Income Tax in India

Income Tax in India

Income Tax in India

Tax can be defined as cost of living in society levied by government to meet expenses of society. Taxes in India can be categorized as direct and indirect
taxes. Direct tax is a tax which you pay on your income to the government.

Starting with income tax basics, the most important term to understand is
what is income. Income, as per the Income Tax Act is set in five categories
that anyone who has a source of earning is liable to pay.

  1. Salary Income

Payment received from your employer is part of this category including basic pay, annuity, advances, allowance, conveyance, perquisites and
retirement benefits Etc. The total of all these makes up your gross salary.
This is the income which is treated as income form salary.

2. House Property Income

Income in the form of rent received from residential or commercial property that you own is taxable under law as Income from House Property. All types of properties are taxed under the head ‘income from
house property’. An owner for the purpose of income tax is its legal owner,
someone who can exercise the rights of the owner in his own right and not
on someone else’s behalf.

3. Income from Business and Profession

If you are a business owner or salaried professional, or freelancer, then
your income in the form of payment or profits will be taxed under this
category.

The terms business activity includes “any trade, commerce, manufacturing
activity or any adventure or concern in the nature of trade, commerce, and
manufacture”.

There are two types of business, speculative and Non-speculative.

Speculative business income: Income from intraday equity trading is
considered a speculative business income. Intraday trading simply
means the buying and selling of financial instruments on the same
day.

Non-speculative business income: It is the income from trading
Futures & Options is taken as a non-speculative business. F&O is also
considered as non-speculative as these instruments are used for
hedging and also for taking/giving delivery of the underlying contract.

4. Capital Gains Income

Any profit or gain that arises from the sale of a capital asset is a capital
gain. Land, building, house property, vehicles, patents, trademarks,
leasehold rights, machinery, and jewellery are a few examples of capital
assets.

Capital gains are not applicable to an inherited property as there is no
sale, only a transfer of ownership. The Income Tax Act has specifically
exempted assets received as gifts by way of an inheritance or will.
However, if the person who inherited the asset decides to sell it, capital
gains tax will be applicable. There are two type of capital Assets

• STCG (Short-term Capital Asset)

An asset held for a period of 36 months or less is a short-term capital
asset. The criteria of 36 months have been reduced to 24 months for
immovable properties such as land, building and house property from
FY 2017-18

• LTCG (Long-term Capital Asset)

An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

5. Income from Other Sources

Any income received that is not included in the above four categories it
shall falls under income from other sources. They can be recurring like
interest (earned from post office savings, bank deposits, savings bank
deposits, recurring deposits), and non-recurring income is income
earned once by way of lottery, game show or gambling.

You enjoy a deduction up to Rs 10,000 on interest received from savings
account and recurring deposits. While senior citizens get a deduction up
to Rs 50,000 on their interest income from fixed deposits.

Please note that dividend income received from an Indian company is
exempt under Section 10(34) of the Income-tax Act, 1961 and need not
be shown under “other sources” as income but must be shown under
“Exempt income” in your tax return.

However, a taxpayer other than a company, in receipt of dividend in
excess of Rs 10 lakhs is liable for income tax on such income at the rate
of 10%.

Tax-Free Income

Income which is not liable for taxation like agricultural income, receipts
from HUF, interest earned by NRIs on bonds notified by Central
Government, gratuities, commutation of pension, proceeds from
insurance received after the death of the insured person, Provident
Fund receipts, among others.

What is Financial Year and Assessment Year as per income Tax Act?

The year in which income is earned and advance tax paid is the financial
year.

Assessment year is the year following the financial year when the income
tax department assesses the income tax returns filed by the taxpayer.

So, for the Financial Year 2020-21, the assessment year is going to be
FY2012-22.

Who is an Assessee?

An assessee is a person or entity who is entitled to pay the taxes. It could
be an individual, an HUF or Hindu Undivided Family, partnership firm,
company, Body of Individuals or AOP (association of persons).

Income tax slab rate applicable for New Tax regime for FY 2020-21.

Income Tax SlabsTax Slab Rates for FY 2020-21
(Applicable for All Individuals & HUF)
Rs 0.00 – Rs 2.50 LakhNIL
Rs 2.5 lakhs- Rs 3.00 Lakh
Rs. 3.00 lakhs – Rs 5.00 Lakh
5% (tax rebate u/s 87a is available)
Rs. 5.00 lakhs- Rs 7.5 Lakh10%
Rs 7.5 lakhs – Rs 10.00 Lakh15%
Rs 10.00 lakhs – Rs. 12.50 Lakh20%
Rs. 12.5 lakhs- Rs. 15.00 Lakh25%
Rs. 15 Lakh30%
Income tax slab rate applicable for New Tax regime for FY 2020-21

Additional Information

• Please note that the tax rates in the New tax regime is the same for
all categories of Individuals, i.e., Individuals & HUF up to 60 years of
age, Senior citizens above 60 years up to 80 years, and Super senior
citizens above 80 years. Hence no increased basic exemption limit
benefit will be available to senior and super senior citizens in the
New Tax regime.

• Individuals with Net taxable income less than or equal to Rs 5 lakh
will be eligible for tax rebate u/s 87A i.e., tax liability will be nil of
such individual in both – New and old/existing tax regimes.

• Basic exemption limit for NRIs is of Rs 2.5 Lakh irrespective of age.

• Additional Health and Education cess at the rate of 4 % will be
added to the income tax liability in all cases. (increased from 3%
since FY 18-19)

• Surcharge applicable as per tax rates below in all categories
mentioned above:

  1. 10% of Income tax if total income > Rs.50 lakh
  2. 15% of Income tax if total income > Rs.1 crore
  3. 25% of Income tax if total income > Rs.2 crore
  4. 37% of Income tax if total income > Rs.5 crore

• The taxpayer opting for concessional rates in the New Tax regime
will have to forgo certain exemptions and deductions available in
the existing old tax regime. In all there are 70 deductions &
exemptions that are not allowed, out of which the most commonly
used are listed below:

List of common Exemptions and deductions “Not allowed” under
New Tax rate regime

• Leave Travel Allowance
• House Rent Allowance
• Conveyance allowance
• Daily expenses in the course of employment
• Relocation allowance
• Helper allowance
• Children education allowance
• Other special allowances [Section 10(14)]
• Standard deduction on salary
• Professional tax
• Interest on housing loan
• Deduction under Chapter VI-A deduction (80C,80D, and so
on)

List of deductions “allowed” under new Tax rate regime

• Transport allowance for especially abled people
• Conveyance allowance for expenditure incurred for travelling
to work
• Investment in Notified Pension Scheme under section 80CCD
(2)
• Deduction for employment of new employees under section
80JJAA
• Depreciation u/s 32 of the Income-tax act except additional
depreciation.
• Any allowance for travelling for employment or on transfer

In this new regime, taxpayers have an option to choose either:

  1. To pay income tax at lower rates as per New Tax regime on the
    condition that they forgo certain permissible exemptions and
    deductions available under income tax, Or
  2. To continue to pay taxes under the existing tax rates. The assessee can avail rebates and exemptions by staying in the old regime and paying tax at the existing higher rate

Thanks for read my article “Income Tax in India

read more at GST Return and Type of GST Return

read more at Corporate Compliance Calendar for January, 2021 Includes MCA Compliance, INCOME TAX 


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