax Act 1961, oversees the administration of taxes in India.
Financial year is the year in which you earn your income, and assessment year is the year when that income is taxed, and you file your return. Assessment Year falls after the Financial Year.
The tax base of India for Income Tax is just close to one percent. One of the reasons attributed for such a low income tax base is tax evasion. India also has a progressive tax system that imposes higher tax on high income, which could lead to tax evasion. Hence, the government relies on higher rates for indirect taxes on goods and services. These taxes are considered unfair and regressive, as taxes are charged on consumption of goods and services. Lower Income people consume these goods, and end up paying most of their income.
Rushi has a knack for creating simple, intuitive solutions for each project. With tremendous content analysis experience, He loves to help our readers see their creative vision come to life, along with this he can be seen reading nonfiction books.