In this article, we will look into the overview of Income Tax along with its slab rates and a few important terms related to it.
Direct and Indirect Tax in India
There are two kinds of taxes prevalent in India. One is the direct tax, particularly income tax, and the other is an indirect tax, which is GST and customs.
In this post, we are going to discuss only income tax.
Income tax is a compulsory payment that a person has to make to the government at the end of every financial year. Now, the question is, why is income tax a direct tax? So, income tax is a direct tax because it is directly charged to an individual’s income.
Most importantly, the income tax is never collectively charged on the whole income. It is charged according to the slab rates given under the Income Tax Act of 1961.
Meaning of Income Tax
Income Tax, as the name suggests, is a tax directly charged on an individual’s income. So, an individual must compulsorily pay some of the money to the government as tax every year. The amount of tax varies from person to person as per their income.
The government only receives money from taxes and uses it for the betterment of society, such as healthcare, infrastructure, etc. Therefore, it is compulsory for every individual to pay tax on their income if his income falls under the slab rates mentioned under the Income Tax Act.
The tax rate depends upon an individual’s salary, starting from 10% to a maximum of 30%, with a surcharge and education cess.
Related: Residential Status and Its Types as Per Indian Taxation Law
Slab Rates Under the Income Tax Act
An individual has to follow three different slab rates depending on their age. Let us understand each one of them one by one.
These rates are from the old tax regime.
Tax rates for individuals below 60 years of age:
| Tax Slabs | Rates |
|---|---|
| Up to Rs. 2.5 lakhs | Nil |
| Rs. 2.5 lakhs - Rs. 5 lakhs | 5% |
| Rs. 5 lakhs - Rs. 10 lakhs | 20% |
| Rs. 10 lakhs and more | 30% |
Tax rates for individuals above 60 years of age:
| Tax Slabs | Rates |
|---|---|
| Up to Rs. 3 lakhs | Nil |
| Rs. 3 lakhs - Rs. 5 lakhs | 5% |
| Rs. 5 lakhs - Rs. 10 lakhs | 20% |
| Rs. 10 lakhs and more | 30% |
Tax rates for individuals above 80 years of age:
| Tax Slabs | Rates |
|---|---|
| Up to Rs. 5 lakhs | Nil |
| Rs. 5 lakhs - Rs. 10 lakhs | 20% |
| Rs. 10 lakhs and more | 30% |
Note:
- A person’s income for the whole fiscal year is taxed at a rate charged by the senior or super senior if they turn 60 or 80 during that year, respectively.
- On income above Rs. 1 crore in a fiscal year, a 10% surcharge is imposed.
- The SHEC (Secondary and Higher Secondary Education Cess) is charged at the rate of 1%, while the educational cess is charged at 2%.
Heads of Income Under the Income Tax Act
In order to classify your income, the Income Tax Act specifies a few heads under which your income will be classified. Moreover, if an individual’s earnings do not come under any of the heads of income, then that earning will not be called an income. Heads of income under the Income Tax Act are listed below.
Income From House Property
Income from house property is the income generated from the property owned by an individual. Rental income will be charged into the hands of the owner of the rented property as income from the house property.
Salary Income
The income an employee receives from the employer in the form of annuity or pension, wages, gratuity, fees, commission, perquisites, employee provident fund, etc. – such an income is taxed in the hands of an employee under the head salary.
Income From Capital Gains
The net profit that an investor earns after selling a capital asset above the cost of acquisition is referred to as capital gain. The profit earned after selling any capital asset is taxable in the hands of the seller as income from capital gains. For example, A has purchased ten shares of Tata Motors at Rs. 3,000, and after a few days, he sells those shares at Rs 4,000. Therefore, the profit of Rs 1,000 will be taxed under the head Income From Capital Gains.
Income From Business and Profession
Any income generated by a person through his own business, self-employment, or working as a freelancer, etc., is taxable under the head income from business and profession.
Income From Other Sources
Any other income earned by an individual during the financial year by way of interest on bank savings, FD, or lotteries is also taxable under the head of income from other sources.
Related: Powers of Income Tax Authorities in India
Important Terms Under Income Tax
Let us discuss a few important terms you must know while studying income tax.
Financial Year
It is the year in which the income is earned, and the income earned in the financial year is charged during the next year. A financial year starts in April and ends in March of the next calendar year.
Assessment Year
It is the year in which the tax is paid. For example, for the assessment year 2022-2023, the financial year will be taken as 2021-2022. The assessment year is the period (April 1 to March 31) in which you are liable to pay taxes on the money you earn in that particular financial year. You are required to file your income tax return during the applicable assessment year. The Assessment Year is the year that starts as soon as the financial year ends.
PAN
PAN is the Permanent Account Number. It is a unique 10-digit alpha-numeric number, and every individual who pays the tax has a PAN number. This number is allotted by the Income Tax department in order to keep a record of taxes paid by an individual.
TAN
TAN is the Tax Deduction and Collection Account Number. It is a 10-digit alpha-numeric number. Moreover, the income tax authority is the department that issues this number. All individuals obliged to deduct tax at source or obligated to collect tax at source must get a TAN.
Summing Up
Every individual has to compulsorily pay income tax to the government during every financial year. The income tax paid in the year is calculated based on income earned during the previous year. The income tax is calculated directly based on the income according to the slab rates. The rates of taxes also vary from person to person depending upon their age and salary.
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