What is Income Tax?

Income tax is a type of tax that the central government charges on the income earned during a financial year by the individuals and businesses. Taxes are sources of revenue for the government. Government utilizes this revenue for developing infrastructure, providing healthcare, education, subsidy to the farmer/agriculture sector and in other government welfare schemes. Taxes are mainly of two types, direct taxes and indirect form of taxes. Tax levied directly on the income earned is called as direct tax, for example Income tax is a direct tax. The tax calculation is based on the income slab rates applicable during that financial year.

Direct Taxes are broadly classified as:

Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed
Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India.

Who should pay Income Tax? – Types of Tax Payers

The Income tax Act has classified the types of taxpayers in various categories. Different tax rules apply for different types of taxpayers.

Taxpayers are categorized as below:

Individuals
Hindu Undivided Family (HUF)
Firms
Companies
Association of Persons (AOP)
Body of Individuals (BOI)
Local Authority
Artificial Judicial Person

Residential status is a crucial factor in determining tax liability. Residents are taxed on their global income (income earned in India and abroad), while non-residents are taxed only on income earned or accrued in India. Within the category of residents, there are further classifications based on age:

Individuals below 60 years
Individuals aged 60 to 80 years, and
Individuals aged 80 years and above.

The income tax calculation involves categorizing income into five heads:

Income from Salary
Income from House Property
Income from Capital Gains
Income from Business and Profession
Income from Other Sources

Taxpayers and Tax Slabs

The Indian income tax system categorizes taxpayers into different groups, including individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), and Bodies of Individuals (BOIs). Taxpayers are subjected to varying tax rates based on their income levels, with rates progressively increasing as income rises. The existing tax regime allows individuals to choose between old and new tax structures. The new tax regime, implemented from the financial year 2020-21, offers lower tax rates but eliminates many deductions and exemptions.

Firms and Indian companies adhere to a fixed tax rate on their taxable profits. Individuals, HUFs, AOPs, and BOIs are taxed based on the income slabs they fall into, each slab having a different tax rate. The introduction of the new tax regime in Budget 2020 provides taxpayers with an alternative tax structure, reflecting a balance between reduced tax rates and reduced exemptions.

In Budget 2023, the income tax slabs under the new tax regime for FY 2023-24 (AY 2024-25) are revised.

The process of filing income tax returns is essential for individuals and entities with taxable income. The Income Tax Return (ITR) forms, including ITR-1 to ITR-7, cater to different types of taxpayers. Filing returns online has become mandatory for most taxpayers, with specific exceptions for individuals aged 80 and above and those with income below Rs 5 lakhs not claiming a refund.

Exceptions to the Income Tax Slab

It’s important to note that income taxation based on slab rates doesn’t apply universally to all types of income. An exception to this rule is capital gains income, which is taxed based on the type of asset owned and its holding period. The duration for which an asset is held determines whether it falls under the category of long-term or short-term capital gains. Moreover, the holding period required to ascertain the nature of the asset varies across different types of assets.

KEY TERMS USED IN INCOME TAX

Financial year: The financial year is the period during which income is earned, typically from April 1 to March 31.

Assessment year: The assessment year follows the financial year and is the period during which taxpayers evaluate their income and pay taxes.

Assessee: The assessee refers to the person or entity assessing their income and paying taxes.

PAN: Permanent Account Number (PAN) is a unique 10-digit alphanumeric identifier issued by the Income Tax Department to Indian taxpayers. It is crucial for all tax-related transactions.

TAN: Tax Deduction and Collection Account Number (TAN) is a 10-digit alphanumeric code allocated to entities responsible for deducting or collecting tax at source.

Tax Deducted at Source (TDS): Tax is deducted at the source by the payer for specific payments to the income recipient, who can later adjust/offset this TDS amount against their final tax liability.

Advance Tax: If a taxpayer’s estimated annual income tax liability exceeds Rs 10,000, they are required to pay taxes in advance, adhering to government-specified due dates for installment payments.

Self-Assessment Tax: This represents the remaining tax amount a taxpayer must pay on their assessed income. It is calculated after subtracting advance tax and TDS from the total income tax calculated on the assessed income.

e-Payment of Taxes: Taxpayers can conveniently make online payments for advance tax and self-assessment tax via the NSDL website or income tax portal, provided they have net banking facilities with an authorized bank.

Filing your ITR

E-filing of returns has become mandatory for most taxpayers, with various deadlines specified. Late filing can lead to disadvantages such as

Denial of carry forward of losses (except house property loss) to future years
Delay in processing refund claims
Difficulty in obtaining home loans, and

Levying of late filing fees and interest.

The income tax return verification form, ITR-V, is generated after submitting the return and must be e-verified or sent to the Centralized Processing Centre (CPC) in Bangalore for verification. E-filing is a comprehensive alternative, providing assistance in claiming deductions, investments, and the overall tax filing process.

Income Tax Forms List

The seven ITR forms are:

ITR-1: Individuals (residents) having income from salary, one house property, other sources, agricultural income less than Rs 5,000 and with a total income of up to Rs 50 lakh
ITR-2: Individuals/HUFs not having any business or profession under any proprietorship
ITR-3: Individuals/HUFs having income from a proprietary business or profession
ITR-4: Individuals/HUFs having presumptive income from business or profession
ITR-5: Partnership firms or LLPs
ITR-6: Companies
ITR-7: Trusts

Documents Needed for ITR Filing

Documents such as Form 16, Form 26AS, Form 16A, proof of tax-saving investments, and bank account details are essential for filing your income tax return. The specific documents required depend on your source of income Documents Required for ITR Filing