Income tax in India is formulated by the Government of India. The Indian Taxation System goes back to the the era of Manu Smriti and Arthashastra. Currently, taxation in India is based on the ancient tax system and was chalked out on the theory of the maximum welfare of the society. Every earning citizen in India has to pay income tax, subject to tax laws. The income could be pension, salary, or could be earnings from a savings account. In this section, we’re trying to give you a comprehensive guide to Income Tax in India.
There of two types taxes - direct tax and indirect tax. The tax that you pay directly to the government based on your income or profit is called income tax.
Income Tax Act of India was passed in 1961 and it governs the provisions for income tax as well as the various deductions that are applicable to it. But, since 1961, the law has undergone several amendments to deal with inflation and other socio-economic situations.
It is one of the most important sources of revenue for the Indian government. Income tax was started as an unavoidable obligation on the citizens in order to raise funds for fulfilling the development and defence needs of the country. Taxes are imposed on income, purchase, sale, and property to help run different government departments and machinery.
In India, the first Income Tax Act was introduced in 1860 by James Wilson to overcome heavy losses suffered by the British Government due to India’s freedom movement in 1857.
Presently, the Income Tax Act 1961 is applicable in India. In 1956, the government requested the imposition of Income Tax Act. The Law Commission submitted its report on the Income tax Act in 1958 and the same year, Chairman Shri Mahavir Tyagi, chaired the Direct Taxes Administration inquiry Commission. Eventually, the Income Tax Act, 1961 was introduced to the public. Since then, it has undergone changes from time to time.
Any Indian citizen aged below 60 years is legally responsible to pay income tax, if their income exceeds Rs 2.5 lakhs. If the individual is above 60 years but below 80 years of age and earns more than Rs 3 lakhs, he/she will have to pay taxes to the Government of India. Lastly, if a senior citizen above 80 years of age earns more than Rs. 5 lakhs, he/she will have to pay the tax.
Apart from this, the following entities that generate income are liable to pay direct taxes:
Income Tax Rules
The Income Tax Act 1961 was introduced by the legislature to oversee and manage income tax in the country. But, the income tax rules were created in 1962 to help implement and apply the law stated in the Act. In addition to this, one can only interpret the income tax rule along with the Income Tax Act. The Income Tax Rules are made within the Income Tax Act's framework and are not allowed to overrule its provisions.
What is Income Tax Act?
The Income Tax Act includes an extensive set of sections. Each section is dedicated to a different aspect of taxation rules in India. Below are the various chapters of the IT Act along with the related sections and sub-sections:
It is a basic introduction to the IT Act.
This chapter deals with the commencement & the extent of the IT Act.
It includes income tax charges, dividend income, the scope of total income, income earned through working abroad, etc.
This includes other forms of income that are not a part of total income, like income from property, institutions, trusts, political parties' incomes, etc.
Sections about income earned from other sources such as income from capital gains, house property, businesses, etc. are included in this chapter
The chapter deals with the transfer of income in which no actual transfer of assets is involved. It also includes revocable transfer.
This chapter deals with the deductions on income generated from specific sources and certain payments.
Rebates and how much share a member would get in a body or an association comprises this chapter.
This chapter deals with the double taxation relief in detail which helps the taxpayers to get a rebate on the income tax paid.
Special scenarios where income tax payment is avoided, including agreements with foreign countries is part of this chapter. The chapter deals with information about the particular countries that follow these kinds of agreements.
This chapter deals with different types of general anti-avoidance income tax rules for income taxpayers.
This chapter deals with the tax calculation under special cases.
This has the special provisions formulated for Non-Resident Indians. It includes short-term capital gains, capital gains, provident funds, etc. This chapter includes Section 110 to Section 115BBE of the income tax rules as per the Income Tax Act, 1961.Various cases in this section yield tax-liable incomes such as foreign currency units, dividends, royalty, etc.
Special tax provisions designed for particular companies forms this chapter. It includes Section 115J to Section 115JF of the Income Tax Act.
This chapter deals with the taxation process to convert a foreign organization into an Indian subsidiary.
Includes taxation process for the profits earned by domestic companies. It also deals with the interest payable in case of non-payment of taxes by the companies or if the company is a defaulter.
This chapter deals with the income tax rules on the distributed income of an organization.
It deals with the rules meant for distributed income of unit holders.
Taxes levied on income received from venture capital funds and venture capital companies is the crux of this chapter.
This chapter deals with special provisions for shipping companies and the involved taxation procedures.
Information related to different income tax authorities, including their jurisdiction, appointment & control, their powers, and disclosure of information.
It deals with Section 139 to Section 152. This chapter includes the return filing formalities, including obtaining PAN, e-filing of ITR, and accounting methods. It also includes other amendments, intimation of any loss and related cases, and rectifying mistakes.
Chapter 14A deals with the special provisions that help to avoid repetitive appeals. It includes the cases that are already pending in the Supreme Court or High Court.
Liabilities for different cases, including general and special provisions is included. It also deals with the provisions meant for tax recovery from NRIs, private companies, etc.
It deals with the firms and their taxation and assessment process. It also deals with constitutional changes, succession, and dissolution processes.
This chapter deals with the clauses related to tax collection and recovery. It also gives an insight into the interest charged on late tax payments or recovery cases.
It deals with the income tax relief given to the companies for the dividends they pay to their shareholders. Chapter 18 also deals with the tax relief provided to the companies in lieu of the charitable work that they support through their foundation wings.
Includes information about the tax refunds, in case any extra tax is paid to the Income Tax department. It involves the cases where a taxpayer is eligible to get a refund, interest on their refund if no claim is made and the correctness of the assessment. It includes Section 237 to Section 245.
It deals with the settlement of cases and includes sections 245A to 245L. Different aspects of settlements such as application, abatement of proceeding, procedure, and recovery are covered under it.
This chapter deals with all advance rulings. It also deals with sections from 245N to 245V. It includes an application for the power of authority, advanced ruling, and procedure.
The chapter deals with the appeals forwarded to the commissioner and deputy commissioner. Other than this, it also deals with appeals made to the Supreme Court, High Court, and other general revision aspects by the commissioner.
It includes sections 269A to section 269S. This chapter deals with acquiring immovable property in some instances to counteract tax evasion. All acquisition aspects, from jurisdiction to every other related aspect, are covered under this chapter.
It deals with different payment modes and requires tax evasion corrections. It also deals with loan accepting and deposits and their corresponding modes.
Deals with buying immovable property. However, the properties that the central Government makes for transfer cases. A few aspects covered under the chapter are appropriate authority, restrictions on the property, vesting of property, and rectifying mistakes.
It includes sections 271 to 275 of the Income Tax Act. It deals with different penalties applicable to taxpayers in different cases. In short, it deals with penalties such as non-payment of taxes, non-disclosure, failure to comply with different provisions of the income tax sections, and so on.
Includes sections 275A to section 280D. These sections deal with prosecution & offenses with respect to compliance failure and other related details.
This chapter includes sections 281 to 298. It further deals with almost all miscellaneous topics that can't be categorized under any other tax chapters mentioned above. It includes generic and special scenarios that may arise concerning the taxation process for different taxpaying entities.
Types of Taxes in India
There are two broad types of taxes according to the Income Tax Act:
It paid directly by the individual it is imposed on, such as wealth tax, income tax, gift tax, etc. The taxpayer pays this tax directly to the Government without any involvement of an third-party.
If a tax is passed on by a taxpayer to another person, it is an indirect tax. This includes sales tax, Value Added Tax (VAT), etc. This type of tax is paid indirectly to the Income tax department.
Beginning April 1, 2020, an individual salaried taxpayer has been given the option to continue with the old tax regime and avail deductions/tax exemptions such section 80C, 80D deductions, HRA, LTA tax exemptions etc. or to opt for the new tax regime and do without approximately 70 deductions and tax exemptions. The new tax regime offers lower tax rates as compared to the old tax regime.
| Income Tax Slab | Tax Rates as per New Regime | Tax Rates as per Old Regime |
| ₹0 - ₹2,50,000 | Nil | Nil |
| ₹2,50,001 - ₹ 5,00,000 | 5% | 5% |
| ₹5,00,001 - ₹ 7,50,000 | 10% | 20% |
| ₹7,50,001 - ₹ 10,00,000 | 15% | 20% |
| ₹10,00,001 - ₹12,50,000 | 20% | 30% |
| ₹12,50,001 - ₹15,00,000 | 25% | 30% |
| Above ₹ 15,00,000 | 30% | 30% |
Disclaimer: This section provides general information and discussions about tax and related subjects. The information and other content provided in this blog, website or in any linked materials are not intended and should not be considered, or used as a substitute for, expert opinion or a law. Kindly contact an expert for tax-related queries. ^^Subject to changes in tax laws.
Source: Income Tax Department, Government of India
While announcing the Union Budget 2023-24, Union Finance Minister Nirmala Sitharaman announced that the new tax regime will now be the default tax regime. Below are the revised tax slabs that were announced on February 1, 2023
The Finance Minister also proposed that insurance policies (excluding ULIPs), where an aggregate premium is over Rs 5 lakh, will be taxable. However, it will not impact the tax exemption provided to the amount received on the death of an insured person.
| Income Tax Slab | Tax Rates as per New Regime |
| ₹ 0 - ₹3,00,000 | Nil |
| ₹ 3,00,000 - ₹ 6,00,000 | 5% |
| ₹ 6,00,001 - ₹ 9,00,000 | 10% |
| ₹ 9,00,001 - ₹ 12,00,000 | 15% |
| ₹ 12,00,001 - ₹15,00,000 | 20% |
| Above ₹ 15,00,000 | 30% |
Disclaimer: This section provides general information and discussions about tax and related subjects. The information and other content provided in this blog, website or in any linked materials are not intended and should not be considered, or used as a substitute for, expert opinion or a law. Kindly contact an expert for tax-related queries. ^^Subject to changes in tax laws.
Source: Income Tax Department, Government of India
So, in our country there are mainly three ways in which the Government collects Income Taxes:
What are the different taxable heads of income?
Income taxes are applicable on the source of income. Here are the five primary income heads from which taxes are deducted.
The taxable income that employees receive from their employers is put under this head. According to section 192 of the Income Tax Act, the employer will hold back taxes if the employees do not fall within the taxable bracket. Details about tax deductions and the net paid income are mentioned in Form 16 that the employer must provide to the employee.
Under sections 30 to 43D of the Income Tax Act, the profits gained by businesses or by providing professional services are considered taxable at appropriate rates. This income head is also known as "Profits and Gains of Business or Profession."
It is defined as the earnings from the sale of capital assets held by the taxpayer. Capital assets refer to the properties such as buildings, lands, bonds, equities, debentures, jewelry, etc. Taxes are levied on the income of the person when such properties are sold.
Income Tax is applicable on house property if the house is given out on rent by the owner. However, the property cannot be used for business or professional purposes under this head.
These include:
Taxes can now be paid online. Taxpayers can use the facility of e-payment in order to pay direct taxes online. However, the taxpayer should have a net-banking account with an authorized bank to avail of the online tax payment facility. Additionally, for validation purpose, the taxpayers also need to provide the Permanent Account Number (PAN) or Tax Deduction and Collection Number (TAN).
Calculation of income tax can be done manually or by using an income tax calculator. The income tax rate applicable for an individual depends on the tax slab under which they fall. For instance, for a salaried person, the income from salary includes the basic income+ House Rent Allowance (HRA) + Transportation Allowance + Special Allowance, if any. However, there are few salary components which are exempted from taxation, such as; Leave Travel Allowance (LTA), reimbursement of telephone bills, etc. Additionally, an individual is also eligible to claim tax exemption on HRA if they reside in a rented house.
Income Tax in India is filed on the basis of two factors:
As per income tax rules, 'Previous Year,' also known as the 'Financial Year,' begins on 1st April of the current year and ends on 31st March of the next year. Hence, the month in which ou start earning does not make a difference, the financial year will end on the 31st of March, and the new tax year will begin 1st April onwards. So, planning your taxes in advance for each financial year is necessary.
The next financial year that comes after the 'Previous Year,' and the one that must be considered to assess and file their income tax returns in the 'Assessment Year.'
Uses & Benefits of Filing Income Tax Return
Filing Income Tax Return (ITR) makes it easier for financial institutions to verify the financial credibility of a person. So, when someone applies for a loan, it helps in getting bank loans sanctioned easily.
The visa process to travel abroad needs ITR proofs.
When ITR is filed before the due date, some losses such as business loss, speculation loss, a capital loss can be taken ahead.
In case additional taxes have been paid, it can only be claimed if you have filed your ITR.
Passport application becomes easier if you have filed your ITR as it serves as a Non-ECR proof (Non-Emigration Check Required). A photocopy of your ITR assessment and the actual payment receipt of the latest income tax return have to be submitted. Even the income tax statement attested by IT authorities can be submitted.
During an unfortunate loss of a human life, the insurance company will need proof of income to process the claim. In case ITR is unavailable, the claim amount might get lower as ITR is the only document the court accepts for such cases.
Applying for government tenders, panel registration becomes easier with ITR. You must submit your ITRs for the last 5 to 7 years, which the tender scrutiny committee will check. It is done to assess whether the applicant has worked on a tender at a particular scale or not.
In case you wish to buy a high life cover of Rs. 50 lakhs or 1 crore, it can only be bought if you have filed your ITR. It helps the insurance providers to verify your annual income.
Every income is not taxed based on income tax slab rates. For instance, capital gains income is an exception. The capital gains tax is applicable on the basis of the asset owned by the individual, and for the period they have owned it. The asset's holding period will decide whether it is a long-term or short-term asset. Below are the tax rate applicable to the different types of capital assets based on the holding period.
| Capital Asset | Holding Period | Tax Rate |
| House Property | More than 2 years- long term. Less than 2 years- short term | 20% depends on the slab rate |
| Equity Mutual Fund | More than 1 year - long term Less than 1 year- Short term | Capital gains more than Rs.1 Lakh are taxable at 10 %, 15% |
| Debt Mutual Fund | More than 3 years- Long Term Less than 3 years- short term | 20% depends on the slab rate |
| Shares(STT Paid) | More than 1 year- long term Less than 1 year- short term | Capital gains more than Rs.1 Lakh are taxable at 10 %, 15% |
| Shares(STT Unpaid) | More than 1 year- long term Less than 1 year- short term | 20% as per the tax slab rate. |
| Fixed Maturity Plans | More than 3 years- long term Less than 3 years- short term | 20% as per the tax slab rate. |
Source: incometaxindia.gov.in
Disclaimer: Tax rules are subject to change
Income-tax is calculated on the annual income of a person, i.e, the period starting from 1 st April and ending on 31 st March of next calendar year.
Income-tax is to be paid by every person, which includes individual, Hindu Undivided Families (HUFs), Association of Persons (AOPs), Body of individuals (BOIs), firms, LLPs, companies, local authority and any artificial juridical person not covered under any of the above.
Indian law requires every ‘person’ to pay income tax. The term person is defined under Section 2(31) of the Income Tax Act. As per this section, the term person will include an individual, a company, a firm, any local authority, an undivided Hindu family, any artificial judicial person, as well as an association of persons or anybody of individuals and whether such a body has or has not undergone any process of incorporation. Further, the law explains that the formation of such a group or body may or may not have been done for the purpose of making income, profit, or gain, yet they are liable for income tax payment.
Income tax is collected in India by a variety of means. Most of the salaried people in India, as well as contractors who receive payment, contribute their income tax through the Tax Deducted at Source (TDS) mode. The person/party making such a payment withholds the income tax component and pays the same to the income tax department. The second method is Tax Collected at Source, where a buyer is required to pay their income tax to a seller, like when buying a new car, and subsequently, the seller deposits that tax to the IT department. Finally, people who are required to pay taxes can voluntarily deposit their income tax in designated banks.
Currently, India has two regimes for income tax. The newer simplified tax regime does away with most of the tax rebates. Under this, you do not have to pay tax if you are earning anywhere between 0 and 2.5 lakhs per annum. Between 2.5 lakhs to 5 lakhs, people can claim a rebate under Section 87A, where a person earning no more than 5 lakhs will get a tax rebate of INR 12,500 or their actual tax, whichever is lower. Under the old tax regime, the basic limit was the same, but anyone earning between 2.5 lakhs to 5 lakhs could claim various tax rebates for zero income tax liability.
Yes, as per Section 91 of the Income Tax Act, there is relief from double taxation. Any individual can get double taxation relief, regardless of whether India and other countries have an active Double Taxation Avoidance Agreement (DTAA). The taxable person should have been a resident of India for the previous year. Their income should have been earned and received outside India. The person should have been taxed in both countries in case of no DTAA. The person must have paid their income tax in a foreign country.
It is very important for a business to keep appropriate business records of transactions so that they can be properly taxed. Indian Income Tax law has laid down Section 44AA, which lists all the books of account that have to be maintained by appropriate professionals. These include:
The Permanent Account Number, colloquially known as the PAN, is the ten-character alphanumeric identification code issued under the aegis of the income tax department that is used for tracking income tax eligibility and liability of a person. A PAN is mandatory for any adult who wants to participate in the modern Indian financial system, from getting a bank account to a loan to buying any property. Every person who is a citizen of India should have a PAN card, including companies. Every individual should get a PAN when they turn 18, just like acquiring a driving license.
Having a PAN is almost a necessity for anyone who wants to do anything in India. Nearly all employers will ask you to get a PAN before they can pay you a salary because of the TDS requirements. You will need a PAN to buy something as simple as a mobile phone connection sim card to a large purchase like your home. Similarly, you will need a PAN to open a bank account, though accounts opened in the names of minors have slightly different rules. To buy an insurance policy, you need PAN. You will need a PAN to get a fixed deposit, a loan, or a credit card. It is an absolute must-have!
You can start by getting a rough estimate of how much taxable income you have made in a year and then refer to the income tax slots chart. This will give you broad-based details of where your tax will stand. For specific information, you can find income tax calculators provided over the internet by different companies like insurance firms, banking firms and online tax consultancy firms. Most of these have question-answer-based online wizard forms which will take your information and present you with your tax liability. You should contact a Chartered Accountant or an income tax lawyer for the exact details.
The internet is a very good place to start. The Income tax department has a number of simple and easy-to-understand guides and charts on their website, which you can refer to. Many newspapers and magazines also publish articles on the internet related to tax. For specific details pertaining to tax-related matters, you should look for online tax consultants, including both tax lawyers and chartered accountants. They specialise in income tax-related manners. You can find them individually, or you can get in touch with any of the tax consulting firms working in different parts of India as well as exclusively online.
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