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Income Tax

Most of us are familiar with the term ‘income tax’. Come end of financial year, and we all dread a stipulated deduction from our salary in the name of income tax. But seldom are we aware of the meaning of income tax and its compositions. So let’s read all about income tax in detail and understand how it affects business professionals like us.

What is Income Tax?

Income tax is a percentage of an individual person’s or Business’ income that is paid to the government to run the nation smoothly, fund infrastructural development, pay salaries of those employed by the state or central governments, etc. All such taxes are levied based on the passing of a law. Income tax is defined as the law that governs the provisions for our income tax.

Income tax is an exclusive and direct means of taxation like capital gains tax, securities transaction tax, etc. There are many other indirect taxes that we pay such as Goods and Services Tax (GST), sales tax, VAT, Octroi and service tax.

A large part of revenue for the Government of India comes from the income tax you pay every month or upon every contractual earning. Ministry of Finance handles these revenue functions and it has delegated the responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).

Who pays Income Tax and why is it needed?

Income tax is applicable to be paid by individuals, corporates, businesses, and all other establishments that generate income. The collection, recovery, and administration of income tax in India is regulated by Income Tax Act, 1961. The government deploys this tax amount for a number of reasons ranging from building the infrastructure to paying the state and central government employees their salaries. Income tax helps the government generate a steady source of income which is eventually used for the development of the nation. Even though income tax is paid every month from the monthly earnings, it is calculated on an annual basis. The amount of income tax an individual has to pay depends on a number of factors.

Changes in Income Tax in the Union Budget of 2018

On 1st February 2018, our Finance Minister, Mr. Arun Jaitley proposed 5 new changes that should be incorporated by the existing standards of the Income Tax Department:

  • An increase of 1% in the cess of corporation and personal income. The cess has now been increased to 4%, from an earlier 3%. This will spiral the total income tax paid by a taxpayer, every year.

  • Salaried individuals, henceforth, will get a deduction of Rs. 40,000 on their incomes. This replaces the existing exemption permitted on reimbursement of medical costs and transportation allowances. Almost 2.5 crore salaried individuals are believed to benefit from this change and the estimated total cost incurred by the Government would amount to Rs. 8,000 crore. Standard deductions on incomes were abolished in the year 2006-07, although soon the concept was brought back into action. Standard deduction comprises of deduction of a certain amount of money from the salaried individual’s income for expenses that the person would incur during his employment in the organisation.

  • The Union Budget 2018 also introduced a new 10% tax charged on investments of long-term capital gains in stocks, and equity mutual funds. The new tax law states that all profits exceeding the amount of Rs.1 lakh (from mutual funds and stock markets) will henceforth be taxed a 10% rate, which is contrary to its existing standard of tax exemption. However, long-term capital gains invested in stocks and mutual funds up until January 31, 2018 will be exempted from any tax deduction.

  • The Finance Minister also introduced a 10% tax rate on distributed income earned from equity-based mutual funds.

  • For the senior citizens of the country, the Indian government has also established a lot of changes that will help minimise their financial burden:

    • The exemption of interest income on pre-payments made in banks and post offices has been increased to Rs. 50,000 from Rs. 10,000.

    • The deduction limit for premiums paid on health insurances or other medical expenditures, under Section 80D, has been increased to Rs. 50,000 from an existing amount of Rs. 30,000.

    • No deduction of TDS under Section 194A. Benefits for interest received from recurring and fixed deposit schemes are available.

Income Tax in Detail

Income tax is paid by every individual person, Hindu Undivided Family, Association of Persons, Body of Individuals, companies, corporate firms, local authorities and any other artificial juridical persons that generate income on a regular basis.

Taxes are calculated on the annual income of a person, and an annual cycle of a year in the eyes of the Income Tax law. This is applicable from the 1st of April and ends on the 31st of March of the next calendar year. The law has recognised these years as “Previous Year” and “Assessment Year”.

The year in which income is earned is called previous year and the one in which it is charged to tax is called assessment year.

Taxes are collected by the government in three ways:

  1. Voluntary payment by taxpayers to designated banks, like advance tax and self-assessment tax.

  2. TDS or Taxes Deducted at Source are the ones which is deducted from your monthly income, before you receive it.

  3. TCS or Taxes Collected.

Income Tax Slab rate

Income tax is charged progressively higher based on individual earnings and hence, tax slab rates are for different categories of taxpayers. The income tax slab rates can be broadly classified as:

New Income Tax Slab Rates for FY 2018-19 (AY 2019-20)

Slab of Income tax for individual tax payers & HUF who are less than 60 years old

Income SlabTax Rate
Income up to Rs. 2,50,000*No Tax
Income from Rs. 2,50,000 – Rs. 5,00,0005%
Income from Rs. 5,00,000 – Rs. 10,00,00020%
Income more than Rs. 10,00,00030%
* If you are less than 60 years old, an income up to Rs. 2,50,000 is exempt from tax.

Income tax slab for individual tax payers & HUF (60 years old or more but less than 80 years old)

Income SlabTax Rate
Income up to Rs. 3,00,000*No Tax
Income from Rs. 3,00,000 – Rs. 5,00,0005%
Income from Rs. 5,00,000 – Rs. 10,00,00020%
Income more than Rs. 10,00,00030%
* Income up to Rs. 3,00,000 is exempt from tax if you are less than 60 years old but less than 80 years of age.

Slab of Income tax for super senior citizens who are 80 years old or more

Income SlabTax Rate
Income up to Rs. 5,00,000*No Tax
Income from Rs. 5,00,000 – Rs. 10,00,00020%
Income more than Rs. 10,00,00030%
* If you are more than 80 years old, then income up to Rs. 5,00,000 is exempt from tax.

Taxable Heads of Income

Income from different sources is taxed differently. These are known as heads of income and are as detailed below:

  • Income from Salaries: Any form of income that is received from an employer by an employee is taxed under this heading. Employers have to withhold tax mandatorily under Section 192, in case the income of their employees falls under a taxable bracket. It is also the employer’s responsibility to also provide a Form 16, which contains details of tax deductions and net paid income.

  • Income from House Property: The income, in this case, is taxable if the assesse is the owner of a property which has been given out on rent. The property here, is not supposed to be used for business or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means you and your family live there, and do not have to pay taxes on this. (Read on to know more about calculating income from house property). Income from house property is calculated as follows:

    • Gross Annual Value (GAV) = x

    • Less: Municipal Taxes Paid = (y)

    • Net Annual Value = x-y

    • Less: Deductions under Section 24 = z

    • Income from House Property = (x-y) – z

  • Profits and Gains Of Business or Profession: These are the types of taxes that are applicable for income from business or professional services rendered. The provisions for computing the tax on this type of income is according to Sections 30 to 43D.

  • Income from Capital Gains: These taxes are applicable on income that arises when capital assets are transferred. Capital assets are defined as a property of any value that is held by the assesse such as buildings, land, equity shares, bonds, debentures, jewellery, art, assets, etc.

  • Income from other sources: Any other source of income that cannot be classified under the above heads of income falls under this heading. There are some specific and pre-determined incomes which fall under this heading, such as:

    • Income by way of dividends.

    • Winnings from horse races / lotteries.

    • Employee’s share contributed towards staff welfare schemes or any fund set up under the ESIC Act that is received by the employer from the employees.

    • Interest on securities like debentures, government securities and bonds.

    • Interest on compensation.

    • Gifts.

    • Rental income other than house property.

    • Family pension received after the death of the pensioner.

    • Income that is earned on interest, other than by way of securities.

Existing Income Tax Norms to change from April 2018

The Union Budget 2018 introduced a whole new set of opportunities for the underprivileged sectors of the country, including senior citizens. The finance minister has proposed new additions to the sectors of healthcare, agriculture and railways, etc. Therefore, here’s what new rules will look like:

  • A standard deduction of Rs. 40,000 has been established, pertaining to salaried employees: This standard deduction came across in the place of the earlier deductions of Rs.19,200 (allowance for transport) and Rs.15,000 (medical reimbursements) and is believed to benefit more than 2.5 crore salaried individuals in the country. The salaried category of people will be subjected to a flat deduction of Rs. 40,000 from their taxable incomes.

  • Cess rates have been increased: There has been an increase in the cess rate levied on income tax in the Union Budget. The rate of cess has been increased to 4% for taxpayers on the total payable income tax amount.

  • A new tax on long-term capital gains has been introduced: The Union Budget 2018 session announced that a 10% tax rate will be levied on all capital profits surpassing the amount of Rs. 1,00,000.

  • A 10% tax will be levied on dividend incomes: Pertaining to equity-oriented mutual funds, a 10% tax rate has been announced in the Union Budget 2018 session.

  • 5. Henceforth, Premium health insurance policies shall be subjected to higher benefits: Typically in the health insurance industry, if you end up paying premiums for a few extra years, you become eligible to some discount offered by the insurer. Earlier, however, a deduction limit of up to Rs. 25,000 was allowed by each individual claiming the same. According to the new budget, if you have a premium health insurance policy that has the validity of a year or more, the deduction made will be directly proportional to the number of years in totality, for which there is a cover available.

  • NPS schemes will attract tax benefits: As of today, a non-employee subscriber of the National Pension Scheme is allowed withdrawals that are absolutely tax-free, and the period has been extended further. Nonetheless, an employee’s contribution to the National pension Scheme is currently taxed, which is coupled with an exemption of 40%, if the account is closed or the individual chooses to opt out. For non-employees, this exemption has not been put to practice.

  • Senior citizens will get higher deduction with regard to their interest income: Senior citizens would be liable to enjoy a higher basic exemption limit with regard to deposits made in banks and post offices. This includes recurring deposits as well. Currently, under Section 80TTA of the Income Tax Act, 1961, an exemption up to Rs. 10,000 is allowed for senior citizens. A new exemption of Rs. 50,000 has been introduced on savings and deposits made by senior citizens, according to the proposed Section 80TTB.

  • An increment in the investment limit of the Pradhan Mantri Vaya Vandana Yojana was also announced by the Financial Minister in the Budget. From an earlier Rs.7.5 lakh, the amount was raised to Rs.15 lakh. The scheme is also said to be extended to March 2020. Currently, the scheme offers an 8% interest rate to senior citizens.

  • Senior citizens will be subject to a higher tax deducted at source (TDS): The threshold for deduction of TDS(concerning senior citizens) has been raised to Rs. 50,000, from an earlier amount of Rs. 10,000,

  • Deduction limit increment under Section 80D of the Income Tax Act: The Union Budget 2018 has announced an immediately effective increment in the deduction limit on premium payments of health insurances. From Rs. 30,000, the deduction limit is said to go up to Rs. 50,000. However, for citizens who are below the age of 60 years, the original deduction amount of Rs. 25,000 is said to remain the same.

  • An increased tax deduction for treatment of specific illnesses, concerning senior citizens: The increased amount of deduction is said to be Rs.1 lakh for senior citizens.

What to do if you have not filed your income tax return even after due date?

If a person is unable to file their ITR before the due date, then according to Section 139(4) of the Income Tax Act, the individual can file a belated return. The facility of belated ITR was introduced for the convenience of the taxpayers. One can file a belated ITR any time before the end of the relevant assessment year. It must however be noted that there is a penalty associated with filing a belated ITR. The individual also stands to lose some of the benefits for not adhering to the e-filing of income tax return by the deadline. For FY 2017-2018, the due date for e-filing income tax returns was 31st August, 2018.

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