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What is Income Tax in India – For Beginners
Income tax is a tax collected by the government of India depending on the income or profit of the individual or company or firm or authority. Basically, there are two types of taxes, direct and indirect tax.
Direct tax is deducted from the individual directly by the government on the basis of the income or profit. The tax that levied on goods and service is the indirect tax. It is collected indirectly from you and is paid to the government as in restaurants, theatres and so on. To make it more clear, service tax that you pay in a restaurant is an indirect tax and Income tax that is deducted from your salary is a direct tax. Income tax collected every month in the form of TDS.
Income tax is calculated on the monthly salary of a person or entity and it is applicable at incremental income tax slab rates. For example, a person with a lower income is taxed at a lower slab rate and the person with the higher income is taxed with a higher slab rate. So, Income tax paid by one person is not the same with the other. The cycle of income in India starts from 1st April of the year and ends on 31st March of the following year.
Income Tax Overview
Income tax is the main source of revenue for the government. The money collected in the name of direct tax is used for various infrastructural developments for the government, defence needs and to pay the salary for state and central government employees. In India, taxes levied on income, sale, purchase and property.
The Income Tax Act in India was first introduced in the year 1860. It was connoted by James Wilson to overcome the money loses in the British Government due to India’s Freedom movement in 1857. Presently, the Income Tax Act 1961 is applicable in India.
What is a Direct Tax and Indirect Tax?
Taxes are generally divided into 2 key categories
- Direct tax
- Indirect tax.
Direct taxes are directly paid tax to the government. Some of the common examples of direct taxes are income tax and corporation tax. An indirect tax is a tax paid indirectly to the government, for example, VAT and GST. Income tax is based on the income of the individual or company whereas indirect tax varies based on the product or service.
Who needs to pay Income Tax?
Under the Income Tax Act, any Indian citizen aged below 60 years and earning income more than Rs.2.5 lakhs per annum is liable to pay income tax. Individuals who are above 60 years with their annual income is more than Rs.2.5 lakhs have to pay income taxes to the government of India.
- Self-employed individuals
- Salaried individuals
- Self-employed professionals
- Legally recognized artificial persons
- Hindu Undivided Family (HUF)
- Body of Individuals (BOI)
- Association of Persons (AOP)
- Corporate firms
- Local Authorities
What are Income Tax Slab Rates?
In India, income is taxable based on annual net income. The tax is evaluated by prescribed income tax slab rates. The income tax slab rates are progressive in nature like the slab rate increases depending on the net annual income of a person. The Income-tax slab rates are liable to be changed periodically and it is a part of the Union Budget announcement. The slab rates of tax on income for the financial year 2018-2019 are as follows:
Income Tax Slab for Individuals
|Income Slab||General Category||Senior Citizens (60 years to 80 years)||Very senior citizens(above 80 years)|
|Up to ₹ 2,50,000||Nil||Nil||Nil|
|₹ 2,50,001 – ₹ 3,00,000||5%||Nil||Nil|
|₹ 3,00,001 – ₹ 5,00,000||5%||5%||Nil|
|₹ 5,00,001 – ₹ 10,00,000||20%||20%||20%|
|Above ₹ 10,00,000||30%||30%||30%|
If a person earns between ₹ 50 Lakhs to ₹ 1 Crore then 10% of the income tax has to be paid and if a person earns more than ₹ 1 Crore then he has to pay 15% of the income tax. Importantly, all the taxpayers has to be paid 4% of their income tax as Health and Education Cess depending on the slab they fall into.
What is the Income Tax Slab for Businesses
For co-operative societies:
|Income tax slabs||Income tax rates|
|If income is within ₹ 10,000||10 % of the income has to be paid as tax|
|If income is between ₹ 10,000 – 20,000||20 % of the income|
|If the income is above ₹ 20,000||30 % of the income|
For Domestic Companies and Firms
Here slab rates are not applicable for domestic companies, local authorities and firms.
- Flat 30% of tax is figured on the total income.
- If the total income of domestic companies exceeds ₹ 1 Crore, an additional charge of 7% is levied
- If the total income of domestic companies exceeds ₹ 10 Crore, a surcharge of 12% is imposed
- An education cess of 3% is also levied as tax from such companies
Filing Returns is Mandatory
It is mandatory for every individuals and entities who gets income in India to file an Income Tax return.
Here, all the taxation process activities are done under Income Tax Department.
It is every tax payer’s responsible to announce their Income to the Department of Income Tax by filing a form prescribed by Govt. of India. It has to be done at the end of every financial year.
This Income Tax Return Form sums up your income made in that financial year. The income can be from salary, business, from housing property, pension or even from capital gains.
How to avoid Income Tax Penalties
Being Indian citizen, it is completely your responsibility to pay the income tax on time, if you forget to do it on time then you have face serious implications from Income Tax Department. To avoid such implications follow these points
- Fill the ITR form correctly, this inform the government about your income and the tax you paid on it.
- According to the Income Tax Act, it is mandatory for every individual/company to file ITR every year.
- If you fail to fill the Income Tax Returns, it will result in serious implications. The Income tax Department may view you as a tax defaulter which results in penalties from the Income Tax Department.
- And also if you have paid more income tax than what is required, the nimiety amount you paid will be refunded.
What are Taxable Income?
Under the Income Tax Act 1961 of Government of India, the following are the different types of taxable Income as per the applicable slab rates:
- Income from Salary
- Income from Business
- Income from House Property
- Income from Capital Gains
- Other income such as dividend income, lottery and other legal gambling etc.
Advantages of Filing Income Tax Return (ITR)
Filing Income Tax returns is mandatory for an individual who pays tax. You are exemption from tax paying when your age is below 60 years with an income up to ₹ 2.5 lakhs. There is a belief among many salaried individuals that the employer has deducted income tax and their duty is over. Actually, it is not over until you fill IT returns. Income tax payment and filing IT returns are two different obligations.
Actually, you have several advantages in filing Income tax returns:
- Helps in easy processing of loans
- Income tax filing is mandatory for VISA processing
- Registering process of immovable properties will be easy
- A credit card will not be issued to the person who didn’t file his returns regularly
- Filing income tax returns helps good credit record in Income Tax Department