Let us begin by understanding the meaning of tax. Tax is a fee charged by a Government on a product, income or activity. There are two types of taxes – direct taxes and indirect taxes.
Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax e.g. income-tax.
Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax e.g. Goods and Services Tax(GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.
Why are Taxes Levied?
The reason for levy of taxes is that they constitute the basic source of revenue to the Government. Revenue so raised is utilized for meeting the expenses of Government like defence, provision of education, health-care, infrastructure facilities like roads, dams etc.
Overview of income tax in India
Constitution of India gives the power to levy and collect taxes whether direct or indirect to the Central and State Government. The Union and State Government are empowered to levy taxes by virtue of Article 246 of the Constitution of India.
Income-tax is the most significant direct tax. Entry 82 of Union List i.e., List I of Seventh Schedule to Article 246 of Constitution of India has given the power to Central Government to levy taxes on income other than agricultural income.
Income-tax is a tax levied on the total income of the previous year of every person. A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc. Income-tax is the most significant direct tax. The income- tax law in India consists of the following components–
Components of Income Tax
Important Dates Related to Income Tax
|31 January||31 March||5 August||Oct - Nov|
|Last date to submit your investment proofs||Last date to make investments under Section 80C||Last date to file your tax return||Time to verify your tax return|
Income Tax Basics
Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. The Act prescribes five heads of income. These are shown below –
There is a charging section under each head of income which defines the scope of income chargeable under that head. These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer. Accordingly, the income is classified as follows:
- Salary, pension earned is taxable under the head “Salaries”.
- Rental income is taxable under the head “Income from house property”.
- Income derived from carrying on any business or profession is taxable under the head “Profits and gains from business or profession”.
- Profit from sale of a capital asset (like land) is taxable under the head “Capital Gains”.
- The fifth head of income is the residuary head. The income which is not taxable under the first four heads will be taxed under the head “Income from other sources”.
The tax payer has to classify the income earned under the relevant head of income.
|Head||Nature of Income|
|Income from Salary||Income from salary and pension are covered under here|
|Income from House Property||This is rental income mostly|
|Income from Capital Gains||Income from sale of a capital asset such as mutual funds, shares, house property, agricultural land|
|Income from Business and Profession||This is when you are self-employed, work as a freelancer or contractor, or you run a business. Life insurance agents, doctors and lawyers who have their own practice, tuition teachers,|
|Income from Other Sources||Income from savings bank account interest, fixed deposits, winning KBC|
Income Tax Slabs
The rates of tax for the different classes of assessees are prescribed by the Annual Finance Act.
For individuals, HUFs etc., there is a slab rate and basic exemption limit. At present, the basic exemption limit is Rs 2,50,000 for individuals. This means that no tax is payable by individuals with total income of up to Rs 2,50,000.
In India, we have four tax slabs each with an increasing tax rate.
- Income earners of up to 2.5 lakhs
- Income earners of between 2.5 lakhs and to 5 lakhs
- Income earners of between 5 lakhs and 10 lakhs
- And those who make more than 10 lakhs per year
|Income Range||Tax rate||Tax to be paid|
|up to Rs.2,50,000||No tax||No tax|
|Between Rs.2.5 lakhs and Rs.5 lakhs||5%||5% of your taxable income|
|Between Rs.5 lakhs and Rs.10 lakhs||20%||Rs.12,500+ 20% of income above Rs. 5 lakhs|
|Above 10 lakhs||30%||Rs.1,12,500+ 30% of income above Rs.10 lakhs|
This is the income tax slab for FY 2017-18 for taxpayers under 60 years. There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.
Surcharge / Rebate under section 87A
Surcharge: Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage of income-tax. In case where the total income of an individual/HUF/AOP/BOI exceeds Rs 50 lakhs but does not exceed Rs 1 crore, surcharge is payable at the rate of 10% of income-tax and in case total income exceeds Rs 1 crore, surcharge is payable at the rate of 15% of income-tax.
Rebate under section 87A: In order to provide tax relief to the individual tax payers who are in the 5% tax slab, section 87A provides a rebate from the tax payable by an assessee, being an individual resident in India, whose total income does not exceed Rs 3,50,000. The rebate shall be equal to the amount of income-tax payable on the total income for any assessment year or an amount of Rs 2,500, whichever is less.
|Total Income||Surcharge||Rebate u/s 87A|
|≤ Rs 3,50,000||Not applicable||Income-tax on total income or Rs 2,500, whichever is less|
|> Rs 3,50,000 ≤ Rs 50,00,000||Not applicable||Not applicable|
|> Rs 50,00,000 ≤ Rs 1,00,00,000||Not applicable||Not applicable|
|> Rs 1,00,00,000||15% of income-tax||Not applicable|
Education cess and secondary and higher education cess on income-tax
The income-tax, as increased by the surcharge or as reduced by the rebate under section 87A, if applicable, is to be further increased by an additional surcharge called education cess@2% and secondary and higher education cess on income-tax @1% of income-tax plus surcharge, if applicable.
Step by Step guide for calculation of total income
- Step 1: Determination of residential status
- Step 2: Classification of income under different heads
- Step 3: Computation of income under each head
- Step 4: Clubbing of income of spouse, minor child etc.
- Step 5: Set-off or carry forward and set-off of losses
- Step 6: Computation of Gross Total Income
- Step 7: Deductions from Gross Total Income
- Step 8: Total income
Advance tax and tax deducted at source
Although the tax liability of an assessee is determined only at the end of the year, tax is required to be paid in advance in four installments on the basis of estimated income i.e., on or before 15th June, 15th September, 15th December and 15th March. However, residents opting for presumptive taxation scheme can pay advance tax in one installment on or before 15th March instead of four installments. In certain cases, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Income-tax Act, 1961 or the Annual Finance Act. Such deduction should be made either at the time of accrual or at the time of payment, as prescribed by the Act.
For example, in the case of salary income, the obligation of the employer to deduct tax at source arises only at the time of payment of salary to the employees. However, in respect of other payments like, fees for professional services, fees for technical services, interest made to residents, the person responsible for paying is liable to deduct tax at source at the time of credit of such income to the accounts of the payee or at the time of payment, whichever is earlier. Such tax deducted at source has to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any authorized bank.
The deadlines are:
|Due Date||Advance Tax Payable|
|On or before 15th June||15% of advance tax|
|On or before 15th September||45% of advance tax|
|On or before 15th December||75% of advance tax|
|On or before 15th March||100% of advance tax|
To calculate your advance tax:
- Add up all the invoices received and include future payments you will be receiving till March 31 to estimate your taxable income.
- Deduct expenses directly related to your business, and any investments you have made under Section 80C.
Previous Year and Assessment Year
Assessment year - The term has been defined under section 2(9). This means a period of 12 months commencing on 1st April every year. The year in which income is earned is the previous year and such income is taxable in the immediately following year which is the assessment year. Income earned in the previous year 2017-18 is taxable in the assessment year 2018-19.
Previous year - The term has been defined under section 3. It means the financial year immediately preceding the assessment year. As mentioned earlier, the income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous year shall be the period beginning on the date of setting up of the business or profession and ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then the previous year will commence from the date on which the source of income newly comes into existence and will end with 31st March of the financial year.
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