Income tax is a type of tax charged by the government on the income earned by individuals or businesses during a certain financial year. Based on the income tax slab, it is computed every financial year.
Decoding income tax meaning is simple. It is a type of direct tax levied by the government on the income given by people and corporations during a fiscal year. The government generates revenue through taxes. The government spends this money on infrastructure development, healthcare, education, farm subsidies, and other government welfare programs.
Taxes are classified into two types, and they are - Direct Taxes and Indirect Taxes.
Direct tax, for example, is a tax levied directly on earned income. Income tax is a kind of direct tax. The tax calculation is according to the income slab rates that were in effect during that fiscal year.
The Income Tax Act of 1961 was enacted by the legislature to govern and manage income tax in the country. However - in 1962, the income tax rules were established to assist in the enforcement and application of the Act's law. Furthermore, the income tax rule can only be read in conjunction with the Income Tax Act.
The Income Tax Rules are created within the framework of the Income Tax Act and are not permitted to supersede its requirements.
Any Indian person under the age of 60 who earns more than Rs 2.5 lakh is required to pay income tax. Individuals above the age of 60 who earn more than Rs 2.5 lakh per year must pay taxes to the Government of India.
The below-mentioned entities are liable to pay taxes-
Under Indian income tax legislation, each of the taxpayers is taxed differently.
Taxpayers are taxed based on their income slab, whilst businesses and Indian companies have a fixed value of tax computed on their taxable profits.
People's earnings are classified into tax brackets or tax slabs. And the tax rate varies for each tax slab. The rate where the income is taxed rises in direct proportion to income.
Everyone in India who earns or receives an income is subject to income tax. (Yes, whether you are a resident or a non-resident of India.) For ease of classification, the Revenue Tax Department divides income into five major categories:
Renting a residence is taxable under this kind of income.
Salary and pension income are taxable under this category of income.
Profits made by self-employed persons, businesses, freelancers, or contractors, as well as income made by professionals such as life insurance agents, chartered accountants, doctors, and lawyers who have their own practice, and tuition teachers, are taxable under this heading.
Surplus income from the sale of capital assets, such as mutual funds, stocks, or real estate, is taxable under this category of income.
Under this heading, income from savings bank account interest, fixed deposits, and lottery winnings are taxable.
Individuals with an annual income of more than Rs. 5 lakhs are needed to pay income tax to the government on their earnings for the fiscal year from April 1-March 31.
The amount of tax you will be asked to pay is determined by your income tax bracket. Currently, the maximum income tax rate is set at 30%, with a surcharge and education cess applied.
The table below illustrates the taxable income in India. Individuals (and Hindu Undivided Family- HUF) and Business Entities are the two main income tax slab groups.
|
Income Slab |
Old Tax Regime |
New tax Regime (until 31 March 2023) |
New Tax Regime (From 01 April 2023) |
|
Rs 0 - Rs 2,50,000 |
- |
- |
- |
|
Rs 2,50,000 - Rs 3,00,000 |
5% |
5% |
- |
|
Rs 3,00,000 - Rs 5,00,000 |
5% |
5% |
5% |
|
Rs 5,00,000 - Rs 6,00,000 |
20% |
10% |
5% |
|
Rs 6,00,000 - Rs 7,50,000 |
20% |
10% |
10% |
|
Rs 7,50,000 - Rs 9,00,000 |
20% |
15% |
10% |
|
Rs 9,00,000 - Rs 10,00,000 |
20% |
15% |
15% |
|
Rs 10,00,000 - Rs 12,00,000 |
30% |
20% |
15% |
|
Rs 12,00,000 - Rs 12,50,000 |
30% |
20% |
20% |
|
Rs 12,50,000 - Rs 15,00,000 |
30% |
25% |
20% |
|
>Rs 15,00,000 |
30% |
30% |
30% |
Following are some key terms associated with income tax-
The fiscal year is a one-year term used by taxpayers for accounting and financial reporting. It is the fiscal year in which income is earned. Such a period runs from April 1 of the calendar year to March 31 of the following calendar year.
The abbreviation is "FY." For example, FY 2021-22 refers to the fiscal year beginning on April 1st, 2021, and ending on March 31st, 2022.
The assessment year is the one-year period from April 1 to March 31, beginning immediately after the fiscal year. This period is known as the assessment year because all taxpayers must evaluate their income received throughout the fiscal year and pay taxes during this period.
For example, the assessment year for revenue received during FY 2021-22 will be AY 2022-23.
The Permanent Account Number is abbreviated as PAN. It is a unique 10-digit alphanumeric digit assigned to Indian taxpayers by the Income Tax Department. All of a person's tax-related transactions and information are recorded using their unique permanent account number.
When paying advance tax or self-assessment tax, the individual must include his or her PAN number, also, where the individual presents his PAN to certain businesses like banks, mutual fund firms, and so on.
The income tax department receives financial information from such organizations via PAN. This enables the tax collector to associate all tax-related operations with the department. As a result, it would be easy to identify all of your financial transactions simply by entering a permanent account number.
An assessee is a person or group who determines his or her income and pays tax in accordance with the Income Tax Act.
The assessee could be an individual, a partnership, a corporation, an Association of Persons (AOP), a trust, or any other entity.
In India, income tax is levied based on a taxpayer's residency status. Individuals who qualify as Indian residents must pay tax on their worldwide income in India, which includes money generated both in India and abroad.
Non-residents, on the other hand, must pay taxes only on their Indian income. For each fiscal year in which income and taxes are calculated, the residential status must be determined independently.
It is a one-of-a-kind ten-digit alphanumeric digit assigned by the Income Tax Department of India. All personnel in charge of a tax deduction (TDS) or collection (TCS) are responsible for getting TAN. The TAN must be included in any TDS/TCS return, payment challan, and TDS/TCS certifications.
Individuals should calculate income tax based on the nature of their earnings. Salary earners might make use of the available exclusions for various allowances.
Individuals and HUFs can take a deduction under Sections 80C through 80U, subtract it from their total gross income, and then compute their income tax due. In addition, the total income tax liability should be adjusted for taxes paid, such as advance tax, TDS, and so on. In addition, the taxpayer should apply the effect of the rebate under Section 87A and relief under Sections 89, 90, and 91 to determine the net amount of income tax payable.
Every source of income should be reported on your tax return. Of course, the legislation exempts some incomes, such as dividend income from an Indian company, LTCG on the listed equity shares up to Rs 1 lakh in any fiscal year, and so on.
As a result, below is a fast guideline you can possibly use to calculate taxes payable on your income-