What is income tax? Come June and July, the whole country asks this! This is the time the whole nation is caught up in the frenzy of filing returns. For some, the exercise is a breeze. For others, it is nothing short of rocket science. This usually happens when we don’t understand the concept of income tax clearly. These pointers should make it simpler.
So, what is income tax?
Income tax is a tax charged on annual income of Individual or business earned in a financial year as per Income Tax Act 1961. All individuals are required to pay a portion of their annual income as tax, known as the income tax percentage. The government oversees the income tax rates, income brackets, and regulations, which may undergo periodic changes. It is crucial for taxpayers to diligently report their income and promptly fulfil their tax obligations as any failure in doing so can result in penalties and fines.
Now let’s understand why we should pay income tax. Tax is a huge source of income for the government and invested for nation building such as funding public services, infrastructure, and other essential programs. As citizens it is our duty to pay taxes and contribute towards building our nation, one step at a time.
Types of taxes in India
There are two broad categories of tax in India.
1) Direct tax - This is the tax that individuals and businesses directly pay to the government on their income. Income tax is the most common example of direct tax.
2) Indirect tax - In this case, taxes are collected by intermediaries who pass on the tax burden on end consumers. GST (Goods and Services Tax), excise duties, service charges, are common examples of indirect tax.
Let’s understand income tax in detail.
The term is self-explanatory: income tax is the tax we pay on the income we earn. That said, it is important to note that income tax is levied differently to different types of incomes, different levels of incomes and so on. Let us begin by looking at the various types of income tax.
1) Income – for individuals. There are 5 types of income in India for individuals. These refer to the five types of income which are taxed.
a. Income from salary
This includes salary, wages, allowances, or any compensation received by an individual on account of being employed. It takes into account the salary, bonuses, commissions if any, perquisites, and any other benefits received by an employee from an employer. It is the responsibility of the employer to deduct tax from the salary as per the relevant regulations.
b. Income from capital gains
Capital gains refer to the profits made by an individual or an entity when they sell a capital asset, such as stocks, real estate, mutual funds, or valuable items like art, jewellery, at a price higher than its original purchase price. Gains are calculated by subtracting the original cost of the asset from the money earned from the sale. Capital gains refer to two types of gains. Short term gains and long-term gains. Accordingly, tax for both is different. Short term gains tax is computed based on the income bracket.
c. Income from property
This refers to property owned by an individual which is not used for their business or profession. Rental income is included here. Tax in this case is calculated based on the annual value of the property. Annual value is derived through multiple factors such as municipal valuation, standard rent, and other factors.
d. Income generated on account profits and / or fees for self employed
This refers to income earned by individuals on account of trade or business, consulting, freelancing, other professional services, or by an individual, or partnership firm. In this case taxable income is computed by deducting business expenses and other allowable deductions from the gross revenue.
e. Income from other sources
This refers to income which cannot be attributed to the above heads, yet it is taxable. Examples include interest income earned on fixed deposits, savings bank accounts, and on loans given to someone. Lottery wins, and dividends also fall in this category.
2) Corporate Tax
Corporate tax refers to tax levied on the profits earned by companies and businesses. It is calculated as a percentage of the company's taxable income, which is the revenue generated minus allowable deductions and expenses. Here, it is not just Indian companies which pay corporate tax. Even foreign companies are liable to pay corporate tax though with a small difference. Indian companies pay tax on their universal income whereas foreign firms pay tax on income earned only in India. The tax is calculated on the net income of the company. Tax rates are different for domestic and international companies.
The features of the Indian tax system are distinctive. Prominent features of the Indian tax system include the following:
Progressive Taxation: Higher-income individuals are taxed at higher rates, aiming for a fair distribution of the tax burden
Share of indirect taxes is larger: Owing to the glaring income inequalities, scope of direct tax is constrained
Tax Deducted at Source (TDS): TDS mandates certain entities to deduct tax at the source before making payments, ensuring a steady revenue for the government
Goods and Services Tax (GST): GST replaced multiple indirect taxes, unifying the tax structure and simplifying tax compliance for businesses
Now that we have looked at income tax in detail, let’s understand how does one calculate income tax? There are two routes to this. The old regime where all incomes are taxed but certain exemptions and deductions can reduce taxable income and increase tax savings. Or the new tax regime which offers six income slabs and a lower tax rate but no exemptions or deductions whatsoever. In fact, you can use the our income tax calculator and compute your tax with just a few clicks.
Once we have grasped the concept of income tax, understood the various types of income tax, figured out the calculation, only one thing remains. Understanding the types of income tax return.
Types of income tax return:
There are seven types of IT Returns forms available to the taxpayer. ITR1 thru ITR7. You must choose the relevant Income Tax Returns form depending upon your category (salaried, HUF etc.) and, your age, and your income level. Tax slabs vary by category, by income level, by age and so on. We would urge you to seek professional help to do this the first couple of times.
Income tax, though often seen as a financial obligation, serves a fundamental purpose in our society. enabling governments to fuel progress by building infrastructure, providing essential services, and uplifting the less fortunate. In India, the tax system plays a crucial role in funding developmental projects and promoting economic growth. By fulfilling our tax obligations, we actively participate in nation-building, fostering a more equitable and prosperous future for all citizens.
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If you’re eligible to pay income tax, you can easily file your returns yourself. The government has simplified the process by collecting taxes through three ways – TDS, advance tax, and self-assessment tax.