By: Admin | Posted on: Apr 12, 2020

Ever wondered what is the Income tax of India? Who should pay Income Tax and is it mandatory to file tax every financial year? Let’s check all the important and interesting things to know.

What is the income tax of India?

Income tax is a revenue source for governments. It is imposed by the government on the income generated by individuals and business persons. According to the law, individuals with taxable income should file an annual income tax return.

An Example to know what is income tax?

In general, we have two types of incomes. They are earned income and unearned income. Earned income is like wages, commissions, and salaries. Unearned income is like rents, interests, and dividends. The majority of countries have progressive income tax systems. The higher-income group pays higher taxes when compared to the lower-income group. Income tax is one of the sources of revenue for governments.

What is taxable income?

The amount of income considered to calculate the tax an individual or a company needs to pay the government in a financial year. The term adjusted gross income is also related to taxable income. Adjusted gross income is the total income, known as “gross income,” minus deductions or exemptions in the tax year

Adjusted Gross Income = Total Income – Deductions or exemptions.

How to find total income?

The total income is the gross income earned from all the sources less (minus) certain allowed deductions, like allowances, expenses, and reliefs. For an individual who is married or is in any civil partnership and jointly assessed, the income of your spouse's or civil partner's is also included in the total income

The Budget 2020 proposals have given new options for individuals. There are new tax rates and slabs, but it is not made compulsory to adopt for the new methods. We have the option to stick to the old method or adapt to the new tax rates and slabs. If we opt for a new system we should give up exemptions like HRA, LTA, investments under Section 80C and etc,.

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2020-21 New Regime Income Tax Slabs and Rates in India

Under the new Regime introduced in Budget 2020 for Personal Income Tax, individual taxpayers have the option to avail lower tax rates by not taking advantage of almost all generally claimed deductions and exemptions. Below are the new tax rates:

When opting for the new regime, the employer's contribution to the National Pension System is allowed as a deduction. Some of the other common exemptions individuals cannot be claimed are;

• LTA - Leave Travel Allowance, Housing & other certain allowances which are wholly for the purpose of business, meal vouchers, etc.
• Standard deduction of Rs 50,000
• Section 80D - Professional tax Interest paid for self-occupied house property loan Section 80C deduction of Rs 150,000 investment in LIC, PPF or Public Provident Fund, EPF, ELSS, or Employee Provident Fund, principal repayment of home loan, etc
• Medical insurance premium deduction of Rs 25000.
• Other deductions under Chapter VIA, like interest on a savings account (80TTA)
• Interest for educational loan repayment (80E)
• Additional interest on housing loan (80EEA)
• Donations (80G) etc

The new tax regime option can be opted or availed on a year-on-year basis for individual taxpayers

Old regime 2020-21 Income Tax Slabs and Rates

Individual taxpayers have a basic exemption limit, where income up to the defined limit is not taxable. The basic exemption varies from the taxpayer to the taxpayer on the basis of the age. And the Income-tax slabs and rates are not different for women taxpayers.

General terms related to Income Tax

1. Assessment Year: Assessment year is a period of 12 months i.e. from April to March
2. Salary: The income earned by an individual
3. HRA: House Rent Allowance is provided by an employer to an employee related to the expenditure incurred for house rent. There are conditions and limits specified for HRA
4. National Pension System (NPS): NPS is a defined contribution based pension scheme under the Pension Fund Regulatory and Development Authority (PFRDA). The NPS allows employers and employees to contribute a certain portion of the employee’s basic salary. The employer contribution is added to the salary income of the employee. The employee can claim a deduction of the employer contribution under section 80CCD (2) to an extent of 10%. The employee can claim his contribution as a deduction under section 80C and there is provision for an additional deduction under section 80CCD(1B) up to Rs 50,000/-. The deduction can only be availed only if the limit of Rs 1,50,000/- specified under section 80CCE is crossed.
5. Leave Travel Assistance: For any travel expenses within the country, one can claim to Leave travel expenses. They are provided by the employer to an employee, LTA does not include expenses for boarding lodging, etc. LTA can be claimed 2 times in 4 years span. LTA expenditure is allowed under given conditions specified under tax laws.
6. House Property
7. Municipal Taxes: The taxes paid to the municipal authorities are eligible for deduction.
8. Interest on Home Loan: Interest on loan for the acquisition and/or construction of house property is Home loan interest. Home loan interest is eligible for deduction while calculating income from house property. In case income from house property is negative or loss, it can be adjusted with income from salary up to Rs 200,000.
9. Employee Contribution to PF: The PF portion from employee’s salaries on a monthly basis is contributed to the provident funds. The contribution amount is eligible for deduction under section 80C - subject to an overall limit of Rs 150,000.
10. Contribution to PPF: Any amount contributed by an employee for his or her spouse or children. PPF account qualifies as a deduction under Section 80C
11. LIC Premium: The LIC Premium paid for keep life insurance policy in force. The premium amount qualifies as a deduction for Section 80C and is subject to an overall limit of Rs 150,000/p-. The tax benefit is for the premium paid for spouse and children of the taxpayer along with the taxpayer.
12. ELSS: A taxpayer can show the investment in an Equity Linked Savings Scheme of any mutual fund for deduction under Section 80C and is subject to a suggested overall limit of Rs 150,000.
13. Tuition fee: The tuition fee paid for school, the university in India for full-time education of children or spouse. The tuition fee qualifies for deduction under Section 80C and is subject to a suggested overall limit of Rs 150,000.
14. Taxable income/ total income –The income that is taxable after the exemptions and deductions available is the taxable income or total income.
15. Standard deduction: The Finance Bill 2018 bought standard deduction of transport allowance – up to Rs 19,200 per annum. Also, there is medical reimbursement up to Rs 15,000 per annum, by producing the bills. For salaried individuals, this is a standard deduction in order to meet their expenses. Finance Bill 2019 proposed to increase this to INR 50,000.
16. Medical Insurance Premium: Any premium paid for individual or spouse or dependent children for medical insurance is eligible for deduction under section 80D to a limit of Rs 25,000. For senior citizens taxpayers, this is Rs 50,000\-. The medical insurance premium and/or medical expenses for dependent parents, an additional deduction of Rs 25,000/- is available. The same is Rs 50,000 if parents are senior citizens. For preventive health checkup Rs 5,000/- can be claimed under section 80D
17. Income from Salary: This is the salary paid to an employee. The salary and other allowances are enclosed in Form 16 and Form 12BA annually provided by the employer to the employee during the Financial Year.

What is Form 16?

Form 16 is the TDS certificate which an employer issue to an employee when TDS is deducted by them. When an employer deducts TDS on salaries, the income tax act mandates that a certificate(Form 16) must be issued by the employer, where all the details of the tax deducted and deposited are furnished. Form 16 has 2 parts - Part A and Part B.

Note: TDS is the abbreviated form of Tax Deducted at Source.

1. Income From Capital GainsProfits or gain earned from the transfer of any capital assets. Capital Assets include property, shares, securities etc. except some category assets specifically excluded like movable personal effects, etc. The capital gain earned can be classified as long term and short term depending on the period of holding.
2. Income from Home Property: Two residential house properties owned by an individual taxpayer should not attract any tax under the income from house property.
3. Income from Other SourcesAny income not classified under head income such as salary, business, house property, and profession and capital gain falls under other sources of income. Income from interest earned from a savings account, deposits, and lottery income, dividend income, etc

Who has to file ITR and how to submit Income Tax Return?

In case, the Total Income of the individual taxpayers exceeds the provided basic exemption limit or in some cases if it satisfies conditions (viz., holding foreign assets) are required to file Income Tax Returns (ITR). The format of ITR is suggested by the tax authorities on every year for filing ITR. If an individual fails to file ITR before the due date. He/she may need to pay the interest, sometimes penalty and also faces prosecution. In the majority of the cases, ITR is electronically filed and the ITR V needs to be authorized using AADHAAR or digital signature (DSC). In case not authorized using AADHAAR or DSC, the physically signed ITR V needs to be sent to CPC in Bangalore within 120 days. The ITR form to be filed depends on the sources of income, income threshold, foreign assets, etc.

We will come with another article on detailed steps to file ITR in the next article.

Do share your comments and doubts in the comments section.