Income Tax

Understanding the Basics of Income Tax in India

Income tax is one of the major sources of revenue generation for the government, playing a key role in the continuous growth and development of the Indian economy. The Government of India directly taxes the incomes and profits earned by individuals, HUFs, and businesses. When many know what income tax is and how it works, it can still be complex for others.  

Read this article to understand the concept of income tax, how to file income tax returns, and what tax slabs and tax regimes are. 

What is Income Tax?

Income tax is the direct tax the central government imposes on the income earned during a financial year. Based on the income tax slab, the individual must pay income tax as governed under the Income Tax Act, 1961 provision.  

Taxes are mainly of two types: direct tax and indirect tax. The tax levied directly on income earned is a direct tax, and income tax is one of them. Depending on the income tax slab and rates, an individual is charged. Also, the tax rates increase with the rise in income. 

Who Are Liable to Pay Income Tax?

As per the Income Tax Act, 1961, taxpayers are classified into various categories, and the tax rates for each are different. The basic category of taxpayers is:

• Individuals (those below 60 years, between 60 and 80 years, and above 60 years of age)
• Hindu Undivided Family (HUF)
• Firms/ companies
• Body of Individuals (BOI)
• Association of Persons (AOP)
• Local authorities
• Artificial judicial person

Criteria of Taxable Income 

The income tax is levied on all types of income, including the following:  

How Does Income Tax Work in India?

Each taxpayer in India is taxed differently depending on their income. The companies have a fixed tax rate calculated on their tax profits. The individuals, HUFs, BOI, AOP, etc., pay taxes based on their income. The people's income is grouped into blocks, generally known as tax slabs. Each tax slab has a different tax rate. With the increase in income, the tax rates also increase. 

If you are a taxpayer, you will have to pay taxes for the financial year (2023-24) in the assessment year (2024-25). The income tax payable also depends upon the income tax slab you choose. 

• Old tax regime 
• New tax regime 

Income Tax Rates Under Old Tax Regime

Under the old tax regime, the income tax rates were divided into 3 slabs of 5%, 20%, and 30% for different income brackets. Furthermore, those who have continued with the old tax regime can claim deductions from allowances like Leave Travel Concession, House Rent Allowance, and others. 

The income tax slab rates for individuals below 60 years of age are as mentioned below: 

For individuals 60 years or above and those above 80 years of age have different tax slabs and tax rates. However, taxpayers can claim deductions for the tax-saving investments made under Sections 80C to 80U. 

Income Tax Rates Under New Tax Regime

Budget 2020-21 introduced the new tax regime, providing taxpayers with more concessional tax rates. As per the best financial suitability and investment preferences, the taxpayers can choose between the new tax regime or continuing with the old tax regime when filing ITR.  

The income tax slab rates under the new tax regime for Financial Year 2022-23 (Assessment Year 2023-24) are as follows:

In Budget 2023, the income tax slabs under the new tax regime are revised for the Financial Year 2023-24 (Assessment Year 2024-25) as follows:

Most deductions and exemptions are not allowed if the taxpayer opts for the new tax regime. However, the following deductions and exemptions are available under the new tax regime:

• Transport allowance for a specially-abled person
• Perquisites for office purposes
• Contribution made by the employer towards NPS
• Daily allowance
• Conveyance allowance incurred as part of employment
• Deduction on income from family pension 
• Exemption on voluntary retirement

Taxpayers Based on Residential Status

Income tax is levied depending on the residential status of the taxpayer. As per the Income Tax Act, an individual can be divided into the following categories based on the residential status: 

• Non-resident (NR)
• Resident and ordinarily resident in India (ROR)
• Resident other than an ordinary resident in India (RNOR)

What is Income Tax Act, 1961?

Passed in 1961, the Income Tax Act is the main legislation that governs all income tax provisions, tax rates, and applicable tax deductions. It was enacted on September 13, 1961. The law has made many amendments due to changing economic situations and conditions. 

The Income Tax Act performs the following functions: 

• Defines and outlines important provisions of income tax
• Set applicable tax rates 
• Prescribes rules and regulations for the calculation and payment of taxes
• Takes control of administration and enforcement of income tax laws
• Specify the limits for tax exemption, deductions, and limits to determine the tax obligations

How is the Income Tax Collected?

The Income Tax Department collects the direct tax on behalf of the Government of India primarily in the following manner: 

• Tax Deducted at Source (TDS): Employers deduct the tax from your monthly salary before you receive it.
• Tax Collected at Source (TCS): Businesses collect tax from their customers and pass it to the government. 
• Voluntary Payment by Taxpayers: Taxpayers can make voluntary income tax contributions to designated banks through advanced tax or self-assessment tax.

The Central Board of Direct Taxes (CBDT) administers direct tax laws through the Income Tax Department. Also, CBDT is responsible for policy regulation and tax planning. 

Terminology of Income Tax Calculation in India

The major terms related to income tax are important to understand. Some of them are mentioned below: 

Previous Year

As per the income tax rules, the previous year is the financial year that begins on 1st April of the current year and ends on 31st March of the next year. This is the year when the income is earned. No matter which month you’ve started to earn, the financial year ends on the 31st of March. Hence, you must start tax planning in advance each financial year. 

Assessment Year

The assessment year is a one-year period that starts immediately after the financial year. During the assessment year, taxpayers must evaluate their total income earned in the financial year and pay taxes. For better understanding, the income earned for FY 2023-24, the assessment year will be AY 2024-25.

Assessee

An assessee is an individual or group who assesses his/her income and is liable to pay tax as per the Income Tax Act. The assessee can be an individual, HUF, partnership firm, company or association of persons, etc. 

How to Calculate Income Tax on Your Own?

Individuals can calculate their income depending on the nature of their earnings. Various tax deductions from Section 80C to 80U can be utilized to deduct the tax liability from their gross salary. Also, salaried individuals can get eligible exemptions on the various allowances as applicable. Follow the given guidelines to calculate the tax payable on your income:

• List down all your incomes from various sources - be it salary, rental income, interest/ profit earned, capital gains, etc.
• Remove the income that is exempted under the law
• Claim all the applicable deductions under every source of income, like:

1. The standard deduction of Rs. 50,000 from the salary income (if applicable)
2. Municipal taxes from rental income
3. Business-related expenses from your business turnover, etc.

• Make a list of all the eligible exemptions under each category of income, like capital gains, etc. 
• Claim applicable deductions on the salary income, considering the Section 80C, 80D, 80TTA, 80TTB, etc. 
• The amount left is your taxable income. Check the updated income tax slab; you will get your income tax payable. 

If you do not want to go ahead with the manual method, take the help of an income tax calculator available on a reliable website. An income tax calculator calculates the estimated amount of income tax you owe. The calculator considers your income, applicable tax slab, deductions, and exemptions to calculate your tax liability. 

Filing for Income Tax Return

All eligible taxpayers must file income tax returns online except for the following individuals listed: 

• Taxpayers aged 80 and above are not required to file income tax returns. 
• Those with annual income below Rs. 5 Lakhs and not claiming a refund need not file a tax return online. 

When filing an income tax return is mandatory, deadlines to file a tax return are also prescribed. Individual taxpayers need to file income tax returns before 31 July, immediately following the concerned financial year. 

E-Filing of Income Tax Return

Income tax e-filing is more convenient and secure. The Income Tax Department has made it easier for taxpayers to pay their taxes, file income tax returns, TDS returns, etc., through various methods, including:

• E-filing 2.0 portal
• E-pay tax
• TIN-NSDL

Individuals prefer e-filing income tax so they do not need to deal with the lengthy paperwork and time-consuming processes. They can securely log in to the website and effortlessly file for returns. The taxpayers should first register at www.incometax.gov.in. Once done, they can log in to the website and file for ITR.

Pro Tip: To make e-filing your income tax return efficient, keep your Permanent Account Number (PAN), Tax Deduction or Tax Collection Number handy while processing your e-tax payments. 

Income Tax Return (ITR)

An Income Tax Return (ITR) is a document that taxpayers submit to the Income Tax Department annually to declare their various income sources and claim applicable deductions and exemptions. The government has prescribed ITR forms for taxpayers to file their income tax returns. 

As per the suitability of your income and type of employment, the taxpayer can select the appropriate ITR form and file for the income tax return. Find the ITR form list below: 

What if I Miss Filing My Income Tax Return on Time?

There are certain major consequences that individuals will have to face if they miss filing income tax return before the due date. Some of the crucial repercussions are listed below: 

• To carry forward losses for future years is denied 
• The process of claiming refunds is delayed
• Difficulty in processing home loans
• Liable to pay a late filing fee of upto Rs. 10,000 under Section 234F
• The interest amount is applicable under Section 234F if the taxes are due as of 31 July

Documents Required for Income Tax Filing

Several documents are typically required for income tax filing, depending on your source of income. Here's a list of essential documents:

W-2 Forms: Details your wages, salary, and withheld taxes from your employer(s)

1099 Forms: Types of income you may have received throughout the year, such as freelance income, interest, dividends, retirement distributions, etc.

1098 Forms: Details the interest paid on loans (if any mortgages)

Receipts for Deductions: Receipts or records for any deductible expenses, such as medical expenses, business expenses, charitable contributions, etc.

Investment Statements: Statements from your investment accounts

Property Tax Records: Statements of property taxes paid during the tax year

Health Insurance Statements: Form 1095-A, B, or C, which verifies your coverage for the year

Bank Statements: Useful for verifying income, especially if you have interest-bearing accounts.

Previous Year's Tax Return: To ensure accuracy and consistency in your filing.

Additionally, certain tax situations may require additional documentation, so consulting with a tax professional is beneficial.

Income Tax Refund FY 2023-24

You are eligible to claim an income tax refund if you have paid more in taxes than your income tax liability calculated based on income, deductions, and credits for a financial year. Several variables, including your filing status, income level, deductions, and credits, can impact the amount you receive back from the government. 

For example, if the income tax liability for the FY 2023-24 is Rs. 35,000, but the employer deducted Rs. 40,000, you can request a refund for the excess Rs. 5,000.

In other cases, if you forgot to declare your tax-saving investments and were charged for accounting for your deductions, you can file for income tax refund. 

Tips for Avoiding Common Income Tax Filing Errors

Here are some practical tips for individuals and businesses to avoid common errors during income tax filing:

1. Keep Accurate Records: Maintain organized records of all income, expenses, deductions, and credits throughout the year. This can include receipts, invoices, bank statements, and other financial documents.

2. Use Reliable Assistance: Consider using reputable tax preparation software or hiring a professional tax preparer to help ensure accuracy and compliance with tax laws. Pay special attention to calculations and ensure all necessary schedules and attachments are included.

3. Double-Check Information: Before submitting your tax return, carefully review tax forms and information for accuracy. Check names, social security numbers, filing deadlines, and other personal details to ensure they match official records.

4. Report All Income: Make sure to report all sources of income, including wages, salaries, tips, interest, dividends, and any income from freelance work or self-employment. Failure to report income can lead to penalties and interest charges.

5. Keep Copies of Tax Returns and Documents: Make copies of your completed tax returns and supporting documents for your records. This can be helpful in case of an audit or if you need to reference past tax information.

6. Be Aware of Common Errors: Common tax filing errors, such as mathematical mistakes, incorrect filing status, and missing signatures, can be pitfalls during tax processing. 

How to Save Income Tax?

Tax planning is crucial to reduce income tax liability. A taxpayer can do this by investing in tax-saving instruments. Certain deductions can be claimed from the total computed income under Section 80C to 80U of the Income Tax Act. Some of the major tax-saving instruments are: 

Pro Tip: It's essential to assess your financial goals, risk tolerance, and investment horizon before choosing tax-saving instruments. 

Bottom Line

Understanding income tax is crucial for every taxpayer, whether you're an individual or a business entity. We've explored various aspects of income taxation, including its significance, calculation methods, and essential documents required for filing. By leveraging deductions, exemptions, and tax-efficient investment options, taxpayers can optimize their tax outcomes while ensuring compliance with applicable tax laws and regulations.

Whether you aim to minimize tax liability, maximize refunds, or strategically invest for the future, we recommend seeking professional guidance before deciding. 

Frequently Asked Questions (Answer the public)

1. What is income tax?

Answer: Income tax is a tax levied by the government on the income of individuals,HUFs, and businesses within its jurisdiction.

2. How is income tax calculated?

Answer: Income tax is calculated based on various factors, including your total income, deductions, credits, and tax brackets determined by the government.

3. What are tax deductions?

Answer: Tax deductions are expenses that are subtracted from your total income, reducing the amount of income subject to taxation.

4. How can I file my income tax return?

Answer: You can file your income tax return through online platforms provided by government agencies or manually by mail.

5. What is the deadline for filing income tax returns?

Answer: The deadline for filing income tax returns for FY 2023-24 (Assessment Year 2024-25) is 31 July 2024. 

6. Are there any tax credits available to reduce my income tax liability?**

Answer: Yes, various tax credits, such as the Earned Income Tax Credit (EITC), Child Tax Credit, and Education Credits, can help reduce your income tax liability.

7. Can I amend my income tax return if I made a mistake?

Answer: Yes, you can file an amended income tax return using Form 1040-X to correct errors or change your original tax return.

8. Are income tax rates changing in 2024?

Answer: No changes are made to the income tax slab rates in Interim Budget 2024 for both old and new tax regimes.

9. How is income tax calculated on salary?

Answer: Income tax on salary is calculated by considering gross salary, exempt allowances, and standard deductions under Section 80C. Tax is then calculated based on applicable slabs and rates. Tax deducted at source (TDS) is subtracted from salary by employers. Professional tax may also apply.

10. When does income tax send notice?

Answer: Income tax notices are issued for reasons such as non-filing of returns, income discrepancies, or TDS mismatches. Scrutiny assessments verify return accuracy, while Section 143(1) intimations address errors. Notices under Section 148 reopen assessments for undisclosed income. Non-compliance with tax laws may also prompt notices. Responding promptly is crucial to avoid penalties.

11. Which income regime is better?

Answer: Deciding which tax regime is better depends on individual financial investments and preferences. The old regime offers deductions and exemptions under various sections, while the new regime offers lower tax rates without deductions. Those with substantial tax-saving investments may benefit from the old regime, while those preferring lower investments may opt for the new regime. We advise you to consult with a tax advisor to help make an informed decision based on personal finances and goals.

12. Which income tax regime is better for senior citizens?

Answer: Under the new tax regime, the tax rates for all taxpayers, including individuals, HUFs, and senior citizens, are the same.

13. How to check income tax refund status?

Answer: Follow these steps to check your income tax refund status:

1. Visit the income tax department's website.

2. Navigate to the refund status section.

3. Enter necessary details, such as your PAN and assessment year.

4. Submit the information accurately.

5. You should be able to view the status of your income tax refund on the screen in the text reflecting "Refund Sent," "Refund Processing," or "No Refund."

Alternatively, you can check your income tax refund status by logging in to your account on the income tax department's e-filing portal.